NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 15, 1998
The 1998 Annual Meeting of the Stockholders of FileNET Corporation (the
"Company") will be held at 9:00 a.m. local time, on May 15, 1998, at The Mondavi
Center, 1570 Scenic Avenue, Costa Mesa, California 92626, for the following
purposes:
1. To elect four directors for the ensuing year or until the
election and qualification of their respective successors;
2. To approve a series of amendments to the Company's 1995 Stock Option
Plan, including a 600,000-share increase in the number of shares of Common
Stock available for issuance thereunder and an increase in the respective
number of shares for which option grants are to be made under the Automatic
Option Grant Program to newly elected and continuing non-employee members
of the Board of Directors;
3. To approve the Company's 1998 Employee Stock Purchase Plan under
which 150,000 shares of Common Stock will be added to the remaining reserve
under the predecessor plan; and
4. To transact such other business as may properly come before the
meeting.
Only stockholders of record at the close of business on March 17, 1998, the
record date, will be entitled to notice of, and to vote at, the 1998 Annual
Meeting and any adjournment thereof.
By Order of the Board of Directors,
/s/ Mark S. St. Clare
Mark S. St. Clare
Secretary
Costa Mesa, California
Dated: April 6, 1998
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE MEETING. WHETHER OR NOT YOU EXPECT TO
ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS
PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING. A
POSTAGE-PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE GIVEN
YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING.
<PAGE>
3565 Harbor Boulevard
Costa Mesa, California 92626
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD
MAY 15, 1998
-----------------
PROXY STATEMENT
-----------------
SOLICITATION OF PROXIES
The accompanying proxy is solicited on behalf of the Board of Directors of
FileNET Corporation (the "Company") for use at the Annual Meeting of
Stockholders to be held at The Mondavi Center, 1570 Scenic Avenue, Costa Mesa,
California 92626, on May 15, 1998 at 9:00 a.m. local time, and at any and all
adjournments or postponements thereof (the "Meeting").
All shares represented by each properly executed, unrevoked proxy received
in time for the Meeting will be voted in the manner specified therein. If the
manner of voting is not specified in an executed proxy received by the Company,
the proxy will be voted FOR (i) the election of the four nominees for election
to the Board of Directors listed in the proxy, (ii) the approval of the
amendments to the Company's 1995 Stock Option Plan, including a 600,000-share
increase in the number of shares of Common Stock available for issuance
thereunder and an increase in the respective number of shares for which option
grants are to be made under the Automatic Option Grant Program to newly elected
and continuing non-employee members of the Board of Directors; and (iii) the
approval of the 1998 Employee Stock Purchase Plan under which 150,000 shares of
Common Stock will be added to the remaining reserve under the predecessor plan.
Any stockholder has the power to revoke his or her proxy at any time before
it is voted. A proxy may be revoked by delivering a written notice of revocation
to the Secretary of the Company, by presenting a later-dated proxy executed by
the person who executed the prior proxy, or by attendance at the meeting and
voting in person by the person who executed the proxy. Attendance at the meeting
will not, by itself, revoke a proxy.
This proxy statement is being mailed to the Company's stockholders on or
about April 6, 1998. The expense of soliciting proxies will be borne by the
Company. Expenses include reimbursement paid to brokerage firms and others for
their expenses incurred in forwarding solicitation material regarding the
Meeting to beneficial owners of the Company's Common Stock. Solicitation of
proxies will be made by mail. Further solicitation of proxies may be made by
telephone or oral communication by the Company's regular employees, who will not
receive additional compensation for such solicitation.
OUTSTANDING SHARES AND VOTING RIGHTS
Only holders of record of the 15,145,900 shares of the Company's Common
Stock outstanding at the close of business on the record date, March 17, 1998,
will be entitled to notice of and to vote at the Meeting or any adjournment or
postponement thereof. On each matter to be considered at the Meeting, each
stockholder will be entitled to cast one vote for each share of the Company's
Common Stock held of record by such stockholder on March 17, 1998.
1.
<PAGE>
In order to constitute a quorum for the conduct of business at the Meeting,
a majority of the outstanding shares of the Common Stock of the Company entitled
to vote at the Meeting must be present or represented at the Meeting. Pursuant
to Delaware law, directors are elected by a plurality vote. The other matters
submitted for stockholder approval at the Meeting will be decided by the
affirmative vote of a majority of shares present in person or represented by
proxy at the Meeting and entitled to vote on each matter. With regard to the
election of directors, votes may be cast in favor of or withheld from each
nominee; votes that are withheld will be excluded entirely from the vote and
will have no effect. Abstentions may be specified on all proposals except the
election of directors and will be counted as present for purposes of determining
the existence of a quorum regarding the item on which the abstention is noted
and will also be counted for purposes of determining whether stockholder
approval of that item has been obtained. If shares are not voted by the broker
who is the record holder of the shares, or if shares are not voted in other
circumstances in which proxy authority is defective or has been withheld with
respect to any matter, these non-voted shares are not deemed to be present or
represented for purposes of determining whether stockholder approval of that
matter has been obtained.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table sets forth as of March 17, 1998 the amount and
percentage of the outstanding shares of the Common Stock of the Company which,
according to the information supplied to the Company, are beneficially owned by
(i) each person who, to the knowledge of the Company, is the beneficial owner of
more than 5% of the Company's outstanding Common Stock, (ii) each person who is
currently a director of the Company or is a nominee for election as a director
of the Company, (iii) each named executive officer in the Summary Compensation
Table which appears below and (iv) all current directors and executive officers
of the Company as a group. Except to the extent indicated in the footnotes to
the following table, the person or entity listed has sole voting or dispositive
power with respect to the shares which are deemed beneficially owned by such
person or entity, subject to community property laws where applicable.
Name(2)(3) Total Percent of
Outstanding Shares of
Common Stock Common Stock
Beneficially Beneficially
Owned (1) Owned (1)
---------------- ------------
Directors
Theodore J. Smith(4) 243,673 1.6%
Frederick K. Fluegel(5) 63,179 *
William P. Lyons(6) 16,250 *
John C. Savage(7) 9,883 *
Named Executive Officers:
Lee D. Roberts -- *
Bruce A. Waddington(8) 44,393 *
Mark S. St.Clare(9) 17,602 *
Lewis H. Carpenter, Jr.(10) 48,306 *
All executive officers and
directors as a group (13 persons)(11) 467,503 3.0
- ----------
* less than 1%
(1) Beneficial ownership and percentage of beneficial ownership as of March
17, 1998 for each person includes shares for which options held by such
person are currently exercisable or will become exercisable within 60 days
after March 17, 1998, as if such option shares were outstanding on March
17, 1998.
2.
<PAGE>
(2) The address of each individual named is 3565 Harbor Boulevard, Costa Mesa,
California 92626, unless otherwise indicated.
(3) To the Company's knowledge, as of March 17, 1998, no person beneficially
owned more than 5% of the Company's outstanding Common Stock.
(4) Includes 81,673 shares held by the Theodore J. Smith Family Trust as to
which shares Mr. Smith, as co-trustee for this trust, has shared voting
and dispositive power. Also includes 162,000 shares issuable upon exercise
of options that are currently exercisable or will become exercisable
within 60 days after March 17, 1998.
(5) Includes 7,230 shares issuable upon exercise of options that are currently
exercisable or will become exercisable within 60 days after March 17,
1998.
(6) Represents shares held by the Lyons Family Trust as to which shares Mr.
Lyons, as co-trustee for this trust, has shared voting and dispositive
power. Also includes 15,250 shares issuable upon exercise of options that
are currently exercisable or will become exercisable within 60 days after
March 17, 1998.
(7) Includes 7,626 shares issuable upon exercise of options that are currently
exercisable or will become exercisable within 60 days after March 17,
1998.
(8) Includes 39,380 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after
March 17, 1998.
(9) Includes 9,433 shares issuable upon exercise of options that are currently
exercisable or will become exercisable within 60 days after March 17,
1998.
(10) Includes 46,000 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after
March 17, 1998.
(11) Includes shares held by the Theodore J. Smith Family Trust and the Lyons
Family Trust whose representatives or family members are members of the
Company's Board of Directors (see footnotes 4 and 6). Also includes
303,044 shares issuable upon exercise of options that are currently
exercisable or will become exercisable within 60 days after March 17,
1998.
3.
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth, as of March 17, 1998, those executive
officers of the Company who were subject to the reporting requirements of
Section 16 of the Securities and Exchange Act of 1934, as amended:
Name Age Position
Theodore J. Smith 68 Chairman of the Board and Chief Executive Officer
since the Company's inception in 1982, and
President of the Company from 1982 to May 1997.
Lee D. Roberts 45 President and Chief Operating Officer since May
1997. Prior to joining the Company in May 1997,
Mr. Roberts was with International Business
Machines Corporation ("IBM") for over 20 years,
serving most recently as General Manager and
Vice President, Worldwide Marketing and Sales for
the Networking Division of IBM.
Lewis H. Carpenter, Jr. 44 Senior Vice President, Worldwide Marketing since
July 1997. From October 1996 to July 1997,
Mr. Carpenter served as Vice President of the
Company and President-Saros Business Unit. From
November 1991 to October 1996, Mr. Carpenter
served as Senior Vice President-International.
R. L. Ercanbrack 43 Senior Vice President, Worldwide Sales since
October 1997. From June 1997 to October 1997,
Mr. Ercanbrack served as Senior Vice President,
International. Prior to joining the Company in
June 1997, Mr. Ercanbrack was with IBM for over
19 years, serving most recently as Vice President
Worldwide Sales, Channel and OEM for the
Networking Division of IBM.
Lee M. Kim 39 Controller, Chief Accounting Officer and Assistant
Secretary since October 1997. Prior to joining the
Company, Mr. Kim was with Wonderware Corporation
since 1993, where he served as Director of
Finance.
William J. Kreidler 53 Senior Vice President, Services and Operations
since July 1997. From August 1992 to July 1997,
Mr. Kreidler served as Vice President, Operations.
Jordan M. Libit 49 Senior Vice President, Busiess Development and
Strategy since July 1997. From February 1992 to
July 1997, Mr. Libit served as Vice President,
Marketing.
Audrey N. Schaeffer 53 Vice President, Human Resources since January
1993, Director of Administration from March 1986
to January 1993, and Assistant Secretary since
April 1988.
Mark S. St.Clare 51 Senior Vice President, Finance and Chief Financial
Officer since January 1985 and Secretary since
June 1993.
Bruce A. Waddington 47 Senior Vice President, Engineering since June 1993
and Chief Technology Officer since March 1996.
From June 1991 to June 1993 Mr. Waddington was
Vice President, Workstation and Communications
Software.
4.
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual and
long-term compensation earned for services rendered in all capacities to the
Company for the fiscal year ended December 31, 1997 (designated as the 1997 year
below), the fiscal year ended December 31, 1996 (designated as the 1996 year
below) and the fiscal year ended December 31, 1995 (designated as the 1995 year
below), respectively, by the Company's Chief Executive Officer and each of the
other four most highly compensated executive officers of the Company whose
annual salary and bonuses exceeded $100,000 for the fiscal year ended December
31, 1997 (collectively, the "Named Executive Officers"). No executive officer
who would have otherwise been includable in such table on the basis of salary
and bonus earned for the fiscal year ended December 31, 1997 resigned or
terminated employment during the fiscal year.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
--------------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Other
Annual Stock All Other
Compen- Options Compen-
Name and Principal Position Year Salary(1) Bonus(2) sation (Shares) sation(3)
- --------------------------- ---- --------- -------- ------ -------- ---------
Theodore J. Smith 1997 $360,850 $162,146 -- 185,000(4) $23,091
Chairman of the Board and 1996 349,385 -- -- 30,000(5) 21,426
Chief Executive Officer 1995 316,909 157,000 -- 35,000(5) 22,356
Lee D. Roberts(6) 1997 190,000 188,500 $472,143(7) 330,000 417
President and Chief Operating Officer 1996 -- -- -- -- --
1995 -- -- -- -- --
Bruce A. Waddington 1997 216,897 83,520 -- 174,000(4) 3,004
Senior Vice President-Engineering and 1996 185,070 -- -- 20,000(5) 2,688
Chief Technology Officer 1995 168,357 53,376 -- 15,000(5) 2,460
Mark S. St.Clare 1997 210,514 76,560 -- 105,000(4) 4,483
Senior Vice President-Finance, Chief 1996 201,417(8) -- -- 15,634(5) 4,094
Financial Officer and Secretary 1995 183,282 70,000 -- 25,000(5) 3,527
Lewis H. Carpenter, Jr. 1997 211,856 73,726 -- 65,000(4) 2,566
Senior Vice President-Worldwide 1996 196,630 -- 106,780(9) 20,000(5) 2,275
Marketing 1995 174,927 48,164 -- 15,000(5) 2,460
</TABLE>
- ----------
(1) Includes amounts deferred under (a) the Company's Employee Savings and
Investment Plan, a tax-qualified plan under Section 401(k) of the Internal
Revenue Code, and (b) the Company's Deferred Compensation Plan.
(2) Annual bonus amounts are earned and accrued for the fiscal year in which
reported, but are paid after the close of that fiscal year.
(3) Includes (a) the following premiums paid by the Company for fiscal 1997 on
certain term-life insurance policies maintained for the Named Executive
Officers under which such individuals designate their own beneficiaries:
$21,599, $417, $1,512, $2,992 and $1,074 for Messrs. Smith, Roberts,
Waddington, St.Clare and Carpenter, respectively, and (b) a $1,491
contribution for fiscal 1997 made by the Company on behalf of each Named
Executive Officer (other than Mr. Roberts) to the Section 401(k) Plan
which matches a portion of his contribution to that plan.
5.
<PAGE>
(4) Option grants indicated for fiscal 1997 include the following options
regranted on July 11, 1997 in exchange for the cancellation of preexisting
options for the same number of shares but with a higher exercise price per
share: 155,000 option shares, 54,000 option shares, 70,000 option shares
and 50,000 option shares for Messrs. Smith, Waddington, St.Clare and
Carpenter, respectively.
(5) Each of the options grants indicated for fiscal 1995 and 1996 was
originally granted with an exercise price in excess of $18.00 per share
(other than a 634-share option granted to Mr. St.Clare in 1996) and was
cancelled on July 11, 1997 in exchange for a new option for the same
number of shares with an exercise price of $18.00 per share, the fair
market value per share of the Common Stock on the date of regrant.
(6) Mr. Roberts joined the Company and was first appointed an executive
officer in May 1997.
(7) Includes (a) reimbursement of $1,999 for relocation expenses plus the tax
gross-up for the portion includable as taxable income, (b) a housing
allowance in the amount of $21,000 and (c) the aggregate amount of
$449,144 paid in part as reimbursement of the settlement costs and legal
fees incurred by Mr. Roberts in connection with a lawsuit commenced by his
former employer and in part as a tax gross-up on the portion of such
reimbursement includable in his taxable income. See "Employment Contracts
and Change in Control Arrangements" for further information.
(8) Includes $19,971 applied by Mr. St.Clare for the acquisition of special
option grants under the Company's Salary Reduction Option Grant Program.
(9) Represents reimbursement of relocation expenses plus the tax gross-up for
the portion includable as taxable income.
6.
<PAGE>
Option Grants in Last Fiscal Year
The following table provides information on option grants made in the 1997
fiscal year to the Named Executive Officers. No stock appreciation rights were
granted during such fiscal year to the Named Executive Officers.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
for
Individual Grants Option Term(1)
------------------------------------------------- --------------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees Exercise
Granted in Fiscal Price Expiration
Name (#) Year ($/Sh) Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Theodore J. Smith......... 30,000(2)(3) 1.1 $18.00 07/10/07 $339,486 $860,255
30,000(2)(4) 1.1 18.00 07/10/07 339,486 860,255
30,000(2)(5) 1.1 18.00 07/10/07 339,486 860,255
35,000(2)(6) 1.3 18.00 07/10/07 396,066 1,003,631
30,000(2)(7) 1.1 18.00 07/10/07 339,486 860,255
30,000(8) 1.1 28.38 12/10/07 535,256 1,356,336
Lee D. Roberts............ 300,000(9) 0.8 14.31 05/21/07 2,698,910 6,839,029
30,000(8) 1.1 28.38 12/10/07 535,256 1,356,336
Bruce A. Waddington....... 100,000(8) 3.6 13.06 05/19/07 821,052 2,080,543
4,000(2)(3) 0.1 18.00 07/10/07 45,265 114,701
15,000(2)(5) 0.5 18.00 07/10/07 169,743 430,128
15,000(2)(6) 0.5 18.00 07/10/07 169,743 430,128
20,000(2)(7) 0.7 18.00 07/10/07 226,324 573,504
20,000(8) 0.7 28.38 12/10/07 356,837 904,224
Mark S. St.Clare.......... 15,000(2)(3) 0.5 18.00 07/10/07 169,743 430,128
15,000(2)(5) 0.5 18.00 07/10/07 169,743 430,128
25,000(2)(6) 0.9 18.00 07/10/07 282,905 716,879
15,000(2)(7) 0.5 18.00 07/10/07 169,743 430,128
25,000(8) 0.9 17.69 09/02/07 278,032 704,533
10,000(8) 0.4 28.38 12/10/07 178,419 452,112
Lewis H. Carpenter, Jr.... 15,000(2)(5) 0.5 18.00 07/10/07 169,743 430,128
15,000(2)(6) 0.5 18.00 07/10/07 169,743 430,128
10,000(2)(10) 0.4 18.00 07/10/07 113,162 286,752
10,000(2)(7) 0.4 18.00 07/10/07 113,162 286,752
15,000(8) 0.5 28.38 12/10/07 267,628 678,168
</TABLE>
- ----------
(1) The assumed 5% and 10% annual rates of stock price appreciation are for
illustrative purposes only. Actual stock prices will vary from time to
time based upon market factors and the Company's financial performance. No
assurance can be given that such rates will be achieved. Unless the market
price of the Common Stock appreciates over the option term, no value will
be realized from the option grants made to the Named Executive Officers.
(2) Such option was originally granted with an exercise price in excess of
$18.00 per share and was cancelled on July 11, 1997 in exchange for a new
option for the same number of shares with an exercise price of $18.00 per
share, the fair market value per share of Common Stock on the date of
regrant. In connection with the cancellation/regrant of the option, the
7.
<PAGE>
following new vesting schedule was imposed on the shares subject to the
new option: (a) upon the optionee's completion of one year of service with
the Company measured from the July 11, 1997 regrant date, the new option
will become exercisable for the number of shares for which the
higher-priced option was exercisable at the time of cancellation and (b)
the new option will become exercisable for each remaining installment of
the option shares on a date six months later than that installment would
have become exercisable under the cancelled option.
(3) Such option will become exercisable for all the option shares upon the
optionee's completion of one year of service with the Company measured
from the July 11, 1997 regrant date.
(4) Such option will become exercisable for 60% of the option shares upon the
optionee's completion of one year of service with the Company measured
from the July 11, 1997 regrant date and will become exercisable for the
remaining 40% of the option shares in two successive equal annual
installments over the optionee's continued period of service, with the
first such installment to become exercisable on June 16, 1998.
(5) Such option will become exercisable for 40% of the option shares upon the
optionee's completion of one year of service with the Company measured
from the July 11, 1997 regrant date and will become exercisable for the
remaining 60% of the option shares in three successive equal annual
installments over the optionee's continued period of service, with the
first such installment to become exercisable on June 8, 1998.
(6) Such option will become exercisable for 25% of the option shares upon the
optionee's completion of one year of service with the Company measured
from the July 11, 1997 regrant date and will become exercisable for the
remaining 75% of the option shares in three successive equal annual
installments over the optionee's continued period of service, with the
first such installment to become exercisable on June 14, 1998.
(7) Such option will become exercisable in four successive equal annual
installments over the optionee's continued period of service, with the
first such installment to become exercisable on June 12, 1998.
(8) Each such option was granted under the Company's 1995 Stock Option Plan
and (other than the 25,000-share option grant indicated for Mr. St.Clare)
will become exercisable for the option shares in four successive equal
annual installments upon the optionee's completion of each year of service
with the Company over the four-year period measured from the December 11,
1997 grant date (or the May 20, 1997 grant date for the first
100,000-share option indicated for Mr. Waddington). The 25,000 share
option indicated for Mr. St.Clare will become exercisable for the option
shares in three successive equal annual installments upon his completion
of each year of service with the Company over the three-year period
measured from September 3, 1998, the first anniversary of the grant date.
Notwithstanding the foregoing, each option will become immediately
exercisable for all the option shares in the event the Company is acquired
by merger or asset sale, unless the option is to be assumed by the
successor entity. Should the option be assumed in the acquisition, then
that option will subsequently become exercisable for all the option shares
in the event the optionee's employment is terminated (whether
involuntarily or through a forced resignation) within 12 months after the
acquisition. The option will also accelerate in full in the event the
optionee's employment is terminated within 12 months after a change of
control of the Company (whether by tender offer for more than 50% of the
Company's outstanding voting securities or a change in the composition of
the Board effected through one or more contested elections for Board
membership). Each option has a maximum term of 10 years, subject to
earlier termination following the optionee's termination of employment.
(9) On May 22, 1997, Mr. Roberts was granted an option for 300,000 shares in
connection with the commencement of his employment with the Company. The
option will become exercisable in four successive equal annual
installments upon his completion of each year of service with the Company
over the four-year period measured from the date on which his employment
with the Company began. However, a portion of the option will become
immediately exercisable if (a) the Company terminates Mr. Roberts
employment within his first year of service without "Cause" (as defined in
Mr. Roberts' employment agreement with the Company), (b) during the term
of the agreement, the Company experiences a change in control and Mr.
Roberts' employment with the Company is terminated in connection
therewith, (c) Mr. Roberts is not appointed Chief Executive Officer of the
8.
<PAGE>
Company before the employment agreement expires and he resigns within
thirty days after the expiration of the agreement or (d) during the term
of the employment agreement, Mr. Roberts resigns for "Good Reason" (as
defined in the employment agreement). The option has a maximum term of 10
years, subject to earlier termination following the optionee's termination
of employment.
(10) Such option will become exercisable in four successive equal annual
installments over the optionee's continued period of service, with the
first such installment to become exercisable on April 3, 1998.
Aggregated Option Exercises in Last Fiscal Year and Year End Option Value
The following table sets forth certain information with respect to the
Named Executive Officers concerning their exercise of options during fiscal 1997
and the unexercised options held by them at the close of such fiscal year. No
stock appreciation rights were held or exercised by the Named Executive Officers
at any time during the 1997 fiscal year.
<TABLE>
<CAPTION>
Value of
Number of Unexercised Unexercised
Options at Fiscal In-the-Money
Year End Options at
Shares (Number of Shares) Fiscal Year End(1)
Name Acquired Value Exercisable/ Exercisable/
on Exercise (#) Realized ($)(2) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Theodore J. Smith......... -- -- 156,000 / 191,000 $3,196,130 / 1,945,570
Lee D. Roberts............ -- -- -- / 330,000 -- / 4,673,100
Bruce A. Waddington....... 12,000 $188,950 27,380 / 187,460 513,955 / 2,581,485
Mark S. St.Clare.......... -- -- 18,634 / 111,000 261,926 / 1,213,420
Lewis H. Carpenter, Jr.... -- -- 40,500 / 72,000 446,735 / 695,140
</TABLE>
- ----------
(1) Calculated on the basis of the average of the high and low selling prices
of the Company's Common Stock on December 31, 1997 ($29.75), the last
trading day in fiscal 1997, minus the exercise price of the option,
multiplied by the number of shares subject to the option.
(2) The excess of the fair market value of the purchased shares on the date of
exercise over the exercise price paid for such shares.
9.
<PAGE>
Option Repricings
As discussed in the Compensation Committee Report on Executive Compensation
below, the Company implemented a special option cancellation/regrant program for
all of its employees, including executive officers, holding stock options with
an exercise price per share in excess of the fair market value of the Company's
Common Stock on the regrant date. The cancellations/regrants were effected on
July 11, 1997, and a number of outstanding options with an exercise price in
excess of $18.00 per share were surrendered for cancellation and new options for
the same aggregate number of shares were granted with an exercise price of
$18.00 per share.
The following table sets forth information with respect to each of the
Company's Named Executive Officers concerning his participation in the option
cancellation/regrant program effected on July 11, 1997. The Company has not
implemented any other option cancellation/regrant programs in which the
Company's executive officers have participated.
<TABLE>
<CAPTION>
Number of Length of
Securities Market Price Exercise Option Term
Underlying of Stock at Price at Remaining at
Options Time of Time of New Date of
Repricing Repriced or Repricing or Repricing or Exercise Repricing or
Name Date Amended Amendment Amendment Price Amendment
<S> <C> <C> <C> <C> <C> <C>
Theodore J. Smith......... 07/11/97 30,000 $18.00 $21.38 $18.00 4 years, 5 months
07/11/97 30,000 18.00 18.38 18.00 6 years, 5 months
07/11/97 30,000 18.00 24.88 18.00 7 years, 5 months
07/11/97 35,000 18.00 40.82 18.00 8 years, 5 months
07/11/97 30,000 18.00 35.13 18.00 9 years, 5 months
Bruce A. Waddington....... 07/11/97 4,000 18.00 21.38 18.00 4 years, 5 months
07/11/97 15,000 18.00 24.88 18.00 7 years, 5 months
07/11/97 15,000 18.00 40.82 18.00 8 years, 5 months
07/11/97 20,000 18.00 35.13 18.00 9 years, 5 months
Mark S. St.Clare.......... 07/11/97 15,000 18.00 21.38 18.00 4 years, 5 months
07/11/97 15,000 18.00 24.88 18.00 7 years, 5 months
07/11/97 25,000 18.00 40.82 18.00 8 years, 5 months
07/11/97 15,000 18.00 35.13 18.00 9 years, 5 months
Lewis H. Carpenter, Jr.... 07/11/97 15,000 18.00 24.88 18.00 7 years, 5 months
07/11/97 15,000 18.00 40.82 18.00 8 years, 5 months
07/11/97 10,000 18.00 26.13 18.00 9 years, 3 months
07/11/97 10,000 18.00 35.13 18.00 9 years, 5 months
</TABLE>
10.
<PAGE>
Compensation Committee Report on Executive Compensation
It is the duty of the Compensation Committee to review and determine the
salaries and bonuses of executive officers of the Company, including the Chief
Executive Officer, and to establish the general compensation policies for such
individuals. The Compensation Committee also has the sole and exclusive
authority to make discretionary option grants to the Company's executive
officers under the 1995 Stock Option Plan.
The Compensation Committee believes that the compensation programs for the
Company's executive officers should reflect the Company's performance and the
value created for the Company's stockholders. In addition, the compensation
programs should support the short-term and long-term strategic goals and values
of the Company and should reward individual contribution to the Company's
success. The Company is engaged in a very competitive industry, and the
Company's success depends upon its ability to attract and retain qualified
executives through the competitive compensation packages it offers to such
individuals.
General Compensation Policy. The Compensation Committee's policy is to
provide the Company's executive officers with compensation opportunities that
are based upon their personal performance, the financial performance of the
Company and their contribution to that performance and are competitive enough to
attract and retain highly skilled individuals. Each executive officer's
compensation package is comprised of three elements: (i) base salary that is
competitive with the market and reflects individual performance, (ii) annual
variable performance awards payable in cash and tied to the Company's
achievement of annual financial performance goals and (iii) long-term
stock-based incentive awards designed to strengthen the mutuality of interests
between the executive officers and the Company's stockholders. As an officer's
level of responsibility increases, a greater proportion of his or her total
compensation will be dependent upon the Company's financial performance and
stock price appreciation rather than base salary.
The Company retains the services of an independent compensation consulting
firm to advise the Compensation Committee as to how the Company's executive
compensation compares to that of companies within and outside of the industry.
Factors. The principal factors that were taken into account in establishing
each executive officer's compensation package for the 1997 fiscal year are
described below. However, the Compensation Committee may in its discretion apply
entirely different factors, such as different measures of financial performance,
for future fiscal years.
Base Salary. In setting base salaries, the Compensation Committee reviews
published compensation survey data for its industry. The Committee has also
identified a group of companies for comparative compensation purposes and it
reviews detailed compensation data incorporated into each such company's proxy
statements. This group is comprised of approximately 25 companies. The base
salary for each officer reflects the salary levels for comparable positions in
the published surveys and the comparative group of companies, as well as the
individual's personal performance and internal alignment considerations. The
relative weight given to each factor varies with each individual in the sole
discretion of the Compensation Committee. Each executive officer's base salary
is adjusted each year on the basis of (i) the Compensation Committee's
evaluation of the officer's personal performance for the year and (ii) the
competitive marketplace for persons in comparable positions. The Company's
performance and profitability may also be a factor in determining the base
salaries of executive officers. For the 1997 fiscal year, the base salary of the
Company's executive officers ranged from the 40th percentile to the 60th
percentile of the base salary levels in effect for comparable positions in the
surveyed compensation data.
Annual Incentives. The incentive bonus program for the 1997 fiscal year,
which the Compensation Committee initially established for the Chief Executive
Officer and the other executive officers (other than Messrs. Roberts and
Ercanbrack), was revised during the year to include performance milestones for
the last three fiscal quarters based on revised earnings per share and backlog
targets. In connection with these revisions, the target bonus of the Chief
Executive Officer and each of the other executive officers (other than Messrs.
Roberts and Ercanbrack) was reduced by twenty-five percent. The bonuses payable
to Messrs. Roberts and Ercanbrack for the 1997 fiscal year were established by
the terms of their individual employment agreements and were not modified. Based
on the Company's performance over the new nine-month measurement period in
11.
<PAGE>
fiscal year 1997 and the contractual bonuses payable to Messrs. Roberts and
Ercanbrack, bonuses in the aggregate amount of $919,188 were awarded to 10
executive officers for the 1997 fiscal year.
Long Term Incentives. Generally, stock option grants are made annually by
the Compensation Committee to each of the Company's executive officers. Each
grant is designed to align the interests of the executive officer with those of
the stockholders and provide each individual with a significant incentive to
manage the Company from the perspective of an owner with an equity stake in the
business. Each grant allows the officer to acquire shares of the Company's
Common Stock at a fixed price per share (the market price on the grant date)
over a specified period of time (up to ten years). Each option becomes
exercisable in successive annual installments over a four-year period,
contingent upon the officer's continued employment with the Company.
Accordingly, the option will provide a return to the executive officer only if
he or she remains employed by the Company during the vesting period, and then
only if the market price of the shares appreciates over the option term.
The size of the option grant to each executive officer, including the Chief
Executive Officer, is set by the Compensation Committee at a level that is
intended to create a meaningful opportunity for stock ownership based upon the
individual's current position with the Company, the individual's personal
performance in recent periods and his or her potential for future responsibility
and promotion over the option term. The Compensation Committee also takes into
account the number of unvested options held by the executive officer in order to
maintain an appropriate level of equity incentive for that individual. The
relevant weight given to each of these factors varies from individual to
individual. The Compensation Committee has established certain guidelines with
respect to the option grants made to the executive officers, but has the
flexibility to make adjustments to those guidelines at its discretion.
CEO Compensation. In setting the total compensation payable to the
Company's Chief Executive Officer for the 1997 fiscal year, the Compensation
Committee sought to have it competitive with other companies in the surveyed
group, while at the same time assuring that a significant percentage of
compensation was tied to Company performance and stock price appreciation.
The Compensation Committee adjusted Mr. Smith's base salary for the 1997
fiscal year in recognition of his personal performance and with the objective of
maintaining his base salary at a competitive level when compared with the base
salary levels in effect for similarly situated chief executive officers. With
respect to Mr. Smith's base salary, it is the Compensation Committee's intent to
provide him with a level of stability and certainty each year and not have this
particular component of compensation affected to any significant degree by
Company performance factors. For the 1997 fiscal year, Mr. Smith's base salary
was approximately at the median of the base salary levels of other chief
executive officers at the surveyed companies.
The remaining components of Mr. Smith's 1997 fiscal year compensation,
however, were primarily dependent upon corporate performance. As discussed
above, the performance milestones initially established for Mr. Smith's
incentive bonus were revised during the year to include performance milestones
for the last three fiscal quarters based on revised earnings per share and
backlog targets. In connection with these revisions, Mr. Smith's target bonus
for the 1997 fiscal year was reduced by twenty-five percent. On the basis of the
Company's performance over the new nine-month measurement period in fiscal year
1997, Mr. Smith was paid a bonus in the amount of $162,000 for such fiscal year.
The Compensation Committee also authorized a stock option grant to Mr. Smith in
fiscal 1997 in order to provide him with an equity incentive to continue
contributing to the financial success of the Company. The option will have value
for Mr. Smith only if the market price of the underlying option shares
appreciates over the market price in effect on the date the grant was made.
Special Option Regrant Program
During the 1997 fiscal year, the Compensation Committee felt that
circumstances had made it necessary for the Company to implement an option
cancellation/regrant program. Accordingly, on July 11, 1997, all of the
Company's employees, including executive officers, were given the opportunity to
surrender their outstanding options under the 1995 Stock Option Plan with
exercise prices in excess of $18.00 per share in return for a new option grant
12.
<PAGE>
for the same number of shares but with a lower exercise price of $18.00 per
share, the fair market value per share of the Company's Common Stock on the
regrant date. Each employee eligible for a new option grant was given the choice
of accepting that option with a new vesting schedule in cancellation of his or
her higher-priced option or rejecting the new grant and retaining the
higher-priced option with its original vesting schedule.
The Compensation Committee determined that this program was necessary
because equity incentives are a significant component of the total compensation
package of each key Company employee and play a substantial role in the
Company's ability to retain the services of individuals essential to the
Company's long-term financial success. The Compensation Committee felt that the
Company's ability to retain key employees would be significantly impaired,
unless value were restored to their options in the form of regranted options at
the current market price of the Company's Common Stock. However, in order for
the regranted options to serve their primary purpose of assuring the continued
service of each optionee, a new vesting schedule was imposed with respect to the
option shares. The shares subject to the new options will vest as follows: (i)
upon the optionee's completion of six months of service with the Company (or one
year of service for executive officers) measured from the July 11, 1997 grant
date, the new option will become exercisable for the number of shares for which
the higher-priced option was exercisable at the time of cancellation, and (ii)
the new option will become exercisable for each remaining installment of the
option shares on a date six months later than that installment would have become
exercisable under the cancelled option. Accordingly, each optionee will only
have the opportunity to acquire the option shares at the lower exercise price if
he or she remains in the Company's employ.
As a result of the new vesting schedules imposed on the regranted options,
the Compensation Committee believes that the program strikes an appropriate
balance between the interests of the option holders and those of the
stockholders. The lower exercise prices in effect under the regranted options
make those options valuable once again to the executive officers and key
employees critical to the Company's financial performance. However, those
individuals will enjoy the benefits of the regranted options only if they in
fact remain in the Company's employ and contribute to the Company's financial
success.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code disallows a tax deduction to
publicly held companies for compensation paid to certain of their executive
officers, to the extent that compensation exceeds $1 million per covered officer
in any fiscal year. The limitation applies only to compensation which is not
considered to be performance-based. Non-performance based compensation paid to
the Company's executive officers for the 1997 fiscal year did not exceed the $1
million limit per officer, and the Compensation Committee does not anticipate
that the non-performance based compensation to be paid to the Company's
executive officers for fiscal 1998 will exceed that limit. The Company's 1995
Stock Option Plan has been structured so that any compensation deemed paid in
connection with the exercise of option grants made under that plan with an
exercise price equal to the fair market value of the option shares on the grant
date will qualify as performance-based compensation which will not be subject to
the $1 million limitation. Because it is unlikely that the cash compensation
payable to any of the Company's executive officers in the foreseeable future
will approach the $1 millon limit, the Compensation Committee has decided at
this time not to take any action to limit or restructure the elements of cash
compensation payable to the Company's executive officers. The Compensation
Committee will reconsider this decision should the individual cash compensation
of any executive officer ever approach the $1 million level.
13.
<PAGE>
It is the opinion of the Compensation Committee that the executive
compensation policies and plans provide the necessary total remuneration program
to properly align the Company's performance and the interests of the Company's
stockholders through the use of competitive and equitable executive compensation
in a balanced and reasonable manner, for both the short and long-term.
Submitted by the Compensation Committee of the Company's Board of Directors:
Compensation Committee
Frederick K. Fluegel, Chairman
William P. Lyons
John C. Savage
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is composed of Messrs. Fluegel, Lyons and
Savage. No member of the Compensation Committee was at any time during the 1997
fiscal year or at any other time an officer or employee of the Company. No
executive officer of the Company served on the board of directors or
compensation committee of any entity which has one or more executive officers
serving as members of the Company's Board of Directors or Compensation
Committee.
14.
<PAGE>
Stock Price Performance Graph
The following graph compares the five year cumulative total stockholder
return on the Company's Common Stock against the cumulative total return of the
Nasdaq Stock Market Index and the Nasdaq Computer and Data Processing Services
Index for the period from December 31, 1992 to December 31, 1997.
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Measurement Period FILENET S&P NASDAQ
(Fiscal Year Covered) CORPORATION 500 INDEX C&DPS INDEX
- --------------------- ----------- --------- -----------
<S> <C> <C> <C>
Measurement Pt- 12/31/92 $100 $100 $100
FYE 01/02/94 $ 95 $115 $106
FYE 01/01/95 $119 $112 $128
FYE 12/31/95 $207 $159 $196
FYE 12/31/96 $141 $195 $242
FYE 12/31/97 $132 $240 $297
</TABLE>
Assumes $100 invested on December 31, 1992 in the Company's Common Stock and in
the stock of each of the other Indices.
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933 or the Securities Exchange Act
of 1934 which might incorporate future filings made by the Company under those
statutes, neither the preceding Compensation Committee Report on Compensation
nor the Stock Price Performance Graph will be incorporated by reference into any
of those prior filings, nor will such report or graph be incorporated by
reference into any future filings made by the Company under those statutes.
Employment Contracts and Change in Control Agreements
In May 1997, the Company entered into an employment agreement with Mr. Lee
D. Roberts, the Company's President and Chief Operating Officer. The agreement
has a term of two years, commencing May 22, 1997, and pursuant to such
agreement, Mr. Roberts was granted an option on such commencement date to
purchase 300,000 shares of the Company's Common Stock at an exercise price of
$14.31 per share. The option will vest in equal successive annual installments
over a period of four years, subject to Mr. Robert's continued employment with
the Company. If (i) the Company terminates Mr. Robert's employment without
"Cause" (as defined in the agreement) within the first year of the employment
term, (ii) during the term of the agreement, the Company experiences a change in
control and Mr. Roberts is terminated without Cause in connection therewith,
(iii) Mr. Roberts has not been appointed Chief Executive Officer of the Company
before the agreement expires (at the end of two years) and resigns within thirty
days thereafter or (iv) during the term of the agreement, Mr. Roberts resigns
for "Good Reason" (as defined in the agreement), then the Company must pay Mr.
Roberts a sum equal to his annual base salary in effect as of the date of
termination plus an amount equal to the annual incentive bonus that Mr. Roberts
would have been entitled to receive during that year if the Company's Earnings
Per Share ("EPS") equalled 100% of the plan. Upon the occurrence of any of the
foregoing events, Mr. Roberts will also be entitled to exercise a portion of his
option on an accelerated basis. Pursuant to the agreement, Mr. Roberts is
entitled to an annual base salary of $325,000, an annual incentive bonus which
is tied to the financial performance of the Company and reasonable relocation
expenses. In addition, the Company agreed to reimburse Mr. Roberts for all legal
fees incurred by him in connection with a lawsuit brought against him by his
former employer for the repayment of any profit realized by him in connection
with the exercise of his options to purchase shares of that employer's common
stock and the subsequent sale of those shares. The Company also agreed to pay
Mr. Roberts an amount equal to any after-tax loss he incurred (based upon the
excess of the amount received by him upon the sale of the shares purchased under
his former employer's options over the option exercise price paid for those
shares) in the event that he was requested by the Company to settle the suit or
did not prevail in the suit. During the 1997 fiscal year, the Company paid Mr.
Roberts an aggregate of $449,144 in connection with the settlement of such suit
and the reimbursement of the tax liability arising from such payment.
None of the Company's other Named Executive Officers has an employment
agreement with the Company, and the employment of each such Named Executive
Officer may be terminated at any time at the discretion of the Board of
Directors. However, the Compensation Committee of the Board of Directors has the
authority as administrator of the Company's 1995 Stock Option Plan to provide
for the accelerated vesting of the shares of Common Stock which are subject to
any outstanding options held by the Chief Executive Officer and the Company's
other executive officers or any unvested shares actually held by those
individuals under the 1995 Stock Option Plan (including any previously
outstanding options under the Company's predecessor 1986 Stock Option Plan which
were incorporated into the 1995 Plan at the time of its implementation), in the
event their employment were to be terminated (whether involuntarily or through a
forced resignation) within a designated period (not to exceed 18 months)
following (i) an acquisition of the Company by merger or asset sale, (ii) a
successful tender for more than 50% of the Company's outstanding Common Stock or
(iii) a change in the majority of the Board as a result of one or more contested
elections for Board membership. The option grants made to the Named Executive
Officers during the 1997 fiscal year, together with all prior option grants held
by such individuals, contain such acceleration provisions which will be
triggered in the event the individual's employment is terminated within 12
months following the change in control event.
16.
<PAGE>
COMPLIANCE WITH SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, executive officers and persons who own more than 10% of
a registered class of the Company's equity securities to file initial reports of
ownership and reports of changes in ownership with the SEC and the Nasdaq
National Market. Such persons are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on its review of copies of such forms received by it with
respect to fiscal year 1997 and the written representations received from
certain reporting persons that no other reports were required, the Company
believes that all directors, executive officers and persons who own more than
10% of the Company's Common Stock have complied with the reporting requirements
of Section 16(a).
17.
<PAGE>
Proposal 1
ELECTION OF DIRECTORS
Directors are elected at each Annual Meeting of Stockholders and hold
office until their successors are duly elected and qualified at the next Annual
Meeting of Stockholders. Pursuant to the Company's Bylaws and a resolution
adopted by a majority of the authorized number of directors, the authorized
number of members of the Board of Directors has been set at four.
The following table sets forth certain information concerning the nominees
for election to the Board of Directors.
Year First
Name, Age, Principal Occupation or Position, Became
and Directorships of Other Publicly Owned Companies a Director
William P. Lyons, 53, President, Chief Executive Officer and 1992
a director of Finjan Software, Ltd. since February 1998.
Prior to February 1998, Mr. Lyons served as President,
Chief Executive Officer and a director of ParcPlace-Digitalk, Inc.
John C. Savage, 50, Managing Director of Redwood Partners, LLC, 1982
a venture buy-out firm and Director of OrCad, Inc. and of
Mattson Technology, Inc.
Theodore J. Smith, 68, Chairman of the Board and Chief 1982
Executive Officer of the Company.
Lee D. Roberts, 45, President and Chief Operating Officer *
since May 1997. Prior to joining the Company in May 1997,
Mr. Roberts was with IBM for over 20 years, serving most
recently as General Manager and Vice President, Worldwide
Marketing and Sales for the Networking Division of IBM.
----------
* Such nominee has not previously served as a director of the Company.
Except as otherwise indicated, during the past five years, each of the
nominees has held the same position with the same entities as listed above.
Frederick K. Fluegel, 58, a director of the Company since 1982 and a member
of the Compensation and Audit Committees, has decided not to stand for
reelection at the Meeting.
The Board of Directors held 13 meetings (including three unanimous written
consents in lieu of a meeting) during the fiscal year ended December 31, 1997.
Each director attended or participated in at least 75% of the aggregate number
of meetings of the Board of Directors held during such period and meetings held
during such period by all committees of the Board of Directors on which that
director served.
The Company has standing Audit and Compensation Committees, but has not
established a Nominating Committee. Messrs. Savage and Fluegel comprise the
Audit Committee. The Audit Committee met once during the fiscal year ended
December 31, 1997. The Audit Committee's responsibilities include recommending
the selection of the Company's independent public accountants to the Board of
Directors, as well as reviewing the (i) scope and results of the audit
engagement with the independent public accountants and management, (ii) adequacy
of the Company's internal accounting control procedures, (iii) independence of
the independent public accountants and (iv) the range of audit and non-audit
fees charged by the independent public accountants. During fiscal year 1997,
Messrs. Fluegel, Lyons and Savage comprised the Compensation Committee, which
met six times during the fiscal year ended December 31, 1997. The Compensation
18.
<PAGE>
Committee reviews and approves executive salaries, considers awards to be
granted under the Company's officer bonus plan, has the exclusive authority to
make stock option grants under the 1995 Stock Option Plan to the Company's
executive officers and performs other related functions upon request of the
Board of Directors. Either the Compensation Committee or the full Board of
Directors may award option grants to all other eligible individuals under the
1995 Stock Option Plan.
Board Compensation and Benefits
Each director who is not an employee of the Company is reimbursed for
actual expenses incurred in attending Board meetings. In addition, each
non-employee director received the following compensation for his Board service
during fiscal 1997: (i) an annual retainer fee of $12,000; (ii) a fee of $1,500
for each Board meeting attended; and (iii) a fee of $1,000 for each Committee
meeting attended which was not held on the same day as a Board meeting.
At the 1997 Annual Stockholders Meeting held on May 20, 1997, Messrs.
Fluegel, Savage and Lyons each received, upon their reelection to the Board, a
stock option for 3,500 shares of the Company's Common Stock under the Automatic
Option Grant Program in effect for non-employee Board members under the 1995
Stock Option Plan. Each option has an exercise price of $13.06 per share, the
fair market value per share of Common Stock on the grant date. Each option will
become exercisable for the option shares in a series of four successive equal
annual installments upon the optionee's completion of each year of Board service
over the four-year period measured from the grant date. The option has a maximum
term of 10 years measured from the grant date, subject to earlier termination
following the optionee's cessation of Board service.
On January 2, 1998, Mr. Savage, in connection with his election to apply
his $12,000 cash retainer fee for the 1998 fiscal year to the acquisition of a
special option grant under the Director Fee Option Grant Program in effect under
the 1995 Stock Option Plan, was granted an option for 610 shares under that
program. The option has an exercise price of $9.83 per share, one-third of the
fair market value per share of the Common Stock on the grant date ($29.50).
Accordingly, the spread on the option shares at the time of grant (the fair
market value of those shares less the aggregate exercise price) was equal to the
cash retainer fee Mr. Savage elected to apply to the grant. The option will
become exercisable for the option shares in a series of 12 successive equal
monthly installments upon the optionee's completion of each month of Board
service during the 1998 calendar year. The option will immediately become
exercisable for all the option shares in the event any of the following
transactions should occur while the optionee continues in Board service: (i) the
optionee dies or becomes permanently disabled, (ii) the Company is acquired by
merger or asset sale or (iii) there is a change in control of the Company
(whether by tender offer for more than 50% of the Company's outstanding voting
securities or a change in the composition of the Board effected through one or
more contested elections for Board membership). The option has a maximum term of
10 years measured from the grant date, subject to earlier termination three
years following the optionee's cessation of Board service.
Provided the stockholders approve Proposal 2 at the Meeting, the provisions
of the Automatic Option Grant Program in effect under the 1995 Stock Option Plan
will be amended to provide the following option grants to the non-employee Board
members over their period of continued Board service: (i) each individual
reelected to the Board as a non-employee Board member at the 1998 Annual Meeting
will receive at that time an option grant for 15,000 shares of the Company's
Common Stock; (ii) each individual who first joins the Board as a non-employee
Board member at the 1998 Annual Meeting or at any time thereafter will, upon his
or her initial election or appointment to the Board, receive an option grant for
25,000 shares of the Company's Common Stock, provided such individual has not
previously been in the Company's employ, and (iii) on the date of each Annual
Stockholders Meeting, beginning with the 1998 Annual Meeting, each non-employee
Board member reelected to the Board at that time will also receive an option
grant for 7,000 shares of the Company's Common Stock, provided such individual
has served as a non-employee Board member for at least six months. For further
information concerning the terms of such options, please see the description of
the Automatic Option Grant Program in Proposal 2 below "Approval of Amendments
to the 1995 Stock Option Plan."
19.
<PAGE>
Stockholder Approval
Directors will be elected by a favorable vote of a plurality of the shares
of voting stock present and entitled to vote, in person or by proxy, at the
Meeting. Abstentions or broker non-votes as to the election of directors will
not affect the election of the candidates receiving the plurality of votes.
Unless instructed to the contrary, the shares represented by the proxies will be
voted FOR the election of the four nominees named above as directors. Although
it is anticipated that each nominee will be able to serve as a director, should
any nominee become unavailable to serve, the proxies will be voted for such
other person or persons as may be designated by the Company's Board of
Directors. As of the date of this Proxy Statement, the Board of Directors is not
aware of any nominee who is unable or will decline to serve as a director.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF ALL FOUR
NOMINEES NAMED ABOVE.
20.
<PAGE>
Proposal 2
APPROVAL OF AMENDMENTS TO THE 1995 STOCK OPTION PLAN
The Company's stockholders are being asked to approve a series of
amendments to the Company's 1995 Stock Option Plan (the "1995 Plan") that will
increase the number of shares of Common Stock issuable under the 1995 Plan by an
additional 600,000 shares and revise the provisions of the Automatic Option
Grant Program to effect the following changes:
(i) Each individual reelected to the Board as a non-employee Board member
at the 1998 Annual Meeting will receive at that time an option grant for
15,000 shares of the Company's Common Stock.
(ii) Each individual who first joins the Board as a non-employee Board
member at the 1998 Annual Meeting or at any time thereafter will, upon his
or her initial election or appointment to the Board, receive an option
grant for 25,000 shares of the Company's Common Stock, provided such
individual has not previously been in the Company's employ. Previously,
newly appointed or elected non-employee Board members received an initial
option grant for 10,000 shares of Common Stock.
(iii) On the date of each Annual Stockholders Meeting, beginning with the
1998 Annual Meeting, each individual reelected to the Board as a
non-employee Board member will also receive an option grant for 7,000
shares of the Company's Common Stock, provided such individual has served
as a non-employee Board member for at least six months. Previously,
non-employee Board members received an option grant for 3,500 shares upon
their reelection to the Board.
The share increase to the 1995 Plan will assure that the Company will have
a sufficient reserve of Common Stock to provide a comprehensive equity incentive
program for the Company's officers, employees and non-employee Board members in
order to encourage those individuals to remain in the Company's service and more
closely align their interests with those of the stockholders. The number of
shares for which options will be granted to each newly-hired or continuing
employee will be based both on competitive market conditions and individual
performance. The changes to the Automatic Option Grant Program will provide a
more meaningful equity incentive program to attract and retain the services of
non-employee Board members.
The 1995 Plan became effective on May 24, 1995 upon approval by the
stockholders at the 1995 Annual Meeting and serves as the successor to the
Company's predecessor 1986 Stock Option Plan. The amendment to the 1995 Plan
that is the subject of this Proposal was adopted by the Board as of March 17,
1998. The following is a summary of the principal features of the 1995 Plan, as
amended. The summary, however, does not purport to be a complete description of
all the provisions of the 1995 Plan. Any stockholder of the Company who wishes
to obtain a copy of the actual plan document may do so upon written request to
the Company's Secretary at the Company's principal executive offices in Costa
Mesa, California.
Equity Incentive Programs
The 1995 Plan contains five separate equity incentive programs: (i) a
Discretionary Option Grant Program, (ii) a Salary Reduction Option Grant
Program, (iii) a Stock Issuance Program, (iv) an Automatic Option Grant Program,
and (v) a Director Fee Option Grant Program. The principal features of each
program are described below. The Compensation Committee has the exclusive
authority to administer the Discretionary Option Grant Program and Stock
Issuance Program with respect to option grants and stock issuances made to the
Company's executive officers and non-employee Board members. The Compensation
Committee and the full Board each have separate but concurrent authority to make
option grants and stock issuances under those programs to all other eligible
individuals. The term Plan Administrator, as used in this summary, will mean
either the Compensation Committee or the Board, to the extent each such entity
is acting within the scope of its administrative jurisdiction under the 1995
Plan. The Compensation Committee will also have the exclusive authority to
select the executive officers and other highly compensated employees who may
participate in the Salary Reduction Option Grant Program, but neither the
21.
<PAGE>
Compensation Committee nor the Board will exercise any other administrative
discretion under that program or under the Automatic Option Grant or Director
Fee Option Grant Program for the non-employee Board members. All grants under
these three latter programs will be made in strict compliance with the express
provisions of each such program, and stockholder approval of the 600,000-share
increase subject to this Proposal will also constitute pre-approval of all
option grants subsequently made pursuant to the express provisions of those
programs on the basis of such share increase and the subsequent exercise of
those options in accordance with their terms.
Share Reserve
The maximum number of shares of the Company's Common Stock available for
issuance over the term of the 1995 Plan may not exceed 4,312,415 shares,
including the 600,000-share increase for which stockholder approval is sought
under this Proposal. However, not more than 3,661,985 shares may be issued under
the 1995 Plan after March 17, 1998. In no event may any individual participant
in the 1995 Plan be granted stock options and direct stock issuances for more
than 200,000 shares in the aggregate per calendar year.
The shares of Common Stock issuable under the 1995 Plan may be drawn from
shares of the Company's authorized but unissued Common Stock or from shares of
Common Stock reacquired by the Company, including shares repurchased on the open
market.
Shares subject to any outstanding options under the 1995 Plan (including
options incorporated from the predecessor 1986 Stock Option Plan) which expire
or otherwise terminate prior to exercise will be available for subsequent
issuance. Unvested shares issued under the 1995 Plan and subsequently
repurchased by the Company, at the option exercise or direct issue price paid
per share, pursuant to the Company's repurchase rights under the 1995 Plan will
also be available for reissuance.
Eligibility
Employees, non-employee Board members, and independent consultants and
advisors in the service of the Company or its parent and subsidiaries (whether
now existing or subsequently established) will be eligible to participate in the
Discretionary Option Grant and Stock Issuance Programs. Executive officers and
other highly compensated employees will also be eligible to participate in the
Salary Reduction Option Grant Program, and non-employee members of the Board
will also be eligible to participate in the Automatic Option Grant and Director
Fee Option Grant Programs.
As of March 17, 1998, 10 executive officers, three non-employee Board
members and approximately 920 other employees and consultants were eligible to
participate in the Discretionary Option Grant and Stock Issuance Programs,
approximately 10 executive officers were eligible to participate in the Salary
Reduction Option Grant Program, and three non-employee Board members were
eligible to participate in the Automatic Option Grant and Director Fee Option
Grant Programs.
Valuation
The fair market value per share of Common Stock on any relevant date under
the 1995 Plan will be the average between the high and low selling prices per
share on that date on the Nasdaq National Market. On March 17, 1998, the fair
market value per share determined on such basis was $38.69.
Discretionary Option Grant Program
The options granted under the Discretionary Option Grant Program may be
either incentive stock options under the federal tax laws or non-statutory
options. Each granted option will have an exercise price per share not less than
one hundred percent (100%) of the fair market value per share of Common Stock on
the option grant date, and no granted option will have a term in excess of ten
years. The shares subject to each option will generally vest in a series of
installments over a specified period of service measured from the grant date.
22.
<PAGE>
Upon cessation of service, the optionee will have a limited period of time
in which to exercise any outstanding option to the extent exercisable for vested
shares. The Plan Administrator will have complete discretion to extend the
period following the optionee's cessation of service during which his or her
outstanding options may be exercised and/or to accelerate the exercisability or
vesting of such options in whole or in part. Such discretion may be exercised at
any time while the options remain outstanding, whether before or after the
optionee's actual cessation of service.
Salary Reduction Option Grant Program
The Plan Administrator will have complete discretion in implementing the
Salary Reduction Option Grant Program for one or more calendar years and in
selecting the executive officers and other highly compensated individuals who
are to participate in the program for those years. As a condition to such
participation, each selected individual must, prior to the start of the calendar
year of participation, file with the Plan Administrator an irrevocable
authorization directing the Company to reduce, by a designated multiple of one
percent (1%), his or her base salary for the upcoming calendar year. The salary
reduction amount must not be less than the greater of (i) five percent (5%) of
the participant's base salary for the year or (ii) Ten Thousand Dollars
($10,000.00), and may not be more than the lesser of (i) twenty-five percent
(25%) of his or her base salary or (ii) Seventy Five Thousand Dollars
($75,000.00). Each individual who files a proper salary reduction authorization
will be granted a stock option under the Salary Reduction Option Grant Program
on the first trading day in January of the calendar year for which that salary
reduction is to be in effect. Stockholder approval of the 600,000-share increase
subject to this Proposal will constitute pre-approval of each option
subsequently granted pursuant to the provisions of the Salary Reduction Option
Grant Program on the basis of such share increase and the subsequent exercise of
that option in accordance with its terms.
Each option will be subject to substantially the same terms and conditions
applicable to option grants made under the Discretionary Option Grant Program,
except for the following differences:
- Each option will be a non-statutory option.
- The exercise price per share will be equal to one-third of the fair
market value per share of Common Stock on the option grant date, and the
number of option shares will be determined by dividing the total dollar
amount of the authorized reduction in the participant's base salary by
two-thirds of the fair market value per share of Common Stock on the option
grant date. As a result, the total spread on the option (the fair market
value of the option shares on the grant date less the aggregate exercise
price payable for those shares) will equal the dollar amount of the
reduction to the optionee's base salary to be in effect for the calendar
year for which the option grant is made.
- The option will become exercisable for the option shares in a series
of twelve (12) successive equal monthly installments upon the optionee's
completion of each calendar month of service in the calendar year for which
the salary reduction is in effect.
- Each option will remain outstanding for vested shares until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date the
optionee's service terminates.
Stock Issuance Program
Shares may be issued under the Stock Issuance Program for such valid
consideration under the Delaware General Corporation Law as the Plan
Administrator deems appropriate, provided the value of such consideration is not
less than the fair market value of the issued shares on the date of issuance.
Shares may also be issued solely as a bonus for past services.
23.
<PAGE>
The shares issued as a bonus for past services will be fully vested upon
issuance. All other shares issued under the program will be subject to a vesting
schedule tied to the performance of service or the attainment of performance
goals. The following requirements will govern the applicable vesting schedule:
- For any shares which are to vest solely through the participant's
performance of services, the Plan Administrator will impose a minimum
service period of at least three (3) years before any of the shares will
vest.
- For any shares which are to vest upon the participant's performance
of services and the Company's attainment of one or more prescribed
performance milestones, the Plan Administrator will impose a minimum
service period of at least one (1) year.
The Plan Administrator will have the sole and exclusive authority,
exercisable upon a participant's termination of service, to vest any or all
unvested shares of Common Stock at the time held by that participant, to the
extent the Plan Administrator determines that such vesting provides an
appropriate severance benefit under the circumstances.
Automatic Option Grant Program
Under the amended Automatic Option Grant Program, each individual reelected
to the Board as a non-employee Board member at the 1998 Annual Meeting will
receive at that time an automatic option grant for 15,000 shares of Common
Stock. Each individual who first becomes a non-employee Board member at the 1998
Annual Meeting or at any time thereafter, whether through election by the
stockholders or appointment by the Board, will receive, upon his or her initial
election or appointment to the Board, an automatic option grant for 25,000
shares of Common Stock, provided such individual was not previously in the
Company's employ. In addition, at each annual stockholders meeting, beginning
with the 1998 Annual Meeting, each individual who is reelected as a non-employee
Board member will automatically be granted at that meeting a stock option to
purchase 7,000 shares of Common Stock, provided such individual has served as a
non-employee Board member for at least six months. There will be no limit on the
number of such 7,000-share options which any one non-employee Board member may
receive over his or her period of Board service, and non-employee Board members
who have previously served in the Company's employ will be fully eligible for
one or more 7,000-share option grants over their period of Board service.
Stockholder approval of the 600,000-share increase subject to this Proposal will
constitute pre-approval of each option granted on or after the date of the 1998
Annual Meeting pursuant to the provisions of the Automatic Option Grant Program
on the basis of such share increase and the subsequent exercise of that option
in accordance with its terms.
Each option under the Automatic Option Grant Program will have an exercise
price per share equal to one hundred percent (100%) of the fair market value per
share of Common Stock on the option grant date and a maximum term of ten (10)
years measured from the grant date. The option will be immediately exercisable
for all the option shares, but any purchased shares will be subject to
repurchase by the Company, at the exercise price paid per share, upon the
optionee's cessation of Board service prior to vesting in those shares. The
shares subject to each option will vest (and the Company's repurchase rights
will lapse) in four (4) successive equal annual installments over the optionee's
period of Board service, with the first such installment to vest upon the
completion of one (1) year of Board service measured from the option grant date.
The shares subject to each outstanding automatic option grant will
immediately vest should the optionee die or become permanently disabled while a
Board member or should any of the following events occur while the optionee
continues in Board service: (i) an acquisition of the Company by merger or asset
sale, (ii) the successful completion of a tender offer for more than fifty
percent (50%) of the outstanding voting securities or (iii) a change in the
majority of the Board occasioned by one or more contested elections for Board
membership. Each automatic option grant held by an optionee upon his or her
termination of Board service will remain exercisable, for any or all of the
option shares in which the optionee is vested at the time of such termination,
for up to a twelve (12)-month period following such termination date.
24.
<PAGE>
Director Fee Option Grant Program
Each non-employee Board member will have the right to apply all or a
portion of his total retainer fee otherwise payable in cash each year (currently
$12,000) to the acquisition of a special option grant under the Director Fee
Option Grant Program. The grant will automatically be made on the first trading
day in January following the filing of the stock-in-lieu of cash election and
will have an exercise price per share equal to one-third of the fair market
value of the option shares on the grant date. The number of option shares will
be determined by dividing the total dollar amount of the retainer fee subject to
the director's election by two-thirds of the fair market value per share of
Common Stock on the option grant date. As a result, the total spread on the
option (the fair market value of the option shares on the grant date less the
aggregate exercise price payable for those shares) will be equal to the portion
of the retainer fee subject to the director's election. Stockholder approval of
the 600,000-share increase subject to this Proposal will constitute pre-approval
of each option subsequently granted pursuant to the provisions of the Director
Fee Option Grant Program on the basis of that share increase and the subsequent
exercise of that option in accordance with its terms.
The option will become exercisable for the option shares in a series of
twelve (12) successive equal monthly installments upon the optionee's completion
of each month of Board service during the calendar year of the option grant. In
the event the optionee ceases Board service for any reason (other than death or
permanent disability), the option will immediately terminate with respect to any
unvested shares subject to the option at the time. However, the option will
remain exercisable for the vested shares subject to the option until the earlier
of (i) the expiration of the ten (10)-year option term or (ii) the end of the
three (3)-year period measured from the date of the optionee's cessation of
Board service. Should the optionee's service as a Board member cease by reason
of death or permanent disability, then the option will immediately become
exercisable for all the shares of Common Stock subject to the option and may be
exercised for such shares until the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the end of the three (3)-year period measured from
the date of the optionee's cessation of Board service.
Stock Awards
The table on the following page shows, as to each of the Named Executive
Officers in the Summary Compensation Table and the various indicated individuals
and groups, the number of shares of Common Stock subject to options granted
under the 1995 Plan since January 1, 1997 through March 17, 1998, together with
the weighted average exercise price payable per share. The number of shares and
weighted average exercise price calculations include all options granted during
the indicated period and subsequently regranted at a lower exercise price per
share pursuant to the option cancellation/regrant program described below. No
direct stock issuances have been made to date under the 1995 Plan.
25.
<PAGE>
<TABLE>
=================================================================================================================
OPTION TRANSACTIONS
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Options Granted Weighted Average
Name (Number of Shares) Exercise Price
- ---------------------------------------------------------- ------------------------ ---------------------------
<S> <C> <C>
Theodore J. Smith 185,000 $19.68
Chairman of the Board and Chief Executive Officer
- ---------------------------------------------------------- ------------------------ ---------------------------
Lee D. Roberts* 30,000 $28.38
President and Chief Operating Officer
- ---------------------------------------------------------- ------------------------ ---------------------------
Bruce A. Waddington 174,000 $16.35
Senior Vice President-Engineering
and Chief Technology Officer
- ---------------------------------------------------------- ------------------------ ---------------------------
Mark S. St.Clare 105,000 $18.91
Senior Vice President-Finance
Chief Financial Officer and Secretary
- ---------------------------------------------------------- ------------------------ ---------------------------
Lewis H. Carpenter, Jr. 65,000 $20.40
Senior Vice President-Worldwide Marketing
- ---------------------------------------------------------- ------------------------ ---------------------------
All executive officers as a group (10) 758,100 $19.49
- ---------------------------------------------------------- ------------------------ ---------------------------
Frederick K. Fluegel 3,500 $13.06
- ---------------------------------------------------------- ------------------------ ---------------------------
William P. Lyons 3,500 $13.06
- ---------------------------------------------------------- ------------------------ ---------------------------
John C. Savage 4,683 $12.32
- ---------------------------------------------------------- ------------------------ ---------------------------
All non-employee directors as a group (3) 11,683 $12.76
- ---------------------------------------------------------- ------------------------ ---------------------------
All employees, including current officers who are not
executive officers, as a group 1,761,476 $20.12
========================================================== ======================== ===========================
</TABLE>
- --------
* The table does not include the 300,000-share option grant made to Mr.
Roberts outside of the 1995 Plan in connection with his commencement of
employment with the Company.
As of March 17, 1998, 2,809,229 shares of Common Stock were subject to
outstanding options under the 1995 Plan, and 852,756 shares remained available
for future issuance, including the 600,000-share increase for which stockholder
approval is sought under this Proposal.
On July 11, 1997, the Plan Administrator implemented an option
cancellation/regrant program for all employees of the Company, including the
Company's executive officers. Pursuant to that program, each such employee was
given the opportunity to surrender his or her outstanding options under the 1995
Plan with exercise prices in excess of $18.00 per share in return for a new
option grant for the same number of shares but with an exercise price of $18.00
per share, the fair market value per share of Common Stock on the July 11, 1997
grant date of the new option. Options for a total of 1,552,525 shares with a
weighted average exercise price of $27.40 per share were surrendered for
cancellation, and new options for the same number of shares were granted with
the $18.00 per share exercise price. Upon the optionee's completion of six
months of service with the Company (or one year of service for executive
officers) measured from the July 11, 1997 grant date, the new option will become
exercisable for the number of shares for which the higher-priced option was
exercisable at the time of cancellation, and the new option will become
exercisable for each remaining installment of the option shares on a date six
months later than that installment would have become exercisable under the
cancelled option.
New Plan Benefits
As of March 17, 1998, no option grants or direct stock issuances have been
made under the 1995 Plan on the basis of the 600,000-share increase for which
26.
<PAGE>
stockholder approval is sought under this Proposal. If the Proposal is approved,
then Messrs. Lyons and Savage will each receive option grants for an aggregate
of 22,000 shares under the Automatic Option Grant Program upon their reelection
to the Board at the 1998 Annual Meeting. Each such option will have an exercise
price per share equal to the average of the high and low selling prices per
share on the Nasdaq National Market on the date of the 1998 Annual Meeting.
Acceleration
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed or replaced by the successor corporation will automatically
accelerate in full, and all unvested shares under the Stock Issuance Program
will immediately vest, except to the extent the Company's repurchase rights with
respect to those shares are transferred to the successor corporation. The Plan
Administrator will have complete discretion to grant one or more options under
the Discretionary Option Grant Program which will become fully exercisable for
all option shares in the event those options are assumed in the acquisition and
the optionee's service with the Company or the acquiring entity is involuntarily
terminated within a designated period following such acquisition. The Plan
Administrator will have similar discretion to grant options which will become
fully exercisable for all the option shares should the optionee's service
terminate, whether involuntarily or through a resignation for good reason,
within a designated period following a change in control of the Company (whether
by successful tender offer for more than fifty percent (50%) of the outstanding
voting stock or by proxy contest for the election of Board members). The Plan
Administrator may also provide for the automatic vesting of any outstanding
shares under the Stock Issuance Program upon similar terms and conditions.
Each option outstanding under the Salary Reduction Option Grant, Automatic
Option Grant and Director Fee Option Grant Programs will also automatically
accelerate in the event of an acquisition or change in control of the Company.
The acceleration of vesting in the event of a change in the ownership or
control of the Company may be seen as an anti-takeover provision and may have
the effect of discouraging a merger proposal, a takeover attempt or other
efforts to gain control of the Company.
Financial Assistance
The Plan Administrator may institute a loan program to assist one or more
participants in financing the exercise of outstanding options or the purchase of
shares under the 1995 Plan. The Plan Administrator will determine the terms of
any such assistance. However, the maximum amount of financing provided any
participant may not exceed the cash consideration payable for the issued shares
plus all applicable taxes incurred in connection with the acquisition of the
shares.
Changes in Capitalization
In the event any change is made to the outstanding shares of Common Stock
by reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares or other change in corporate structure effected
without the Company's receipt of consideration, appropriate adjustments will be
made to (i) the maximum number and/or class of securities issuable under the
1995 Plan, (ii) the number and/or class of securities for which any one person
may be granted stock options and direct stock issuances under the 1995 Plan per
calendar year, (iii) the number and/or class of securities for which grants are
subsequently to be made under the Automatic Option Grant Program to new and
continuing non-employee Board members and (iv) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option in order to prevent the dilution or enlargement of benefits thereunder.
27.
<PAGE>
Amendment and Termination
The Board may amend or modify the 1995 Plan in any or all respects
whatsoever, subject to any required stockholder approval under applicable law or
regulation. The Board may terminate the 1995 Plan at any time, and the 1995 Plan
will in all events terminate on May 24, 2005.
FEDERAL INCOME TAX CONSEQUENCES
Option Grants
Options granted under the 1995 Plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options which are not intended to meet such requirements. The
Federal income tax treatment for the two types of options differs as follows:
Incentive Options. No taxable income is recognized by the optionee at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise made the
subject of disposition. For Federal tax purposes, dispositions are divided into
two categories: (i) qualifying and (ii) disqualifying. A qualifying disposition
occurs if the sale or other disposition is made after the optionee has held the
shares for more than two (2) years after the option grant date and more than one
(1) year after the exercise date. If either of these two holding periods is not
satisfied, then a disqualifying disposition will result.
Upon a qualifying disposition, the optionee will recognize long-term
capital gain in an amount equal to the excess of (i) the amount realized upon
the sale or other disposition of the purchased shares over (ii) the exercise
price paid for the shares. If there is a disqualifying disposition of the
shares, then the excess of (i) the fair market value of those shares on the
exercise date over (ii) the exercise price paid for the shares will be taxable
as ordinary income to the optionee. Any additional gain or loss recognized upon
the disposition will be recognized as a capital gain or loss by the optionee.
If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction, for the taxable
year in which such disposition occurs, equal to the excess of (i) the fair
market value of such shares on the option exercise date over (ii) the exercise
price paid for the shares. In no other instance will the Company be allowed a
deduction with respect to the optionee's disposition of the purchased shares.
Non-Statutory Options. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Company in the event of the optionee's
termination of service prior to vesting in those shares, then the optionee will
not recognize any taxable income at the time of exercise but will have to report
as ordinary income, as and when the Company's repurchase right lapses, an amount
equal to the excess of (i) the fair market value of the shares on the date the
repurchase right lapses over (ii) the exercise price paid for the shares. The
optionee may, however, elect under Section 83(b) of the Internal Revenue Code to
include as ordinary income in the year of exercise of the option an amount equal
to the excess of (i) the fair market value of the purchased shares on the
exercise date over (ii) the exercise price paid for such shares. If the Section
83(b) election is made, the optionee will not recognize any additional income as
and when the repurchase right lapses.
The Company will be entitled to an income tax deduction equal to the amount
of ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the taxable
year of the Company in which such ordinary income is recognized by the optionee.
28.
<PAGE>
Direct Stock Issuance
The tax principles applicable to direct stock issuances under the 1995 Plan
will be substantially the same as those summarized above for the exercise of
non-statutory option grants.
Deductibility of Executive Compensation
The Company anticipates that any compensation deemed paid by it in
connection with disqualifying dispositions of incentive stock option shares or
exercises of non-statutory options granted with exercise prices equal to the
fair market value of the option shares on the grant date will qualify as
performance-based compensation for purposes of Code Section 162(m) and will not
have to be taken into account for purposes of the $1 million limitation per
covered individual on the deductibility of the compensation paid to certain
executive officers of the Company. Accordingly, all compensation deemed paid
with respect to those options will remain deductible by the Company without
limitation under Code Section 162(m).
Accounting Treatment
Under current accounting principles, neither the grant nor the exercise of
options granted under the 1995 Plan with exercise prices equal to the fair
market value of the option shares on the grant date will result in a direct
charge to the Company's reported earnings. However, the Company must disclose,
in footnotes and pro-forma statements to the Company's financial statements, the
impact those options would have upon the Company's reported earnings were the
value of those options at the time of grant treated as a compensation expense.
In addition, the number of outstanding options under the 1995 Plan may be a
factor in determining the Company's diluted earnings per share.
Stockholder Approval
The affirmative vote of a majority of the outstanding voting shares of the
Company present or represented and entitled to vote at the Meeting is required
for approval of the amendments to 1995 Plan. Should such stockholder approval
not be obtained, then any stock options granted under the 1995 Plan on the basis
of the 600,000-share increase which forms part of this Proposal will terminate
without ever becoming exercisable for any of the shares of Common Stock subject
to those options, and no further options will be granted on the basis of that
increase. In addition, none of the changes to the Automatic Option Grant Program
will be implemented. Accordingly, in the absence of such stockholder approval,
(A) the 1995 Plan (including the Automatic Option Grant Program thereunder) will
remain in existence in accordance with the provisions of the plan document in
effect immediately prior to the new amendments; (B) stock options and direct
stock issuances may continue to be made under the 1995 Plan until the share
reserve as last approved by the stockholders is issued; and (C) each of the
non-employee Board members reelected at the 1998 Annual Meeting will receive an
automatic option grant for 3,500 shares, and the newly-elected non-employee
Board members will each receive an option grant for 10,000 shares.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDMENTS
TO THE 1995 PLAN.
29.
<PAGE>
Proposal 3
APPROVAL OF 1998 EMPLOYEE STOCK PURCHASE PLAN
The Company's stockholders are being asked to approve the implementation of
the 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan") as the
successor to the Company's existing 1988 Employee Qualified Stock Purchase Plan
(the "Predecessor Plan"). If the stockholders approve the 1998 Purchase Plan,
the Predecessor Plan will terminate with the purchase period ending on September
30, 1998, and no further shares of Common Stock will be issued under the
Predecessor Plan after that date. However, the share reserve remaining under the
Predecessor Plan after the September 30, 1998 purchase date will be transferred
to the new 1998 Purchase Plan and will form part of the initial share reserve
available for issuance thereunder.
The 1998 Purchase Plan is intended to provide eligible employees of the
Company and its participating affiliates with the opportunity to acquire a
proprietary interest in the Company through participation in a payroll-deduction
based employee stock purchase program designed to operate in compliance with
Section 423 of the Internal Revenue Code. The 1998 Purchase Plan was adopted by
the Board of Directors on March 17, 1998 and will become effective on October 1,
1998 (the "Effective Date"), provided the 1998 Purchase Plan is approved by the
stockholders at the Meeting.
The following is a summary of the principal features of the 1998 Purchase
Plan. The summary, however, does not purport to be a complete description of all
the provisions of the 1998 Purchase Plan. Any stockholder of the Company who
wishes to obtain a copy of the actual plan document may do so upon written
request to the Corporate Secretary at the Company's principal executive offices
in Costa Mesa, California.
Share Reserve
The implementation of the 1998 Purchase Plan will result in the reservation
of an additional one hundred fifty thousand (150,000) shares of Common Stock
under the Company's employee stock purchase program. To this reserve will be
added the actual number of shares of Common Stock which remain available for
issuance under the Predecessor Plan following the close of the current purchase
period thereunder on September 30, 1998, so that a total of not more than two
hundred thousand (200,000) shares will be issuable under the 1998 Purchase Plan
after September 30, 1998 (150,000 new shares plus an estimated 50,000 shares
carried over from the Predecessor Plan). This share reserve will also be used to
fund all stock purchases under the International Employee Stock Purchase Plan
which the Company has established for the employees of its foreign subsidiaries.
The provisions of the International Employee Stock Purchase Plan will be
substantially the same as those which will be in effect for 1998 Purchase Plan,
except to the extent certain modifications may be necessary to satisfy legal or
regulatory requirements of the applicable foreign jurisdictions.
In the event any change is made to the outstanding shares of Common Stock
by reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares or other change in corporate structure effected
without the Company's receipt of consideration, appropriate adjustments will be
made to (i) the class and maximum number of securities issuable under the 1998
Purchase Plan, including the class and maximum number of securities issuable per
participant or in the aggregate on any one purchase date, and (ii) the class and
maximum number of securities subject to each outstanding purchase right and the
purchase price payable per share thereunder.
Administration
The 1998 Purchase Plan will be administered by the Compensation Committee
of the Board of Directors. Such committee, as Plan Administrator, will have full
authority to adopt such rules and procedures as it may deem necessary for proper
plan administration and to interpret the provisions of the 1998 Purchase Plan.
All costs and expenses incurred in plan administration will be paid by the
Company without charge to participants.
30.
<PAGE>
Offering Periods
Shares will be issued through a series of successive offering periods, each
of six (6) months duration. The initial offering period, however, will be of
seven (7) months duration and will run from October 1, 1998 to April 30, 1999.
It is expected that the initial offering period for the International Employee
Stock Purchase Plan will be ten (10) months duration and will run from July 1,
1998 to April 30, 1999. The next offering period for both the 1998 Purchase Plan
and the International Employee Stock Purchase Plan is scheduled to commence on
May 1, 1999. Each participant will be granted a separate option to purchase
shares of Common Stock for each offering period in which he or she participates.
Except for the initial offering period in which the options will be granted on
October 1, 1998 (or July 1, 1998 for the International Plan) and exercised on
April 30, 1999, options under the 1998 Purchase Plan will be granted on the
first business day in May and November each year and will be automatically
exercised on the last business day in the immediately succeeding October and
April, respectively, each year. Each option entitles the participant to purchase
the whole number of shares of Common Stock obtained by dividing the
participant's payroll deductions for the offering period by the purchase price
in effect for such period.
Eligibility
Any individual who customarily works for more than twenty (20) hours per
week for more than five (5) months per calendar year in the employ of the
Company or any participating affiliate will be eligible to participate in one or
more offering periods. An eligible employee may only join an offering period on
the start date of that period.
Participating affiliates include any parent or subsidiary corporations of
the Company, whether now existing or hereafter organized, which elect, with the
approval of the Plan Administrator, to extend the benefits of the 1998 Purchase
Plan to their eligible employees.
As of March 17, 1998, approximately 1,000 employees, including 10 executive
officers, were eligible to participate in the Predecessor Plan.
Purchase Provisions
Each participant may authorize periodic payroll deductions in any multiple
of one percent (1%) of his or her cash earnings, up to a maximum of ten percent
(10%). A participant may not increase his or her rate of payroll deduction for
an offering period after the start of that period, but he or she may decrease
the rate once per offering period.
On the last business day of each offering period, the accumulated payroll
deductions of each participant will automatically be applied to the purchase of
whole shares of Common Stock at the purchase price in effect for that period.
However, no participant may, on any one purchase date within the offering
period, purchase more than four hundred (400) shares of Common Stock. In
addition, the maximum number of shares of Common Stock purchasable by all
participants in the aggregate on any one purchase date cannot exceed eighty-five
thousand (85,000) shares, subject to periodic adjustments in the event of
certain changes in the Company's capitalization.
Purchase Price
The purchase price per share at which Common Stock will be purchased on the
participant's behalf for each offering period will be equal to eighty-five
percent (85%) of the lower of (i) the fair market value per share of Common
Stock on the start date of that offering period or (ii) the fair market value
per share of Common Stock on the last day of that offering period.
31.
<PAGE>
Valuation
The fair market value per share of Common Stock on any relevant date will
be deemed equal to the average of the high and low selling prices per share on
such date on the Nasdaq National Market. On March 17, 1998, the fair market
value per share determined on such basis was $38.69.
Special Limitations
The 1998 Purchase Plan imposes certain limitations upon a participant's
rights to acquire Common Stock, including the following limitations:
- No purchase right may be granted to any individual who owns stock
(including stock purchasable under any outstanding options or purchase rights)
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or any of its affiliates.
- No purchase right granted to a participant may permit such individual to
purchase Common Stock at a rate greater than $25,000 worth of such Common
Stock (valued at the time such purchase right is granted) for each calendar
year the purchase right remains outstanding at any time.
- No participant may purchase more than 400 shares of Common Stock on any
one purchase date.
- No more than 85,000 shares of Common Stock may be purchased in the
aggregate by all participants on any one purchase date.
Termination of Purchase Rights
A participant's purchase right will immediately terminate upon such
participant's loss of eligible employee status, and his or her accumulated
payroll deductions for the offering period in which the purchase right
terminates will be promptly refunded. A participant may withdraw from an
offering period at any time prior to the last fifteen (15) days of that period
and elect to have his or her accumulated payroll deductions for the offering
period in which such withdrawal occurs either refunded or applied to the
purchase of shares of Common Stock on the next purchase date.
Stockholder Rights
No participant will have any stockholder rights with respect to the shares
of Common Stock covered by his or her purchase right until the shares are
actually purchased on the participant's behalf. No adjustment will be made for
dividends, distributions or other rights for which the record date is prior to
the date of such purchase.
Assignability
No purchase right will be assignable or transferable and will be
exercisable only by the participant.
Acquisition
Should the Company be acquired by merger or asset sale during an offering
period, all outstanding purchase rights will automatically be exercised
immediately prior to the effective date of such acquisition. The purchase price
will be equal to eighty-five (85%) of the lower of (i) the fair market value per
share of Common Stock on the start date of that offering period or (ii) the fair
market value per share of Common Stock immediately prior to such acquisition.
The limitation on the maximum number of shares purchasable in the aggregate on
any one purchase date shall not apply to the share purchases effected in
connection with such acquisition.
32.
<PAGE>
Amendment and Termination
The 1998 Purchase Plan will terminate upon the earliest to occur of (i)
October 31, 2008, (ii) the date on which all available shares are issued or
(iii) the date on which all outstanding purchase rights are exercised in
connection with an acquisition of the Company.
The Board of Directors may at any time alter, suspend or discontinue the
1998 Purchase Plan. However, the Board of Directors may not, without stockholder
approval, (i) increase the number of shares issuable under the 1998 Purchase
Plan, except in connection with certain changes in the Company's capital
structure, (ii) alter the purchase price formula so as to reduce the purchase
price or (iii) modify the requirements for eligibility to participate in the
1998 Purchase Plan.
Plan Benefits
The table below shows, as to each of the Named Executive Officers in the
Summary Compensation Table and the various indicated groups, the following
information with respect to transactions under the Predecessor Plan effected
during the period from January 1, 1997 to December 31, 1997: (i) the number of
shares of Common Stock purchased under the Predecessor Plan during that period
and (ii) the weighted average purchase price paid per share of Common Stock in
connection with such purchases.
<TABLE>
========================================================================================================
PURCHASE PLAN TRANSACTIONS
- --------------------------------------------------------------------------------------------------------
<CAPTION>
Weighted
Number of Average
Name Shares Purchase Price
- ---------------------------------------------------------------- ------------------ ------------------
<S> <C> <C>
Theodore J. Smith __ __
Chairman of the Board
and Chief Executive Officer
- ---------------------------------------------------------------- ------------------ ------------------
Lee D. Roberts __ __
President and Chief Operating Officer
- ---------------------------------------------------------------- ------------------ ------------------
Bruce A. Waddington __ __
Senior Vice President-Engineering
and Chief Technology Officer
- ---------------------------------------------------------------- ------------------ ------------------
Mark S. St.Clare 735 $13.61
Senior Vice President-Finance
Chief Financial Officer and Secretary
- ---------------------------------------------------------------- ------------------ ------------------
Lewis H. Carpenter, Jr. __ __
Senior Vice President-Worldwide Marketing
- ---------------------------------------------------------------- ------------------ ------------------
All current executive officers as a group (10 persons) 2,519 $13.62
- ---------------------------------------------------------------- ------------------ ------------------
All employees, including current officers who are not 86,049 $13.62
executive officers as a group (461 persons)
========================================================================================================
</TABLE>
Federal Tax Consequences
The 1998 Purchase Plan is intended to be an "employee stock purchase plan"
within the meaning of Section 423 of the Internal Revenue Code. Under a plan
which so qualifies, no taxable income will be recognized by a participant, and
no deductions will be allowable to the Company, in connection with the grant or
the exercise of an outstanding purchase right.
33.
<PAGE>
Taxable income will not be recognized until there is a sale or other
disposition of the shares acquired under the 1998 Purchase Plan or in the event
the participant should die while still owning the purchased shares.
If the participant sells or otherwise disposes of the purchased shares
within two (2) years after the start date of the offering period in which such
shares were acquired or within one (1) one year after the actual purchase date
of those shares, then the participant will recognize ordinary income in the year
of sale or disposition equal to the amount by which the fair market value of the
shares on the purchase date exceeded the purchase price paid for those shares,
and the Company will be entitled to an income tax deduction, for the taxable
year in which such sale or disposition occurs, equal in amount to such excess.
If the participant sells or disposes of the purchased shares more than two
(2) years after the start date of the offering period in which such shares were
acquired and more than one (1) one year after the actual purchase date of those
shares, then the participant will recognize ordinary income in the year of sale
or disposition equal to the lesser of (i) the amount by which the fair market
value of the shares on the sale or disposition date exceeded the purchase price
paid for those shares or (ii) fifteen percent (15%) of the fair market value of
the shares on the start date of the offering period, and any additional gain
upon the disposition will be taxed as a long-term capital gain. The Company will
not be entitled to any income tax deduction with respect to such sale or
disposition.
If the participant still owns the purchased shares at the time of death,
the lesser of (i) the amount by which the fair market value of the shares on the
date of death exceeds the purchase price or (ii) fifteen percent (15%) of the
fair market value of the shares on his or her entry date into the offering
period in which those shares were acquired will constitute ordinary income in
the year of death.
Accounting Treatment
Under current accounting rules, the issuance of Common Stock under the 1998
Purchase Plan will not result in a direct charge to the Company's reported
earnings. However, the Company must disclose, in footnotes and pro-forma
statements to the Company's financial statements, the impact the purchase rights
granted under the 1998 Purchase Plan would have upon the Company's reported
earnings were the value of those purchase rights treated as compensation
expense.
Stockholder Approval
The affirmative vote of a majority of the Company's voting stock present or
represented and entitled to vote at the Meeting is required for approval of the
1998 Purchase Plan. Should such stockholder approval not be obtained, then the
1998 Purchase Plan will not be implemented, and no purchase rights will be
granted and no stock issuances will be made under the 1998 Purchase Plan. The
Company's existing 1988 Employee Qualified Stock Purchase Plan will, however,
continue to remain in effect, and purchase rights may be granted and stock
purchases may continue to be made pursuant to the provisions of that plan until
the available reserve of Common Stock under that plan has been issued.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE 1998
PURCHASE PLAN. THE BOARD BELIEVES THAT IT IS IN THE BEST INTERESTS OF THE
COMPANY TO CONTINUE A PROGRAM OF STOCK OWNERSHIP FOR THE COMPANY'S EMPLOYEES IN
ORDER TO PROVIDE THEM WITH A MEANINGFUL OPPORTUNITY TO ACQUIRE A SUBSTANTIAL
PROPRIETARY INTEREST IN THE COMPANY AND THEREBY ENCOURAGE SUCH INDIVIDUALS TO
REMAIN IN THE COMPANY'S SERVICE AND MORE CLOSELY ALIGN THEIR INTERESTS WITH
THOSE OF THE STOCKHOLDERS.
34.
<PAGE>
APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The firm of Deloitte & Touche LLP, the Company's independent accountants
for the fiscal year ended December 31, 1997, was selected by the Board of
Directors, upon recommendation of the Audit Committee, to act in the same
capacity for the fiscal year ending December 31, 1998. Neither the firm nor any
of its members has any relationship with the Company or any of its affiliates
except in the firm's capacity as the Company's auditor.
Representatives of Deloitte & Touche LLP are expected to be present at the
Meeting and will have the opportunity to make statements if they so desire and
respond to appropriate questions from the stockholders.
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
All proposals of stockholders intended to be presented at the Company's
1999 Annual Meeting of Stockholders must be directed to the attention of the
Secretary of the Company, at the address of the Company set forth on the first
page of this Proxy Statement, by December 7, 1998, if they are to be considered
for possible inclusion in the Proxy Statement and form of proxy used in
connection with such meeting.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors knows of no
other matters which may be presented for consideration at the Meeting. However,
if any other matter is presented properly for consideration and action at the
Meeting, or any adjournment or postponement thereof, it is intended that the
Proxies will be voted with respect thereto in accordance with the best judgment
and in the discretion of the proxy holders.
By Order of the Board of Directors,
Mark S. St.Clare
Secretary
Dated: April 6, 1998
35.
<PAGE>
FILENET CORPORATION
1995 STOCK OPTION PLAN
AS AMENDED AND RESTATED THROUGH MARCH 17, 1998
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1995 Stock Option Plan is intended to promote the
interests of FileNet Corporation, a Delaware corporation, by providing eligible
persons with the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Corporation as an incentive for them
to remain in the service of the Corporation.
This Plan shall serve as the successor to the Corporation's
existing Second Amended and Restated Stock Option Plan (the "Predecessor Plan"),
and no further option grants or share issuances shall be made under the
Predecessor Plan from and after the Effective Date of this Plan. All outstanding
stock options under the Predecessor Plan on the Effective Date shall be
incorporated into this Plan and shall accordingly be treated as outstanding
stock options under this Plan. However, each outstanding option grant so
incorporated shall continue to be governed solely by the express terms and
conditions of the agreement evidencing such grant, and no provision of this Plan
shall be deemed to affect or otherwise modify the rights or obligations of the
holders of such incorporated options with respect to their acquisition of shares
of the Corporation's Common Stock thereunder.
Capitalized terms shall have the meanings assigned to such
terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity programs:
- the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock,
- the Salary Reduction Option Grant Program under which eligible
employees may elect to have a portion of their base salary reduced
each year in return for options to purchase shares of Common Stock,
- the Stock Issuance Program under which eligible persons may, at
1.
<PAGE>
the discretion of the Plan Administrator, be issued shares of Common
Stock directly without any intervening option grant,
- the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive option grants
at periodic intervals to purchase shares of Common Stock, and
- the Director Fee Option Grant Program under which non-employee
Board members may elect to have all or any portion of their annual
retainer fee otherwise payable in cash applied to a special option
grant.
B. The provisions of Articles One and Seven shall apply to all equity
programs under the Plan and shall govern the interests of all persons under
the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have the sole and exclusive
authority to administer the Discretionary Option Grant and Stock Issuance
Programs with respect to Section 16 Insiders. Except to the extent the Primary
Committee is granted sole and exclusive authority under one or more specific
provisions of the Plan, administration of the Discretionary Option Grant and
Stock Issuance Programs with respect to all other persons eligible to
participate in these programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer these programs with respect to such persons. The members of the
Secondary Committee may be individuals who are Employees.
B. Members of the Primary Committee or any Secondary Committee
shall serve for such period of time as the Board may determine and may be
removed by the Board at any time. The Board may also at any time terminate the
functions of any Secondary Committee and reassume all powers and authority
previously delegated to such committee.
C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant or Stock Issuance Program under its jurisdiction or
any option or stock issuance thereunder.
2.
<PAGE>
D. Service on the Primary Committee or the Secondary Committee
shall constitute service as a Board member, and members of each such committee
shall accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
E. The Primary Committee shall have the sole and exclusive
authority to select the eligible individuals who are to participate in the
Salary Reduction Option Grant Program, but all option grants under the Salary
Reduction Option Grant Program shall be made in accordance with express terms of
that program and the Primary Committee shall exercise no discretion with respect
to the terms of those grants. Administration of the Automatic Option Grant and
Director Fee Option Grant Programs shall be self-executing in accordance with
the terms of that program, and no Plan Administrator shall exercise any
discretionary functions with respect to any option grants or stock issuances
made under those programs.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary
Option Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee Board members, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Only the Company's executive officers and other
highly-compensated Employees shall be eligible to participate in the Salary
Reduction Option Grant Program.
C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time or times
when such option grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an Incentive Option
or a Non-Qualified Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
for such shares.
3.
<PAGE>
D. The Plan Administrator shall have the absolute discretion
either to grant options in accordance with the Discretionary Option Grant or to
effect stock issuances in accordance with the Stock Issuance Program.
E. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals who
first become non-employee Board members on or after the Effective Date, whether
through appointment by the Board or election by the Corporation's stockholders,
and (ii) those individuals who are re-elected to serve as non-employee Board
members at one or more Annual Stockholders Meetings beginning with the 1996
Annual Meeting. A non-employee Board member who has previously been in the
employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to
receive an option grant under the Automatic Option Grant Program at the time he
or she first becomes a non-employee Board member, but shall be eligible to
receive periodic option grants under the Automatic Option Grant Program upon his
or her subsequent re-election to the Board.
F. All non-employee Board members shall be eligible to
participate in the Director Fee Option Grant Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares repurchased
by the Corporation on the open market. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed 4,312,415
shares. Such share reserve is comprised of (i) the 2,112,415 shares of Common
Stock which remained available for issuance under the Predecessor Plan as of the
Effective Date, including the shares subject to the outstanding option grants
under the Predecessor Plan which have been incorporated into this Plan and the
additional shares of Common Stock available for future grant under the
Predecessor Plan, (ii) an additional increase of 350,000 shares of Common Stock
previously authorized by the Board and approved by the Corporation's
stockholders at the 1995 Annual Meeting, (iii) an additional increase of 650,000
shares of Common Stock authorized by the Board in March 1996 and approved by the
stockholders at the 1996 Annual Meeting, (iv) a further increase of 600,000
shares of Common Stock authorized by the Board on March 20, 1997 and approved by
the stockholders at the 1997 Annual Meeting, plus (v) a further increase of
600,000 shares of Common Stock authorized by the Board on March 17, 1998,
subject to stockholder approval at the 1998 Annual Meeting. In no event,
however, shall any person participating in the Plan receive stock options and
direct stock issuances under this Plan for more than 200,000 shares of Common
Stock per calendar year, beginning with the 1995 calendar year.
B. Shares of Common Stock subject to outstanding options
(including options incorporated into this Plan from the Predecessor Plan) shall
be available for subsequent issuance under the Plan to the extent those options
expire or terminate for any reason prior to exercise in full. Unvested shares
issued under the Plan and subsequently cancelled or repurchased by the
Corporation at the option exercise or direct issue price paid per share pursuant
to the Corporation's repurchase rights under the Plan shall also be available
4.
<PAGE>
for subsequent issuance under the Plan. However, should the exercise price of an
option under the Plan be paid with shares of Common Stock or should shares of
Common Stock otherwise issuable under the Plan be withheld by the Corporation in
satisfaction of the withholding taxes incurred in connection with the exercise
of an option or the vesting of a stock issuance under the Plan, then the number
of shares of Common Stock available for issuance under the Plan shall be reduced
by the gross number of shares for which the option is exercised or which vest
under the stock issuance, and not by the net number of shares of Common Stock
issued to the holder of such option or stock issuance.
C. If any change is made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan, (ii) the number and/or class of securities for which any one
person may be granted stock options and direct stock issuances under this Plan
per calendar year, (iii) the number and/or class of securities for which grants
are subsequently to be made under the Automatic Option Grant Program to new and
continuing non-employee Board members, (iv) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option under the Plan and (v) the number and/or class of securities and price
per share in effect under each outstanding option incorporated into this Plan
from the Predecessor Plan. Such adjustments to the outstanding options are to be
effected in a manner which shall preclude the enlargement or dilution of rights
and benefits under such options. The adjustments determined by the Plan
Administrator shall be final, binding and conclusive.
5.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
<PAGE>
Each option shall be evidenced by one or more documents in the
form approved by the Plan Administrator; provided, however, that each such
document shall comply with the terms specified below. Each document evidencing
an Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
1. The exercise price per share shall be fixed by
the Plan Administrator but shall not be less than one hundred percent (100%)
of the Fair Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due
upon exercise of the option and shall, subject to the provisions of Section I
of Article Six and the documents evidencing the option, be payable in one or
more of the forms specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on
the Exercise Date, or
(iii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant
to which the Optionee shall concurrently provide irrevocable
written instructions to (a) a Corporation-designated brokerage
firm to effect the immediate sale of the purchased shares and
remit to the Corporation, out of the sale proceeds available on
the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all
applicable Federal, state and local income and employment taxes
required to be withheld by the Corporation by reason of such
exercise and (b) the Corporation to deliver the certificates for
the purchased shares directly to such brokerage firm in order to
complete the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
6.
<PAGE>
B. Exercise and Term of Options. Each option shall be
exercisable at such time or times, during such period and for such number of
shares as shall be determined by the Plan Administrator and set forth in the
documents evidencing the option. However, no option shall have a term in excess
of ten (10) years measured from the option grant date.
C. Effect of Termination of Service.
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service
or death:
(i) Any option outstanding at the time of the
Optionee's cessation of Service for any reason shall remain
exercisable for such period of time thereafter as shall be
determined by the Plan Administrator and set forth in the
documents evidencing the option, but no such option shall be
exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised
by the personal representative of the Optionee's estate or
by the person or persons to whom the option is transferred
pursuant to the Optionee's will or in accordance with the
laws of descent and distribution.
(iii) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the
Optionee shall terminate immediately and cease to be
outstanding.
(iv) During the applicable post-Service exercise
period, the option may not be exercised in the aggregate for
more than the number of vested shares for which the option
is exercisable on the date of the Optionee's cessation of
Service. Upon the expiration of the applicable exercise
period or (if earlier) upon the expiration of the option
term, the option shall terminate and cease to be outstanding
for any vested shares for which the option has not been
exercised. However, the option shall, immediately upon the
Optionee's cessation of Service, terminate and cease to be
outstanding to the extent the option is not otherwise at
that time exercisable for vested shares.
(v) In the event of a Corporate Transaction, the
provisions of Section III of this Article Two shall govern
the period for which the outstanding options are to remain
exercisable following the Optionee's cessation of Service
and shall supersede any provisions to the contrary in this
section.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any
time while the option remains outstanding, to:
7.
<PAGE>
(i) extend the period of time for which the option is
to remain exercisable following the Optionee's cessation of
Service from the limited exercise period otherwise in effect
for that option to such greater period of time as the Plan
Administrator shall deem appropriate, but in no event beyond
the expiration of the option term, and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with
respect to the number of vested shares of Common Stock for
which such option is exercisable at the time of the
Optionee's cessation of Service but also with respect to one
or more additional installments in which the Optionee would
have vested had the Optionee continued in Service.
D. Stockholder Rights. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
F. Limited Transferability of Options. During the lifetime of
the Optionee, Incentive Options shall be exercisable only by the Optionee and
shall not be assignable or transferable other than by will or by the laws of
descent and distribution following the Optionee's death. However, a
Non-Qualified Option may, in connection with the Optionee's estate plan, be
assigned in whole or in part during the Optionee's lifetime to one or more
members of the Optionee's immediate family or to a trust established exclusively
for one or more such family members. The assigned portion may only be exercised
by the person or persons who acquire a proprietary interest in the option
pursuant to the assignment. The terms applicable to the assigned portion shall
be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Seven shall be applicable to Incentive
Options. Options which are specifically designated as Non-Qualified Options when
issued under the Plan shall not be subject to the terms of this Section II.
8.
<PAGE>
A. Eligibility. Incentive Options may only be granted to
Employees.
B. Dollar Limitation. The aggregate Fair Market Value of the
shares of Common Stock (determined as of the respective date or dates of grant)
for which one or more options granted to any Employee under the Plan (or any
other option plan of the Corporation or any Parent or Subsidiary) may for the
first time become exercisable as Incentive Options during any one calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
C. 10% Stockholder. If any Employee to whom an Incentive
Option is granted is a 10% Stockholder, then the exercise price per share shall
not be less than one hundred ten percent (110%) of the Fair Market Value per
share of Common Stock on the option grant date, and the option term shall not
exceed five (5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable with respect to the total number of shares of Common Stock at
the time subject to such option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, an outstanding option
shall not so accelerate if and to the extent: (i) such option is, in connection
with the Corporate Transaction, either to be assumed by the successor
corporation (or parent thereof) or to be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation (or parent
thereof), (ii) such option is to be replaced with a cash incentive program of
the successor corporation which preserves the spread existing on the unvested
option shares at the time of the Corporate Transaction and provides for
subsequent payout in accordance with the same vesting schedule applicable to
such option or (iii) the acceleration of such option is subject to other
limitations imposed by the Plan Administrator at the time of the option grant.
The determination of option comparability under clause (i) above shall be made
by the Plan Administrator, and its determination shall be final, binding and
conclusive.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
9.
<PAGE>
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan, (iii) the maximum number and/or
class of securities for which any one person may be granted stock options and
direct stock issuances under the Plan per calendar year and (iv) the maximum
number and/or class of securities which may be issued pursuant to Incentive
Options granted under the Plan following the consummation of the Corporate
Transaction.
E. The Plan Administrator shall have full power and authority
to grant options under the Discretionary Option Grant Program which will
automatically accelerate in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those options are assumed or replaced and do not
otherwise accelerate. Any options so accelerated shall remain exercisable for
fully-vested shares until the earlier of (i) the expiration of the option term
or (ii) the expiration of the one (1)-year period measured from the effective
date of the Involuntary Termination. In addition, the Plan Administrator may
provide that one or more of the Corporation's outstanding repurchase rights with
respect to shares held by the Optionee at the time of such Involuntary
Termination shall immediately terminate, and the shares subject to those
terminated repurchase rights shall accordingly vest in full.
F. The Plan Administrator shall have full power and authority
to grant options under the Discretionary Option Grant Program which will
automatically accelerate in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control. Each option so accelerated shall remain exercisable for fully-vested
shares until the earlier of (i) the expiration of the option term or (ii) the
expiration of the one (1)-year period measured from the effective date of the
Involuntary Termination. In addition, the Plan Administrator may provide that
one or more of the Corporation's outstanding repurchase rights with respect to
shares held by the Optionee at the time of such Involuntary Termination shall
immediately terminate, and the shares subject to those terminated repurchase
rights shall accordingly vest in full.
10.
<PAGE>
G. The portion of any Incentive Option accelerated in
connection with a Corporate Transaction or Change in Control shall remain
exercisable as an Incentive Option only to the extent the applicable One Hundred
Thousand Dollar limitation is not exceeded. To the extent such dollar limitation
is exceeded, the accelerated portion of such option shall be exercisable as a
Non-Qualified Option under the Federal tax laws.
H. The outstanding options shall in no way affect the right of
the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
11.
<PAGE>
ARTICLE THREE
SALARY REDUCTION OPTION GRANT PROGRAM
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive
authority to determine the calendar year or years (if any) for which the Salary
Reduction Option Grant Program is to be in effect and to select the Employees
eligible to participate in the Salary Reduction Option Grant Program for those
calendar year or years. Each selected Employee who elects to participate in the
Salary Reduction Option Grant Program must, prior to the start of each calendar
year of participation, file with the Plan Administrator (or its designate) an
irrevocable authorization directing the Corporation to reduce his or her base
salary for that calendar year by a designated multiple of one percent (1%).
However, the minimum amount of such salary reduction must be not less than the
greater of (i) five percent (5%) of his or her rate of base salary for that
calendar year or (ii) Ten Thousand Dollars ($10,000.00) and must not be more
than the lesser of (i) twenty five percent (25%) of his or her rate of base
salary for the calendar year or (ii) Seventy Five Thousand Dollars ($75,000.00).
Each individual who files a proper salary reduction authorization shall
automatically be granted an option under this Salary Reduction Option Grant
Program on the first trading day in January of the calendar year for which that
salary reduction is to be in effect. Stockholder approval of this 1997
Restatement at the 1997 Annual Stockholders Meeting will constitute pre-approval
of each option subsequently granted pursuant to the express terms of this Salary
Reduction Option Grant Program and the subsequent exercise of that option in
accordance with its terms.
II. OPTION TERMS
Each option shall be a Non-Qualified Option evidenced by one
or more documents in the form approved by the Plan Administrator; provided,
however, that each such document shall comply with the terms specified below.
A. Exercise Price.
1. The exercise price per share shall be thirty-three
and one-third percent (33-1/3%) of the Fair Market Value per share of Common
Stock on the option grant date.
2. The exercise price shall become immediately due
upon exercise of the option
and shall be payable in one or more of the alternative forms authorized under
the Discretionary Option Grant Program. Except to the extent the sale and
remittance procedure specified thereunder is utilized, payment of the exercise
price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common
Stock subject to the option shall be determined pursuant to the following
formula (rounded down to the nearest whole number):
12.
<PAGE>
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the dollar amount by which the Optionee's base
salary is to be reduced for the calendar year, and
B is the Fair Market Value per share of Common Stock
on the option grant date.
C. Exercise and Term of Options. The option shall become
exercisable in a series of twelve (12) successive equal monthly installments
upon the Optionee's completion of each calendar month of Service in the calendar
year for which the salary reduction is in effect. Each option shall have a
maximum term of ten (10) years measured from the option grant date.
D. Effect of Termination of Service. Should the Optionee cease
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
term or (ii) the expiration of the three (3)-year period measured from the date
of such cessation of Service. Should the Optionee die while holding one or more
options under this Article Three, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or in accordance with the laws of descent and distribution.
Such right of exercise shall lapse, and the option shall terminate, upon the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the three
(3)-year period measured from the date of the Optionee's cessation of Service.
However, the option shall, immediately upon the Optionee's cessation of Service
for any reason, terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction while the
Optionee remains in Service, each outstanding option held by such Optionee under
this Salary Reduction Option Grant Program shall automatically accelerate so
that each such option shall, immediately prior to the effective date of the
Corporate Transaction, become fully exercisable with respect to the total number
of shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
Each such outstanding option shall be assumed by the successor corporation (or
parent thereof) in the Corporate Transaction and shall remain exercisable for
the fully-vested shares until the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of the Optionee's cessation of Service.
13.
<PAGE>
B. In the event of a Change in Control while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Salary Reduction Option Grant Program shall automatically accelerate so that
each such option shall immediately become fully exercisable with respect to the
total number of shares of Common Stock at the time subject to such option and
may be exercised for any or all of those shares as fully-vested shares of Common
Stock. The option shall remain so exercisable until the earlier or (i) the
expiration of the ten (10)-year option term or (ii) the expiration of the three
(3)-year period measured from the date of the Optionee's cessation of Service.
C. The grant of options under the Salary Reduction Option
Grant Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Salary
Reduction Option Grant Program shall be the same as the terms in effect for
option grants made under the Discretionary Option Grant Program.
14.
<PAGE>
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
<PAGE>
Shares of Common Stock may be issued under the Stock Issuance
Program directly without any intervening option grants. Each such stock issuance
shall be evidenced by a Stock Issuance Agreement which complies with the terms
specified below.
A. Issue Price. The shares shall be issued for such valid
consideration under the Delaware General Corporation Law as the Plan
Administrator may deem appropriate, but the value of such consideration as
determined by the Plan Administrator shall not be less than one hundred percent
(100%) of the Fair Market Value of the issued shares of Common Stock on the
issuance date.
B. Vesting Provisions.
1. The Primary Committee shall have the sole and
exclusive authority to issue shares of Common Stock under the Stock Issuance
Program as a bonus for past services rendered to the Corporation (or any Parent
or Subsidiary). All such bonus shares shall be fully and immediately vested upon
issuance.
2. All other shares of Common Stock authorized for
issuance under the Stock Issuance Program by the applicable Plan Administrator
shall have a minimum vesting schedule determined in accordance with the
following requirements:
(i) For any shares which are to vest solely by
reason of Service to be performed by the Participant, the Plan
Administrator shall impose a minimum Service period of at least three
(3) years measured from the issue date of such shares.
(ii)For any shares which are to vest upon the
Participant's completion of a designated Service requirement and the
Corporation's attainment of one or more prescribed performance
milestones, the Plan Administrator shall impose a minimum Service
period of at least one (1) year measured from the issue date of such
shares.
3. Any new, substituted or additional securities or
other property (including money paid other than as a regular cash dividend)
which the Participant may have the right to receive with respect to the
Participant's unvested shares of Common Stock by reason of any stock dividend,
stock split, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration shall be issued subject to (i) the same
vesting requirements applicable to the Participant's unvested shares of Common
Stock and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.
15.
<PAGE>
4. The Participant shall have full stockholder rights
with respect to any shares
of Common Stock issued to the Participant under the Stock Issuance Program,
whether or not the Participant's interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.
5. Should the Participant cease to remain in Service
while holding one or more
unvested shares of Common Stock issued under the Stock Issuance Program or
should the performance objectives not be attained with respect to one or more
such unvested shares of Common Stock, then those shares shall be immediately
surrendered to the Corporation for cancellation, and the Participant shall have
no further stockholder rights with respect to those shares. To the extent the
surrendered shares were previously issued to the Participant for consideration
paid in cash or cash equivalent (including the Participant's purchase-money
promissory note), the Corporation shall repay to the Participant the cash
consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to such surrendered shares.
6. The Primary Committee shall have the sole and
exclusive authority, exercisable
upon a Participant's termination of Service, to waive the surrender and
cancellation of any or all unvested shares of Common Stock (or other assets
attributable thereto) at the time held by that Participant, if the Primary
Committee determines such waiver to be an appropriate severance benefit for the
Participant.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights
under the Stock Issuance Program shall terminate automatically, and all the
shares of Common Stock subject to those terminated rights shall immediately vest
in full, in the event of any Corporate Transaction, except to the extent (i)
those repurchase rights are to be assigned to the successor corporation (or
parent thereof) in connection with such Corporate Transaction or (ii) such
accelerated vesting is precluded by other limitations imposed in the Stock
Issuance Agreement.
B. The Plan Administrator shall have the discretionary
authority to structure one or more of the Corporation's repurchase rights under
the Stock Issuance Program in such manner that those repurchase rights shall
automatically terminate, and all the shares of Common Stock subject to those
terminated rights shall immediately vest in full, in the event the Participant's
Service should subsequently terminate by reason of an Involuntary Termination
within eighteen (18) months following the effective date of any Corporate
Transaction in which those repurchase rights are assigned to the successor
corporation (or parent thereof).
16.
<PAGE>
C. The Plan Administrator shall have the discretionary
authority to structure one or more of the Corporation's repurchase rights under
the Stock Issuance Program in such manner that those repurchase rights shall
automatically terminate, and all the shares of Common Stock subject to those
terminated rights shall immediately vest in full, in the event the Participant's
Service should subsequently terminate by reason of an Involuntary Termination
within eighteen (18) months following the effective date of any Change in
Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion,
be held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.
17.
<PAGE>
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
The provisions of the Automatic Option Grant Program have been
revised as of March 17, 1998, subject to stockholder approval at the 1998 Annual
Meeting. Should such stockholder approval not be obtained, then the provisions
of the Automatic Option Grant Program as in effect immediately prior to this
March 17, 1998 restatement shall be automatically re-instated, and all option
grants shall subsequently be made to the non-employee Board members pursuant to
those reinstated provisions.
I. OPTION TERMS
A. Grant Dates. Option grants shall be made on the dates
specified below:
1. Each individual who is re-elected to the Board as
a non-employee Board member at the 1998 Annual Stockholders Meeting shall
automatically be granted at that time a Non-Qualified Option to purchase 15,000
shares of Common Stock.
2. Each individual who is first elected or appointed
as a non-employee Board member at the 1998 Annual Stockholders Meeting or at any
time thereafter shall automatically be granted, upon his or her initial election
or appointment (as the case may be), a Non-Qualified Option to purchase 25,000
shares of Common Stock, provided that individual has not previously been in the
employ of the Corporation or any Parent or Subsidiary.
3. On the date of each Annual Stockholders Meeting,
beginning with the 1998 Annual Meeting, each individual who is re-elected to
serve as a non-employee Board member at such meeting shall automatically be
granted a Non-Qualified Option to purchase an additional 7,000 shares of Common
Stock, provided such individual has served as a non-employee Board member for a
period of at least six (6) months. There shall be no limit on the number of such
7,000-share option grants any one non-employee Board member may receive over his
or her period of Board service, and non-employee Board members who have
previously been in the employ of the Corporation or any Parent or Subsidiary
shall be eligible to receive such annual option grants upon their re-election as
non-employee Board members at one or more Annual Stockholders Meetings.
Stockholder approval of this 1998 Restatement at the 1998 Annual
Stockholders Meeting will constitute pre-approval of each option granted at or
after that Annual Meeting pursuant to the express terms of this Automatic Option
Grant Program and the subsequent exercise of that option in accordance with its
terms.
18.
<PAGE>
B. Exercise Price.
1. The exercise price per share shall be equal to one
hundred percent (100%) of the Fair Market Value per share of Common Stock on the
option grant date.
2. The exercise price shall be payable in one or more
of the alternative forms authorized under the Discretionary Option Grant
Program. Except to the extent the sale and remittance procedure specified
thereunder is utilized, payment of the exercise price for the purchased shares
must be made on the Exercise Date.
C. Option Term. Each option shall have a term of ten
(10) years measured from the option grant date.
D. Exercise and Vesting of Options. Each option shall be
immediately exercisable for any or all of the option shares. However, any shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. Each option grant shall vest, and the
Corporation's repurchase right shall lapse, in a series of four (4) successive
equal annual installments over the Optionee's period of continued service as a
Board member, with the first such installment to vest upon the Optionee's
completion of one (1) year of Board service measured from the option grant date.
E. Effect of Termination of Board Service. The following
provisions shall govern the exercise of any outstanding options held by the
Optionee under this Automatic Option Grant Program at the time the Optionee
ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death,
the personal representative of the Optionee's estate or the person or
persons to whom the option is transferred pursuant to the Optionee's
will or in accordance with the laws of descent and distribution) shall
have a twelve (12)-month period following the date of such cessation of
Board service in which to exercise each such option. However, each
option shall, immediately upon the Optionee's cessation of Board
service, terminate and cease to remain outstanding with respect to any
option shares in which the Optionee is not otherwise at that time
vested.
(ii) During the twelve (12)-month exercise period, the
option may not be exercised in the aggregate for more than the number
of vested shares for which the option is exercisable at the time of the
Optionee's cessation of Board service. However, should the Optionee
cease to serve as a Board member by reason of death or Permanent
Disability, then all shares at the time subject to the option shall
immediately vest so that such option may, during the twelve (12)-month
exercise period following such cessation of Board service, be exercised
for all or any portion of such shares as fully-vested shares.
19.
<PAGE>
(iii) In no event shall the option remain exercisable
after the expiration of the option term.
II. SPECIAL ACCELERATION EVENTS
A. In the event of any Corporate Transaction, the shares of
Common Stock at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option shall,
immediately prior to the specified effective date of the Corporate Transaction,
become fully exercisable for all of the shares of Common Stock at the time
subject to that option and may be exercised for all or any portion of such
shares as fully-vested shares of Common Stock. Immediately following the
consummation of the Corporate Transaction, each automatic option grant under the
Plan shall terminate and cease to be outstanding, except to the extent assumed
by the successor corporation or its parent company.
B. In connection with any Change in Control of the
Corporation, the shares of Common Stock at the time subject to each outstanding
option but not otherwise vested shall automatically vest in full so that each
such option shall, immediately prior to the specified effective date for the
Change in Control, become fully exercisable for all of the shares of Common
Stock at the time subject to that option and may be exercised for all or any
portion of those shares as fully-vested shares of Common Stock. Each such option
shall remain exercisable for such fully-vested option shares until the
expiration or sooner termination of the option term.
C. The automatic option grants outstanding under the Plan
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
20.
<PAGE>
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
I. OPTION GRANTS
Each non-employee Board member may elect to apply all or any
portion of the annual retainer fee otherwise payable in cash for his or her
service on the Board to the acquisition of a special option grant under this
Director Fee Option Grant Program. Such election must be filed with the
Corporation's Chief Financial Officer prior to first day of July in the calendar
year immediately preceding the calendar year for which the annual retainer fee
which is the subject of that election is otherwise payable. Each non-employee
Board member who files such a timely election shall automatically be granted an
option under this Director Fee Option Grant Program on the first trading day in
January in the calendar year for which the annual retainer fee which is the
subject of that election would otherwise be payable. Stockholder approval of
this 1997 Restatement at the 1997 Annual Stockholders Meeting will constitute
pre-approval of each option subsequently granted pursuant to the express terms
of this Director Fee Option Grant Program and the subsequent exercise of that
option in accordance with its terms.
II. OPTION TERMS
Each option shall be a Non-Qualified Option governed by the
terms and conditions specified below.
A. Exercise Price.
1. The exercise price per share shall be thirty-three
and one-third percent (33-1/3%) of the Fair Market Value per share of Common
Stock on the option grant date.
2. The exercise price shall become immediately due
upon exercise of the option and shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
B. Number of Option Shares. The number of shares of Common
Stock subject to the option shall be determined pursuant to the following
formula (rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject
to the non-employee Board member's election, and
21.
<PAGE>
B is the Fair Market Value per share of Common Stock
on the option grant date.
C. Exercise and Term of Options. The option shall become
exercisable in a series of twelve (12) successive equal monthly installments
upon the Optionee's completion of each calendar month of Board service in the
calendar year for which the annual retainer fee which is the subject of his or
her election under this Article Six would otherwise be payable. Each option
shall have a maximum term of ten (10) years measured from the option grant date.
D. Effect of Termination of Service. Should the Optionee cease
Board service for any reason (other than death or Permanent Disability) while
holding one or more options under this Article Six, then each such option shall
remain exercisable, for any or all of the shares for which the option is
exercisable at the time of such cessation of Board service, until the earlier of
(i) the expiration of the ten (10)-year option term or (ii) the expiration of
the three (3)-year period measured from the date of such cessation of Board
service. However, each option held by the Optionee under this Article Six at the
time of his or her cessation of Board service shall immediately terminate and
cease to remain outstanding with respect to any and all shares of Common Stock
for which the option is not otherwise at that time exercisable.
E. Death or Permanent Disability. Should the Optionee's
service as a Board member cease by reason of death or Permanent Disability, then
each option held by such Optionee under this Article Six shall immediately
become exercisable for all the shares of Common Stock at the time subject to
that option, and the option may, during the three (3)-year period following such
cessation of Board service, be exercised for any or all of those shares as
fully-vested shares.
Should the Optionee die while holding one or more options
under this Article Six, then each such option may be exercised, for any or all
of the shares for which the option is exercisable at the time of the Optionee's
cessation of Board service (less any shares subsequently purchased by Optionee
prior to death), by the personal representative of the Optionee's estate or by
the person or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and distribution. Such
right of exercise shall lapse, and the option shall terminate, upon the earlier
of (i) the expiration of the ten (10)-year option term or (ii) the three
(3)-year period measured from the date of the Optionee's cessation of Board
service.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction while the
Optionee remains a Board member, each outstanding option held by such Optionee
under this Director Fee Option Grant Program shall automatically accelerate so
that each such option shall, immediately prior to the effective date of the
Corporate Transaction, become fully exercisable with respect to the total number
of shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
Each such outstanding option shall be assumed by the successor corporation (or
parent thereof) in the Corporate Transaction and shall remain exercisable for
22.
<PAGE>
the fully-vested shares until the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of the Optionee's cessation of Board service.
B. In the event of a Change in Control while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall immediately become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
The option shall remain so exercisable until the earlier or (i) the expiration
of the ten (10)-year option term or (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Service.
C. The grant of options under the Director Fee Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director
Fee Option Grant Program shall be the same as the terms in effect for option
grants made under the Discretionary Option Grant Program.
23.
<PAGE>
ARTICLE SEVEN
MISCELLANEOUS
I. FINANCING
The Plan Administrator may permit any Optionee or Participant
to pay the option exercise price under the Discretionary Option Grant Program or
the purchase price of shares issued under the Stock Issuance Program by
delivering a promissory note payable in one or more installments. The terms of
any such promissory note (including the interest rate and the terms of
repayment) shall be established by the Plan Administrator in its sole
discretion. Promissory notes may be authorized with or without security or
collateral. In all events, the maximum credit available to the Optionee or
Participant may not exceed the sum of (i) the aggregate option exercise price or
purchase price payable for the purchased shares plus (ii) any Federal, state and
local income and employment tax liability incurred by the Optionee or the
Participant in connection with the option exercise or share purchase.
II. TAX WITHHOLDING
The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
III. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan became effective upon approval by the
Corporation's stockholders at the 1995 Annual Stockholders Meeting.
B. The Plan was amended and restated by the Board in March
1996 (the "March 1996 Restatement") to effect the following revisions: (i)
increase the maximum number of shares of Common Stock authorized for issuance
over the term of the Plan by an additional 650,000 shares to 3,112,415 shares
and (ii) increase the limit on the maximum number of shares of Common Stock
which may be issued under the Plan prior to the required cessation of further
Incentive Option grants by an additional 650,000 shares to a total of 3,050,000
shares of Common Stock. The March 1996 Restatement became effective immediately
upon adoption by the Board and was approved by the Corporation's stockholders at
the 1996 Annual Meeting.
C. The Plan was again amended and restated on March 20, 1997 (the
"1997 Amendment") to effect the following changes: (i) increase the number of
shares of Common Stock authorized for issuance over the term of the Plan by an
additional 600,000 shares, (ii) render the non-employee Board members eligible
to receive option grants and direct stock issuances under the Discretionary
Option Grant and Stock Issuance Programs, (iii) eliminate the plan limitation
which precluded the grant of additional Incentive Options once the number of
shares of Common Stock issued under the Plan, whether as vested or unvested
24.
<PAGE>
shares, exceeded 3,050,000 shares, (iv) eliminate certain restrictions on the
eligibility of non-employee Board members to serve as Plan Administrator and (v)
effect a series of technical changes to the provisions of the Plan (including
the stockholder approval requirements) in order to take advantage of the recent
amendments to Rule 16b-3 of the Securities and Exchange Commission which exempts
certain officer and director transactions under the Plan from the short-swing
liability provisions of the Federal securities laws. The 1997 Amendment became
effective immediately upon adoption by the Board and was approved by the
Corporation's stockholders at the 1997 Annual Meeting.
D. The Plan was further amended and restated on March 17, 1998
(the "1998 Restatement") to increase the number of shares of Common Stock
authorized for issuance over the term of the Plan by an additional 600,000
shares and to effect the following changes to the Automatic Option Grant Program
in effect under Article Five:
(i) Each individual reelected to the Board as a
non-employee Board member at the 1998 Annual Meeting shall receive at
that time an option grant for 15,000 shares of the Company's Common
Stock.
(ii) Each individual who first joins the Board
as a non-employee Board member at the 1998 Annual Meeting or at any
time thereafter shall, upon his or her initial election or appointment
to the Board, receive an option grant for 25,000 shares of the
Company's Common Stock, provided such individual has not previously
been in the Company's employ.
(iii) On the date of each Annual Stockholders
Meeting, beginning with the 1998 Annual Meeting, each individual
reelected to the Board as a non-employee Board member will receive an
option grant for 7,000 shares of the Company's Common Stock, provided
such individual has served as a non-employee Board member for at least
six months.
The 1998 Amendment is subject to stockholder approval at the 1998 Annual
Meeting, and no option grants made on the basis of the 600,000-share increase
under the 1998 Restatement shall become exercisable in whole or in part unless
and until the 1998 Restatement is approved by the stockholders. Should such
stockholder approval not be obtained at the 1998 Annual Meeting, then each
option grant made pursuant to such 600,000-share increase shall terminate and
cease to remain outstanding, and no further option grants shall be made on the
basis of that share increase. However, the provisions of the Plan as in effect
immediately prior to the 1998 Restatement (including the provisions of the
Automatic Option Grant Program) shall automatically be reinstated, and option
grants may thereafter continue to be made pursuant to the reinstated provisions
of the Plan. All option grants made prior to the 1998 Restatement shall remain
outstanding in accordance with the terms and conditions of the respective
instruments evidencing those options or issuances, and nothing in the 1998
Restatement shall be deemed to modify or in any way affect those outstanding
options or issuances. Subject to the foregoing limitations, the Plan
Administrator may make option grants under the Plan at any time before the date
fixed herein for the termination of the Plan.
25.
<PAGE>
E. The Plan Administrator shall have full power and authority,
exercisable in its sole discretion, to extend one or more provisions of the
Discretionary Option Grant Program, including (without limitation) the vesting
acceleration provisions of Section III of Article Two relating to Corporate
Transactions and Changes in Control, to one or more outstanding stock options
under the Predecessor Plan which are incorporated into this Plan on the
Effective Date but which do not otherwise contain such provisions.
F. The Plan shall terminate upon the earliest of (i) May 24,
2005, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. Upon a clause
(i) plan termination, all outstanding option grants and unvested stock issuances
shall thereafter continue to have force and effect in accordance with the
provisions of the documents evidencing such grants or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects. However, no such
amendment or modification shall adversely affect the rights and obligations with
respect to stock options or unvested stock issuances at the time outstanding
under the Plan unless the Optionee or the Participant consents to such amendment
or modification. In addition, certain amendments may require stockholder
approval pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted
under the Discretionary Option Grant and Salary Reduction Option Grant Programs
and shares of Common Stock may be issued under the Stock Issuance Program that
are in each instance in excess of the number of shares then available for
issuance under the Plan, provided any excess shares actually issued under those
programs shall be held in escrow until there is obtained stockholder approval of
an amendment sufficiently increasing the number of shares of Common Stock
available for issuance under the Plan. If such stockholder approval is not
obtained within twelve (12) months after the date the first such excess
issuances are made, then (i) any unexercised options granted on the basis of
such excess shares shall terminate and cease to be outstanding and (ii) the
Corporation shall promptly refund to the Optionees and the Participants the
exercise or purchase price paid for any excess shares issued under the Plan and
held in escrow, together with interest (at the applicable Short Term Federal
Rate) for the period the shares were held in escrow, and such shares shall
thereupon be automatically cancelled and cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
26.
<PAGE>
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock
option under the Plan and the issuance of any shares of Common Stock (i) upon
the exercise of any granted option or (ii) under the Stock Issuance Program
shall be subject to the Corporation's procurement of all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the stock
options granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued
or delivered under the Plan unless and until there shall have been compliance
with all applicable requirements of Federal and state securities laws, including
the filing and effectiveness of the Form S-8 registration statement for the
shares of Common Stock issuable under the Plan, and all applicable listing
requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
27.
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. Automatic Option Grant Program shall mean the automatic option grant
program in effect under the Plan.
B. Board shall mean the Corporation's Board of Directors.
C. Change in Control shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any
person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation), of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders, or
(ii) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more
contested elections for Board membership, to be comprised of
individuals who either (A) have been Board members continuously since
the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of
the Board members described in clause (A) who were still in office at
the time the Board approved such election or nomination.
D. Code shall mean the Internal Revenue Code of 1986, as amended.
E. Common Stock shall mean the Corporation's common stock.
F. Corporate Transaction shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.
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G. Corporation shall mean FileNet Corporation, a Delaware corporation.
H. Director Fee Option Grant Program shall mean the special stock
option grant in effect for non-employee Board members under Article Six of the
Plan.
I. Discretionary Option Grant Program shall mean the discretionary
option grant program in effect under the Plan.
J. Effective Date shall mean the date of the 1995 Annual Stockholders
Meeting, provided the Plan is approved by the stockholders at that meeting.
K. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
L. Exercise Date shall mean the date on which the Corporation shall
have received written notice of the option exercise.
M. Fair Market Value per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the average
of the high and low selling prices per share of Common Stock on the
date in question, as such prices are reported by the National
Association of Securities Dealers on the Nasdaq National Market or any
successor system. If there are no high or low selling prices for the
Common Stock on the date in question, then the Fair Market Value shall
be the average of the high and low selling prices on the last preceding
date for which such quotations exist.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the average of the
high and low selling prices per share of Common Stock on the date in
question on the Stock Exchange determined by the Plan Administrator to
be the primary market for the Common Stock, as such prices are
officially quoted in the composite tape of transactions on such
exchange. If there are no high and low selling prices for the Common
Stock on the date in question, then the Fair Market Value shall be the
average of the high and low selling prices on the last preceding date
for which such quotations exist.
N. Incentive Option shall mean an option which satisfies the
requirements of Code Section 422.
A-2
<PAGE>
O. Involuntary Termination shall mean the termination of the Service of
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge
by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following
(A) a change in his or her position with the Corporation which
materially reduces his or her level of responsibility, (B) a reduction
in his or her level of compensation (including base salary, fringe
benefits and participation in any corporate-performance based bonus or
incentive programs) by more than fifteen percent (15%) or (C) a
relocation of such individual's place of employment by more than fifty
(50) miles, provided and only if such change, reduction or relocation
is effected by the Corporation without the individual's consent.
P. Misconduct shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
Q. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
R. Non-Qualified Option shall mean an option not intended to satisfy
the requirements of Code Section 422.
S. Optionee shall mean any person to whom an option is granted under
the Discretionary Option Grant, Salary Reduction Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.
T. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
U. Participant shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.
V. Permanent Disability or Permanently Disabled shall mean the
A-3
<PAGE>
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
and Director Fee Option Grant Programs, Permanent Disability or Permanently
Disabled shall mean the inability of the non-employee Board member to perform
his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
W. Plan shall mean the Corporation's 1995 Stock Option Plan, as set
forth in this document.
X. Plan Administrator shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Y. Predecessor Plan shall mean the Corporation's Second Amended and
Restated Stock Option Plan, pursuant to which 3,250,000 shares of Common Stock
have been authorized for issuance.
Z. Primary Committee shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders.
AA. Salary Reduction Option Grant Program shall mean the salary
reduction grant program in effect under the Plan.
BB. Secondary Committee shall mean a committee of two (2) or more Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
CC. Section 16 Insider shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
DD. Service shall mean the performance of services for the Corporation
(or any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.
EE. Stock Exchange shall mean either the American Stock Exchange or the
New York Stock Exchange.
FF. Stock Issuance Agreement shall mean the agreement entered into by
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<PAGE>
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
GG. Stock Issuance Program shall mean the stock issuance program in
effect under the Plan.
HH. Subsidiary shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
II. 10% Stockholder shall mean the owner of stock (as determined under
Code Section 424(d)) possessing ten percent (10%) or more of the total combined
voting power of all classes of stock of the Corporation (or any Parent or
Subsidiary).
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<PAGE>
FILENET CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the
interests of FileNet Corporation by providing eligible employees with the
opportunity to acquire a proprietary interest in the Corporation through
participation in a payroll-deduction based employee stock purchase plan designed
to qualify under Section 423 of the Code.
This Plan shall serve as the successor to the Corporation's existing
1988 Employee Stock Purchase Plan (the "Predecessor Plan"), and no further
shares of Common Stock will be issued under the Predecessor Plan from and after
the Effective Date.
Capitalized terms herein shall have the meanings assigned to
such terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret
and construe any provision of the Plan and to adopt such rules and regulations
for administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of Common
Stock purchased on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan and the International Plan shall
not exceed Two Hundred Thousand (200,000) shares and shall be limited to the
following components: (i) the actual number of shares of Common Stock remaining
for issuance under the Predecessor Plan on the Effective Date (estimated at
Fifty Thousand (50,000 shares) plus (ii) an additional One Hundred Fifty
Thousand (150,000) shares of Common Stock.
1.
<PAGE>
B. Should any change be made to the Common Stock by reason of
any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and class of securities
issuable under the Plan and the International Plan, (ii) the maximum number and
class of securities purchasable per Participant on any one Purchase Date, (iii)
the maximum number and class of securities purchasable by all Participants in
the aggregate on any one Purchase Date and (iv) the number and class of
securities and the price per share in effect under each outstanding purchase
right in order to prevent the dilution or enlargement of benefits thereunder.
IV. PURCHASE PERIODS
A. Shares of Common Stock shall be offered for purchase under
the Plan through a series of successive purchase periods until such time as (i)
the maximum number of shares of Common Stock available for issuance under the
Plan shall have been purchased or (ii) the Plan shall have been sooner
terminated.
B. Each purchase period shall have a duration of six (6)
months. Purchase periods shall run from the first business day in May to the
last business day in October each year and from the first business day in
November each year to the last business day in April of the following year.
However, the initial purchase period under the Plan shall begin on October 1,
1998 and end on the last business day in April 1999.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start
date of any purchase period shall be eligible to participate in the Plan for
that purchase period.
B. To participate in the Plan for a particular purchase
period, the Eligible Employee must complete the enrollment forms prescribed by
the Plan Administrator (including a stock purchase agreement and a payroll
deduction authorization) and file such forms with the Plan Administrator (or its
designate) on or before the start date of the purchase period.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for
purposes of acquiring shares of Common Stock under the Plan may be any multiple
of one percent (1%) of the Cash Earnings paid to the Participant during each
purchase period, up to a maximum of ten percent (10%). The deduction rate so
authorized shall continue in effect for the entire purchase period and for each
subsequent purchase period the Participant remains in the Plan. The Participant
may not increase his or her rate of payroll deduction during a purchase period,
but may effect such increase as of the start date of any subsequent purchase
period following the filing of a new payroll deduction authorization with the
Plan Administrator. However, the Participant may, at any time during the
purchase period, reduce his or her rate of payroll deduction to become effective
as soon as possible after filing the appropriate form with the Plan
Administrator. The Participant may not, however, effect more than one (1) such
reduction per purchase period.
2.
<PAGE>
B. Payroll deductions shall begin on the first pay day
following the start date of the purchase period and shall (unless sooner
terminated by the Participant) continue through the pay day ending with or
immediately prior to the last day of the purchase period. The amounts so
collected shall be credited to the Participant's book account under the Plan,
but no interest shall be paid on the balance from time to time outstanding in
such account. The amounts collected from the Participant shall not be required
to be held in any segregated account or trust fund and may be commingled with
the general assets of the Corporation and used for general corporate purposes.
C. Payroll deductions shall automatically cease upon the
termination of the Participant's purchase right in accordance with the
provisions of the Plan.
D. The Participant's acquisition of Common Stock under the
Plan on any Purchase Date shall neither limit nor require the Participant's
acquisition of Common Stock on any subsequent Purchase Date.
VII. PURCHASE RIGHTS
A. Grant of Purchase Right. A Participant shall be granted a
separate purchase right on the start date of each purchase period in which he or
she participates. The purchase right shall provide the Participant with the
right to purchase shares of Common Stock on the Purchase Date upon the terms set
forth below. The Participant shall execute a stock purchase agreement embodying
such terms and such other provisions (not inconsistent with the Plan) as the
Plan Administrator may deem advisable.
Under no circumstances shall purchase rights be granted under
the Plan to any Eligible Employee if such individual would, immediately after
the grant, own (within the meaning of Code Section 424(d)) or hold outstanding
options or other rights to purchase, stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Corporation or any Corporate Affiliate.
B. Exercise of the Purchase Right. Each purchase right shall
be automatically exercised on the Purchase Date, and shares of Common Stock
shall accordingly be purchased on behalf of each Participant on such date. The
purchase shall be effected by applying the Participant's payroll deductions for
the purchase period ending on such Purchase Date to the purchase of shares of
Common Stock at the purchase price in effect for that purchase period.
C. Purchase Price. The purchase price per share at which
Common Stock will be purchased on the Participant's behalf on each Purchase Date
shall be equal to eighty-five percent (85%) of the lower of (i) the Fair Market
Value per share of Common Stock on the start date of the purchase period or (ii)
the Fair Market Value per share of Common Stock on that Purchase Date.
3.
<PAGE>
D. Number of Purchasable Shares. The number of shares of
Common Stock purchasable by a Participant on each Purchase Date shall be the
number of whole shares obtained by dividing the amount collected from the
Participant through payroll deductions during the purchase period ending with
that Purchase Date by the purchase price in effect for that period. However, the
maximum number of shares of Common Stock purchasable per Participant on any one
Purchase Date shall not exceed four hundred (400) shares, subject to periodic
adjustments in the event of certain changes in the Corporation's capitalization.
In addition, the maximum number of shares of Common Stock purchasable by all
Participants in the aggregate on any one Purchase Date under the Plan and the
International Plana shall not exceed Eighty Five Thousand (85,000) shares,
subject to periodic adjustments in the event of certain changes in the
Corporation's capitalization.
E. Excess Payroll Deductions. Any payroll deductions not
applied to the purchase of shares of Common Stock on any Purchase Date because
they are not sufficient to purchase a whole share of Common Stock shall be held
for the purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable by the Participant on the
Purchase Date or the limitation on the maximum number of shares purchasable in
the aggregate on the Purchase Date by all Participants shall be promptly
refunded.
F. Termination of Purchase Right. The following provisions
shall govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to
the last fifteen (15) days of the purchase period, terminate his or
her outstanding purchase right by filing the appropriate form with the
Plan Administrator (or its designate), and no further payroll
deductions shall be collected from the Participant with respect to the
terminated purchase right. Any payroll deductions collected during the
purchase period in which such termination occurs shall, at the
Participant's election, be immediately refunded or held for the
purchase of shares on the next Purchase Date. If no such election is
made at the time the purchase right is terminated, then the payroll
deductions collected with respect to the terminated right shall be
refunded as soon as possible.
(ii) The termination of such purchase right
shall be irrevocable, and the Participant may not subsequently rejoin
the purchase period for which the terminated purchase right was
granted. In order to resume participation in any subsequent purchase
period, such individual must re-enroll in the Plan (by making a timely
filing of the prescribed enrollment forms) before the start date of
the new purchase period.
4.
<PAGE>
(iii) Should the Participant cease to remain an
Eligible Employee for any reason (including death, disability or
change in status) while his or her purchase right remains outstanding,
then that purchase right shall immediately terminate, and all of the
Participant's payroll deductions for the purchase period in which the
purchase right so terminates shall be immediately refunded. However,
should the Participant cease to remain in active service by reason of
an approved unpaid leave of absence, then the Participant shall have
the right, exercisable up until the last business day of the purchase
period in which such leave commences, to (a) withdraw all the payroll
deductions collected to date on his or her behalf during such purchase
period or (b) have such funds held for the purchase of shares on the
next scheduled Purchase Date. In no event, however, shall any further
payroll deductions be collected on the Participant's behalf during
such leave. Upon the Participant's return to active service (i) within
ninety (90) days after the start of the leave or (ii) prior to the
expiration of any longer period during his or her re-employment rights
are guaranteed by law or contract, his or her payroll deductions under
the Plan shall automatically resume at the rate in effect at the time
the leave began.
G. Corporate Transaction. Each outstanding purchase right
shall automatically be exercised, immediately prior to the effective date of any
Corporate Transaction, by applying the payroll deductions of each Participant
for the purchase period in which such Corporate Transaction occurs to the
purchase of whole shares of Common Stock at a purchase price per share equal to
eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of
Common Stock on the start date of the purchase period in which such Corporate
Transaction occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Corporate Transaction. However,
the applicable limitation on the number of shares of Common Stock purchasable
per Participant shall continue to apply to any such purchase, but not the
limitation on the aggregate number of shares purchasable by all Participants.
The Corporation shall use its best efforts to provide at least
ten (10) days prior written notice of the occurrence of any Corporate
Transaction, and Participants shall, following the receipt of such notice, have
the right to terminate their outstanding purchase rights prior to the effective
date of the Corporate Transaction.
H. Proration of Purchase Rights. Should the total number of
shares of Common Stock which are to be purchased pursuant to outstanding
purchase rights on any particular date exceed either (i) the number of shares
then available for issuance under the Plan or (ii) the maximum number of shares
purchasable by all Participants (and all participants in the International Plan)
in the aggregate on that Purchase Date, then the Plan Administrator shall make a
pro-rata allocation of the available shares on a uniform and nondiscriminatory
basis, and the payroll deductions of each Participant (and each participant in
the International Plan), to the extent in excess of the aggregate purchase price
payable for the Common Stock pro-rated to such individual, shall be refunded.
5.
<PAGE>
I. Assignability. The purchase right shall be exercisable only
by the Participant and shall not be assignable or transferable by the
Participant.
J. Stockholder Rights. A Participant shall have no stockholder
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to
acquire Common Stock pursuant to any purchase right outstanding under this Plan
if and to the extent such accrual, when aggregated with (i) rights to purchase
Common Stock accrued under any other purchase right granted under this Plan and
(ii) similar rights accrued under other employee stock purchase plans (within
the meaning of Code Section 423) of the Corporation or any Corporate Affiliate,
would otherwise permit such Participant to purchase more than Twenty-Five
Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate
Affiliate (determined on the basis of the Fair Market Value of such stock on the
date or dates such rights are granted) for each calendar year such rights are at
any time outstanding.
B. For purposes of applying such accrual limitations, the
following provisions shall be in effect:
(i) The right to acquire Common Stock under
each outstanding purchase right shall accrue on the Purchase Date in
effect for the purchase period for which such right is granted.
(ii) No right to acquire Common Stock under any
outstanding purchase right shall accrue to the extent the Participant
has already accrued in the same calendar year the right to acquire
Common Stock under one (1) or more other purchase rights at a rate
equal to Twenty-Five Thousand Dollars ($25,000) worth of Common Stock
(determined on the basis of the Fair Market Value per share on the
date or dates of grant) for each calendar year such rights were at any
time outstanding.
C. If by reason of such accrual limitations, any purchase
right of a Participant does not accrue for a particular purchase period, then
the payroll deductions which the Participant made during that purchase period
with respect to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions
of this Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
6.
<PAGE>
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on March 17, 1998 and
shall become effective on the Effective Date, provided the implementation of the
Plan is approved by the Corporation's stockholders at the 1998 Annual Meeting.
No purchase rights granted under the Plan shall be exercised, and no shares of
Common Stock shall be issued hereunder, until the Corporation shall have
complied with all applicable requirements of the 1933 Act (including the
registration of the shares of Common Stock issuable under the Plan on a Form S-8
registration statement filed with the Securities and Exchange Commission), all
applicable listing requirements of any stock exchange (or the Nasdaq National
Market, if applicable) on which the Common Stock is listed for trading and all
other applicable requirements established by law or regulation.
B. Unless sooner terminated by the Board, the Plan shall
terminate upon the earliest to occur of (i) the last business day in October
2008, (ii) the date on which all shares available for issuance under the Plan
(and the International Plan) shall have been sold pursuant to purchase rights
exercised under the Plan (and the International Plan) or (iii) the date on which
all purchase rights are exercised in connection with a Corporate Transaction. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
X. AMENDMENT OF THE PLAN
The Board may alter, amend, suspend or discontinue the Plan at
any time to become effective immediately following the close of any purchase
period. However, the Board may not, without the approval of the Corporation's
stockholders, (i) increase the number of shares of Common Stock issuable under
the Plan, except for permissible adjustments in the event of certain changes in
the Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan, or (iii) modify the requirements for eligibility to participate
in the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of
the Plan shall be paid by the Corporation.
B. Nothing in the Plan shall confer upon the Participant any
right to continue in the employ of the Corporation or any Corporate Affiliate
for any period of specific duration or interfere with or otherwise restrict in
any way the rights of the Corporation (or any Corporate Affiliate employing such
person) or of the Participant, which rights are hereby expressly reserved by
each, to terminate such person's employment at any time for any reason, with or
without cause.
C. The provisions of the Plan shall be governed by the laws of
the State of California without resort to that State's conflict-of-laws rules.
7.
<PAGE>
Schedule A
Corporations Participating in
Employee Stock Purchase Plan
As of October 1, 1998
FileNet Corporation, a Delaware corporation
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
B. Cash Earnings shall mean the (i) base salary payable to a
Participant by one or more Participating Companies during such individual's
period of participation in one or more purchase periods under the Plan plus (ii)
all overtime payments, bonuses, commissions, current profit-sharing
distributions and other incentive-type payments before deduction of any income
or employment taxes. Such Cash Earnings shall be calculated before deduction of
(A) any income or employment tax withholdings or (B) any pre-tax contributions
made by the Participant to any Code Section 401(k) salary deferral plan or any
Code Section 125 cafeteria benefit program now or hereafter established by the
Corporation or any Corporate Affiliate. However, Cash Earnings shall not include
any contributions (other than Code Section 401(k) or Code Section 125
contributions) made on the Participant's behalf by the Corporation or any
Corporate Affiliate to any employee benefit or welfare plan now or hereafter
established.
C. Code shall mean the Internal Revenue Code of 1986, as
amended.
D. Common Stock shall mean the Corporation's common stock.
E. Corporate Affiliate shall mean any parent or subsidiary
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
F. Corporate Transaction shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which
securities possessing fifty percent (50%) or more of the total
combined voting power of the Corporation's outstanding securities are
transferred to a person or persons different from the persons holding
those securities immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of
all or substantially all of the assets of the Corporation in complete
liquidation or dissolution of the Corporation.
A-1
<PAGE>
G. Corporation shall mean FileNet Corporation, a Delaware
corporation and any corporate successor to all or substantially all of the
assets or voting stock of FileNet Corporation which shall by appropriate action
adopt the Plan.
H. Effective Date shall mean the October 1, 1998 effective
date of the Plan, provided the implementation of the Plan is approved by the
Corporation's stockholders at the 1998 Annual Meeting.
I. Eligible Employee shall mean any person who is employed by
a Participating Corporation on a basis under which he or she is regularly
expected to render more than twenty (20) hours of service per week for more than
five (5) months per calendar year for earnings considered wages under Code
Section 3401(a).
J. Fair Market Value per share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded
on the Nasdaq National Market, then the Fair Market Value shall be the
average of the high and low selling prices per share of Common Stock
on the date in question, as those prices are reported by the National
Association of Securities Dealers on the Nasdaq National Market. If
there are no selling prices for the Common Stock on the date in
question, then the Fair Market Value shall be the average of the high
and low selling prices on the last preceding date for which such
quotations exist.
(ii) If the Common Stock is at the time listed
on any Stock Exchange, then the Fair Market Value shall be the average
of the high and low selling prices per share of Common Stock on the
date in question on the Stock Exchange determined by the Plan
Administrator to be the primary market for the Common Stock, as those
prices are officially quoted in the composite tape of transactions on
such exchange. If there are no selling prices for the Common Stock on
the date in question, then the Fair Market Value shall be the average
of the high and low selling prices on the last preceding date for
which such quotations exist.
K. International Plan shall mean the FileNet Corporation
International Employee Stock Purchase Plan.
L. 1933 Act shall mean the Securities Act of 1933, as amended.
M. Participant shall mean any Eligible Employee of a
Participating Corporation who is actively participating in the Plan.
N. Participating Corporation shall mean the Corporation and
A-2
<PAGE>
such Corporate Affiliate or Affiliates as may be authorized from time to time by
the Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan as of the Effective Date are listed in
attached Schedule A.
O. Plan shall mean the Corporation's Employee Stock Purchase
Plan, as set forth in this document.
P. Plan Administrator shall mean the committee of two (2) or
more non-employee Board members appointed by the Board to administer the Plan.
Q. Predecessor Plan shall mean the Corporation's 1988 Employee
Stock Purchase Plan.
R. Purchase Date shall mean the last business day of each
purchase period. The initial Purchase Date shall be April 30, 1999.
S. Stock Exchange shall mean either the American Stock
Exchange or the New York Stock Exchange.
A-3.
<PAGE>
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DETACH HERE
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PROXY
FILENET CORPORATION
3565 Harbor Boulevard
Costa Mesa, CA 92626
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Theodore J. Smith and Mark S. St. Clare as
Proxy holders, or either of them acting alone, each with the power to appoint
his substitute, and hereby authorizes them to represent and vote, as designated
below, all of the shares of Common Stock of FileNET Corporation (the "Company"),
held of record by the undersigned on March 17, 1998 at the 1998 Annual Meeting
of Stockholders to be held at 9:00 a.m. local time, on May 15, 1998, at The
Mondavi Center, 1570 Scenic Avenue, Costa Mesa, California 92626, and any
adjournment thereof ("the Meeting").
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE MEETING. WHETHER OR NOT YOU
EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE
ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR REPRESENTATION AT
THE MEETING. A POSTAGE-PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. EVEN IF
YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE
MEETING.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE (SEE REVERSE SIDE)
<PAGE>
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DETACH HERE
- - ------------------------------------------------------------------------------
Please mark
[X] votes as in
this example
This Proxy when properly executed will be voted in the manner directed herein by
the undersigned stockholder. If no direction is given, this Proxy will be voted
FOR the election to the Board of ALL the nominees listed below and FOR proposals
2 and 3. In their discretion, the Proxy holders are authorized to vote upon such
other business as may properly come before the meeting or any adjournment or
postponement thereof.
1. Election of Directors
Nominees: William P. Lyons, Lee D. Roberts, John C. Savage and
Theodore J. Smith
FOR ALL NOMINEES [_] WITHHOLD FROM ALL NOMINEES [_]
[_] _______________________________________
For all nominees except as noted above.
2. To approve a series of amendments to the Company's 1995 Stock Option Plan,
including a 600,000-share increase in the number of shares of Common Stock
available for issuance thereunder and an increase in the size of the option
grants made under the Automatic Option Grant Program.
FOR [_] AGAINST[_] ABSTAIN [_]
3. To approve the Company's 1998 Employee Qualified Stock Purchase Plan under
which 150,000 shares of Common Stock will be added to the remaining reserve
under the predecessor plan.
FOR [_] AGAINST[_] ABSTAIN [_]
4. To transact such other business as may properly come before the meeting.
Please date this Proxy and sign it exactly as your name or names appear. When
shares are held by joint tenants, both should sign. When signing as an attorney,
executor, administrator, trustee or guardian, please give full title as such. If
shares are held by a corporation, please sign in full corporate name by the
president or other authorized officer. If shares are held by a partnership,
please sign in full partnership name by an authorized person.
MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW [ ]
Signature: ________ Date:__________ Signature: _____________ Date: _________
