FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-15997
FILENET CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-3757924
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3565 Harbor Boulevard, Costa Mesa, CA 92626
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(Address of principal executive offices) (Zip code)
(714) 966-3400
- --------------------------------------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
As of April 30, 1999, there were 31,949,295 shares of the Registrant's common
stock outstanding.
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FILENET CORPORATION
Index
Page
Number
- -------------------- ------------------------------------------------ ----------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets
as of March 31, 1999 (unaudited) and December 31, 1998......... 3
Consolidated Statements of Operations (unaudited)
for the three month periods ended March 31, 1999 and 1998....... 4
Consolidated Statements of Comprehensive Operations (unaudited)
for the three month periods ended March 31, 1999 and 1998....... 5
Consolidated Statements of Cash Flows (unaudited)
for the three month periods ended March 31, 1999 and 1998....... 6
Notes to Consolidated Financial Statements (unaudited).......... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 19
Item 6. Exhibits and Reports on Form 8-K................................ 19
SIGNATURE....................................................... 20
INDEX TO EXHIBITS............................................... 21
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FILENET CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, December 31,
1999 1998
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and short-term marketable securities $ 60,520 $ 71,304
Accounts receivable, net 60,381 61,636
Inventories 1,716 2,419
Prepaid expenses and other current assets 7,737 8,865
----------- -----------
Total current assets 130,354 144,224
Property, net 43,573 44,177
Long-term marketable securities 21,444 10,885
Deferred income taxes 6,393 6,385
Other assets 1,244 1,151
----------- -----------
Total assets $ 203,008 $ 206,822
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,822 $ 21,022
Accrued compensation and benefits 18,183 22,165
Unearned maintenance revenue 13,656 11,238
Accrued royalties 1,808 1,459
Deferred income taxes 949 942
Other accrued liabilities 25,155 19,676
----------- -----------
Total current liabilities 72,573 76,502
Stockholders' equity:
Preferred stock - $.10 par value;
7,000,000 shares authorized; none
issued and outstanding
Common stock - $.01 par value;
100,000,000 shares authorized;
33,032,355 and 32,924,950 shares outstanding
at March 31, 1999 and December 31, 1998,
respectively 144,979 144,242
Retained earnings 5,351 3,304
Accumulated other comprehensive operations (5,328) (2,659)
----------- -----------
145,002 144,887
Treasury stock, at cost; 1,098,000 shares
at March 31, 1999 and December 31, 1998
respectively (14,567) (14,567)
----------- -----------
Total stockholders' equity 130,435 130,320
----------- -----------
Total liabilities and stockholders'
equity $ 203,008 206,822
=========== ===========
See accompanying notes to consolidated financial statements.
3
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FILENET CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Month Ended March 31,
-------------------------------------
1999 1998
----------------- ----------------
(Unaudited) (Unaudited)
Revenue:
Software $ 41,984 $ 43,247
Service 33,427 23,471
Hardware 6,031 6,891
------------ ------------
Total revenue 81,442 73,609
Costs and expenses:
Cost of software revenue 3,961 3,686
Cost of service revenue 20,304 14,346
Cost of hardware revenue 3,166 3,360
Research and development 13,102 12,074
Selling, general and
administrative 39,445 37,567
------------ ---------------
Total costs and expenses 79,978 71,033
----------------- ---------------
Operating income 1,464 2,576
Other income, net 1,461 979
----------------- ---------------
Income before income taxes 2,925 3,555
Provision for income taxes 877 1,031
----------------- ---------------
Net income $ 2,048 $ 2,524
================= ===============
Earnings per share:
Basic $ 0.06 $ 0.08
Diluted $ 0.06 $ 0.08
Weighted average shares
outstanding:
Basic 31,915 30,204
Diluted 32,554 32,962
See accompanying notes to consolidated financial statements.
4
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FILENET CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(In thousands)
Three Months Ended March 31,
-----------------------------------
1999 1998
----------------- ---------------
(Unaudited) (Unaudited)
Net income $ 2,048 $ 2,524
Other comprehensive income (loss):
Foreign currency translation adjustments
(net of tax benefit of $1,779 and $1,147
in 1999 and 1998, respectively) (2,653) (1,721)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period (net of tax effect of $(11)
and $3 in 1999 and 1998, respectively) (16) 5
-------------- ------------
Total other comprehensive loss (2,669) (1,716)
-------------- ------------
Comprehensive income (loss) $ (621) 808
============== ============
See accompanying notes to consolidated financial statements.
5
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FILENET CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Quarter Ended March 31,
-------------------------------
1999 1998
------------- ------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 2,048 $ 2,524
Adjustments to reconcile net loss to net
cash provided by (used by)operating
activities:
Depreciation and amortization 4,323 3,431
Provision for doubtful accounts 43 447
Deferred income taxes 15 300
Changes in operating assets and
liabilities, net of acquisition:
Accounts receivable (492) (2,039)
Inventories 703 558
Prepaid expenses and other
current assets 911 (730)
Accounts payable (8,039) 2,915
Accrued compensation (3,720) (541)
Unearned maintenance revenue 2,474 4,472
Accrued royalties 350 (595)
Other 7,818 4,052
------------- ------------
Net cash provided by (used by) operating
activities 6,434 14,794
------------- ------------
Cash flows from investing activities:
Capital expenditures (4,220) (7,436)
Proceeds from sale of property 37 314
Purchases of marketable securities (16,844) 0
Proceeds from sales and maturities of
marketable securities 5,500 11,345
------------- ------------
Net cash used by investing activities (15,527) 4,223
------------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 738 3,291
Common stock repurchased 0 (4,435)
------------- ------------
Net cash provided by(used by)financing
activities 738 (1,144)
------------- ------------
Effect of exchange rate changes on cash
and cash equivalents (1,246) (1,384)
------------- ------------
Net increase (decrease) in cash and
cash equivalents (9,601) 16,489
Cash and cash equivalents, beginning
of year 55,820 37,344
============= ============
Cash and cash equivalents, end of period $ 46,219 $ 53,833
============= ============
Supplemental cash flow information:
Interest paid $ 6 $ 8
Income taxes paid $ (483) $ (2,066)
See accompanying notes to consolidated financial statements.
6
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FILENET CORPORATION
Notes To Consolidated Financial Statements
(Unaudited)
1. In the opinion of the management of FileNET Corporation ("the Company"),
the accompanying unaudited consolidated financial statements reflect
adjustments (consisting of normal recurring adjustments) necessary to
present fairly the financial position of the Company at March 31, 1999 and
the results of its operations, its comprehensive income and its cash flows
for the three month periods ended March 31, 1999 and 1998. Certain
information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to rules and regulations
of the Securities and Exchange Commission ("SEC"), although the Company
believes that the disclosures in the consolidated financial statements are
adequate to ensure the information presented is not misleading. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 filed by the Company with the SEC on March 30,
1999. The results of operations for the interim periods are not necessarily
indicative of the operating results for the year.
2. In May 1998, the Company effected a two-for-one split of its common stock.
All references in the consolidated financial statements to number of shares
and per share amounts of the Company's common stock have been restated to
reflect the split.
3. Certain reclassifications have been made to the prior year's consolidated
financial statements to conform with the current year's presentation.
4. The following table is a reconciliation of the earnings and share amounts
used in the calculation of basic earnings per share and diluted earnings
per share for the three months ended March 31, 1999.
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Net Income Shares Per Share
Amount
------------ ------------ -----------
<S> <C> <C> <C>
Three months ended March 31, 1999
Basic earning per share $ 2,048 31,915 $ 0.06
Effect of dilutive stock options 639
------------ ------------
Diluted earnings per share $ 2,048 32,554 $ 0.06
============ ============
</TABLE>
5. In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires enterprises to report
comprehensive income and its components in general-purpose financial
statements. SFAS No. 130 is effective for the Company beginning January 1,
1998. Accordingly, the Company has prepared Statements of Comprehensive
Operations for the three months ended March 31, 1999 (restatement of prior
year financial statements is required by SFAS No. 130). Accumulated other
comprehensive operations as of March 31, 1999 is comprised of the
following:
<TABLE>
<CAPTION>
Accumulated
Foreign Currency Unrealized Other
Translation Holding Comprehensive
(In thousands) Adjustment Gains (Losses) Operations
----------------- ----------------- ----------------
<S> <C> <C> <C>
Balance, December 31, 1998 $ (2,667) $ 8 $ (2,659)
Current period changes (2,653) (16) (2,669)
----------------- ----------------- ----------------
Balance, March 31, 1999 $ (5,320) $ (8) (5,328)
================= ================= ================
</TABLE>
6. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. SFAS 133 will require the Company to record
all derivatives on the balance sheet at fair value. For derivatives that
are hedges, changes in the fair value of derivatives will be offset by the
change in fair value of the hedged assets, liabilities, or firm
commitments. The Company believes the impact of adopting this standard will
not be material to its results of operations or equity. The Company will
continue to evaluate the adoption of such pronouncement.
7
<PAGE>
7. In October 1994, Wang Laboratories, Inc. (Wang) filed a complaint in the
United States District Court for the District of Massachusetts alleging
that the Company is infringing five patents held by Wang (the FileNET
Case). On June 23, 1995, Wang amended its complaint to include an
additional related patent. On July 2, 1996, Wang filed a complaint in the
same court alleging that Watermark Software, Inc., formerly a wholly owned
subsidiary that was merged into the Company, is infringing three of the
same patents asserted in the initial complaint (the Watermark Case). On
October 9, 1996, Wang withdrew its claim in the FileNET Case that one of
the patents it initially asserted is infringed by certain of the Company's
products which were commercialized before the initial complaint was filed.
Wang reserved the right to assert that patent against the Company's
products commercialized after that date in a separate lawsuit.
In March 1997, Eastman Kodak Company (Kodak) purchased the Wang imaging
business unit that has responsibility for this litigation. The patents in
the suit have been transferred to a Kodak subsidiary, Kodak Limited of
England, which, in turn, has exclusively licensed them to another Kodak
subsidiary, Eastman Software, Inc. in the United States (Eastman). On July
30, 1997, the Court permitted Eastman and Kodak Limited of England to be
substituted in the litigation in place of Wang.
The Company has moved for summary judgement on noninfringement as to each
of the five patents in the suit, and for summary judgment of invalidity as
to one of the patents. Eastman moved for summary judgment as to the
Company's unenforceability defense on one of the patents. In July 1998, the
Magistrate Judge assigned to the case heard oral arguments on the Company's
motion for summary judgement that U.S. Patent 4,918,588 is not infringed
and is invalid. The Magistrate Judge has not yet decided these motions. The
Company believes that after he has ruled on these motions, he will hear
oral arguments in the remaining motions in the sequence in which they were
filed. A trial date has not been set.
If it should be determined that the patents at issue in the litigation are
valid and are infringed by any of the Company's products, including
Watermark products, the Company will, depending on the product, redesign
the infringing products or seek to obtain a license to market the products.
There can be no assurance that the Company will be able to obtain such a
license on acceptable terms. Based on the Company's analysis of these
Eastman patents and their respective file histories, the Company believes
that it has meritorious defenses to Eastman's claims; however, the ultimate
outcome or any resulting potential loss cannot be determined at this time.
On October 27, 1998, plaintiff Thomas P. Nyquist filed a class action
complaint against the Company and certain of its officers and directors in
the United States District Court for the Central District of California
(the Nyquist Federal Action). The action was purportedly filed on behalf of
a class of purchasers of the Company's common stock during the period April
16, 1998 through October 7, 1998. The plaintiff alleges claims under
Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 in
connection with various public statements made by the Company and certain
of its officers and directors during the putative class period. The
complaint seeks unspecified compensatory damages, interest, attorneys'
fees, expert witness fees and costs. Plaintiff has filed a motion for the
appointment of lead plaintiffs and consolidation of any future related
actions. Defendants have not yet responded to the complaint. The Company
believes that all of the allegations contained in the Nyquist Federal
Action are without merit and intends to defend the actions vigorously;
however, the ultimate outcome or any resulting potential loss cannot be
determined at this time.
The Company, in the normal course of business, is subject to various other
legal matters. While the results of litigation and claims cannot be
predicted with certainty, the Company believes that the final outcome of
these other matters will not have a materially adverse effect on the
Company's consolidated results of operations or financial condition.
8. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which is effective for the year
ending December 31, 1998. SFAS No. 131 requires enterprises to report
selected information about an enterprise's operating segments in
general-purpose financial statements. SFAS No. 131 is effective for the
Company beginning January 1, 1998. Accordingly, the Company has prepared
operating segment information to report components that are evaluated
regularly by the Company's chief operating decision-makers in deciding how
to allocate resources and in assessing performance. The operating segments
are managed separately because each segment represents a strategic business
unit that offers different products or services. The results of the
segments reflect allocation of certain functional expense categories
8
<PAGE>
consistent with its internal reporting which are not the same as GAAP
reporting. Operating segments data for the three month periods ended March
31, 1999 and March 31, 1998 is as follows:
Three Months Ended March 31,
-----------------------------------
In thousands 1999 1998
---------------- --------------
Software
Revenue $ 41,984 $ 43,247
Income (loss) before other income (3,840) (49)
Hardware
Revenue $ 6,031 $ 6,891
Income (loss) before other income 879 972
Customer Support
Revenue $ 19,545 $ 15,862
Income (loss) before other income 3,922 1,624
Professional Services
Revenue $ 9,481 $ 4,685
Income (loss) before other income (381) (180)
Education and other
Revenue $ 4,401 $ 2,924
Income (loss) before other income 884 209
Total
Revenue $ 81,442 $ 73,609
Income (loss) before other income $ 1,464 $ 2,576
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following should be read in conjunction with the unaudited consolidated
financial statements and notes thereto included in Part I--Item 1 and Factors
That May Affect Future Results in this item of this Quarterly Report, and with
the audited consolidated financial statements and notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998.
Results of Operations
Revenue Three Months Ended
March 31,
-------------------------------------------
(Dollars in millions) 1999 1998 Change
------------ ------------ -------------
Software revenue
Domestic $ 25.5 $ 29.5 -14%
International 16.5 13.7 20%
------------ ------------
Total software revenue $ 42.0 $ 43.2 -3%
------------ ------------
Percentage of total revenue 52% 59%
Customer Support
Domestic $ 16.1 $ 12.4 30%
International 5.3 4.0 33%
------------- --------------
Total customer support revenue $ 21.4 $ 16.4 30%
------------- --------------
Percentage of total revenue 26% 22%
Professional Services
Domestic $ 5.1 $ 2.5 104%
International 2.5 1.7 47%
------------- --------------
Total professional services
revenue $ 7.6 $ 4.2 83%
------------- --------------
Percentage of total revenue 9% 6%
Hardware revenue
Domestic $ 4.8 $ 5.0 (4%)
International 1.2 1.9 (37%)
------------- --------------
Total hardware revenue $ 6.0 $ 6.9 (13%)
------------- --------------
Percentage of total revenue 7% 9%
Education and other revenue
Domestic $ 3.2 $ 1.7 88%
International 1.2 1.2 0%
------------- --------------
Total education and other
revenue $ 4.4 $ 2.9 52%
------------- --------------
Percentage of total revenue 6% 4%
Total revenue
Domestic $ 54.7 $ 51.1 7%
International 26.7 22.5 19%
------------- --------------
Total revenue $ 81.4 $ 73.6 11%
------------- --------------
Software revenue from the licensing of the Company's software products decreased
3% for the quarter ended March 31, 1999 over the comparable period of 1998 due
to a decrease in the volume of product shipments domestically offsetting an
increase in international revenues. A decline in revenue for the Company's
Workflo Business Systems products has not been fully offset by the growth in its
newer Panagon products and continues to unfavorably impact overall software
revenue growth.
10
<PAGE>
Customer support revenue consists of revenue from maintenance contracts and "fee
for service" revenues. Customer support revenue increased 30% for the quarter
ended March 31, 1999 over the same period of 1998 attributable to increased
maintenance revenue due to the growth of the Company's installed base.
Professional services revenue consists of revenue from consulting and
implementation services provided to end users of the Company's software products
and technical consulting services provided to the Company's resellers. Such
services are primarily performed on a time and material basis. Professional
services revenue increased 83% for the quarter ended March 31, 1999 over the
same period of 1998 and is a result of the Company's efforts to build its
professional services capabilities to support its solution-oriented strategy.
Hardware revenue is generated primarily from the sale of 12-inch optical storage
and retrieval libraries (OSAR). Hardware revenue decreased by 13% for the
quarter ended March 31, 1999 from the comparable period of 1998 primarily
because of decreases in new orders experienced both domestically and
internationally due to customers' ordering competitive products. The Company
expects hardware revenue to continue to decline in both absolute dollars and as
a percentage of total revenue.
Education and other revenue are generated from the sale of spare parts,
education services, supplies and "third party" products. Education and other
revenue increased 52% for the quarter ended March 31, 1999 over the comparable
period of 1998 due to increased training revenue related to the Panagon product
which was released during the first quarter in 1998.
International revenues were approximately 33% and 30% of total revenues in the
quarter ended March 31, 1999 and 1998, respectively. Management expects that the
Company's international operations will continue to account for a significant
portion of total revenues. However, the ongoing global economic crisis could
adversely affect international revenues. In addition, international revenues
could be adversely affected if the U.S. dollar strengthens against international
currencies.
Cost of Revenue
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------
(Dollars in millions) 1999 1998 Change
----------- ----------- ---------
<S> <C> <C> <C>
Cost of software revenue $ 3.9 $ 3.7 5%
Percentage of software revenue 9% 9%
Cost of customer support revenue $ 9.6 $ 8.4 14%
Percentage of customer support revenue 45% 51%
Cost of professional services revenue $ 7.6 $ 3.7 105%
Percentage of professional services revenue 100% 89%
Cost of hardware revenue $ 3.2 $ 3.4 (6%)
Percentage of hardware revenue 53% 49%
Cost of education and other revenue $ 3.1 $ 2.2 41%
Percentage of education and other revenue 70% 76%
Total cost of revenue $ 27.4 $ 21.4 28%
Percentage of total revenue 34% 29%
</TABLE>
The cost of software revenue includes royalties paid to third parties and the
cost of software distribution. The cost of software revenue as a percentage of
software revenue remained constant at 9% for the quarters ended March 31, 1999
and 1998.
The cost of customer support revenue includes customer support personnel,
supplies, and the cost of third party hardware maintenance. The cost of customer
support revenue as a percentage of customer support revenue for the quarter
ended March 31, 1999 decreased to 45% from 51% in the same period of 1998. The
decrease is attributable to the transition of higher cost hardware maintenance
services to a third party contractor.
The cost of professional services revenue consists primarily of professional
services personnel and third party contractors. The cost of professional
services revenue as a percentage of professional services revenue for the
quarter ended March 31, 1999 increased to 100% from 89% in the same period of
1998 due to the addition of professional services personnel to support the
Company's announced strategy of delivering complete document management
solutions to customers, including related consulting services. The Company
expects professional services revenue to increase and absorb the higher costs.
11
<PAGE>
The cost of hardware revenue includes the cost of manufacturing OSARs, and the
cost of hardware integration personnel. The cost of hardware revenue as a
percentage of hardware revenue for the quarter ended March 31, 1999 increased to
53% from 49% for the comparable period of 1998. The increase is due to lower
revenue without a decrease in fixed manufacturing costs.
The cost of education and other revenue includes the cost of supplies, education
services, spare parts and third party product. The cost of education and other
revenue as a percentage of education and other revenue for the three months
ended March 31, 1999 decreased to 70% from 76% in the same period of 1998 due to
increased training revenue related to the Panagon product which was released
during the first quarter of 1998 without a corresponding increase in training
cost.
Operating Expenses
Three Months Ended March 31,
-----------------------------------------
(Dollars in millions) 1999 1998 Change
----------- ----------- ----------
Research and development $ 13.1 $ 12.1 8%
Percentage of total revenue 16% 16%
Selling, general and administrative $ 39.4 $ 37.6 5%
Percentage of total revenue 48% 51%
Research and development expenses increased 8% for the first quarter of 1999 due
to a general increase in salaries and recruiting costs necessitated by the
intense competitive environment for software engineers; and an increase in cost
of contract developers. As a percentage of total revenue, research and
development expenses were at 16% for the three-month period ended March 31, 1999
and 1998.
The Company expects that competition for qualified technical personnel will
remain intense for the foreseeable future and may result in higher levels of
compensation expense for the Company. The Company believes that research and
development expenditures, including compensation of technical personnel, are
essential to maintaining its competitive position and expects these costs to
continue to constitute a significant percentage of revenues.
Selling, general and administrative expenses increased 5% for the first quarter
of 1999. The increase was primarily due to overall increases in salaries and the
expansion of the Company's sales force offset by decreased marketing program
costs along with lower legal expenses. As a percentage of total revenue,
selling, general and administrative expenses decreased to 48% in the first
quarter of 1999 from 51% in the same quarter of 1998 due to expense levels
growing at a lower rate than revenue.
Provision for Income Taxes. The Company's combined federal, state and foreign
annual effective tax rate for the quarter ended March 31, 1999 was 30% compared
to 29% for the comparable period in 1998. The increase in the rate is
attributable to a decrease in taxable income generated in lower tax
jurisdictions outside of North America.
Foreign Currency Fluctuations and Inflation. The Company's performance can be
affected by changes in foreign currency values relative to the U.S. dollar in
relation to the Company's revenue and operating expenses. The impact to net
income from foreign exchange transactions and hedging activities is immaterial
for all periods reported. As of March 31, 1999, the Company had forward exchange
contracts outstanding totaling approximately $12.3 million in 9 currencies. All
of these contracts mature in three months.
Other comprehensive loss for the three months ended March 31, 1999 reflects an
increase of $2.7 in the unrealized loss due to foreign currency translation.
This increase was primarily attributable to unrealized losses associated with
the weakening of the Euro currency against the U.S. dollar during the period.
Management believes that inflation has not had a significant impact on the
prices of the Company's products, the cost of its materials, or its operating
results for the three months ended March 31, 1999 and 1998.
Other Financial Instruments. The Company enters into forward foreign exchange
contracts as a hedge against effects of fluctuating currency exchange rates on
monetary assets and liabilities denominated in currencies other than the
functional currency of the relevant entity. The Company is exposed to market
risk on the forward exchange contracts as a result of changes in foreign
exchange rates; however, the market risk should be offset by changes in the
valuation of the underlying exposures. Gains and losses on these contracts,
which equal the difference between the forward contract rate and the prevailing
market spot rate at the time of valuation, are recognized in the consolidated
12
<PAGE>
statement of operations. The counterparties to these instruments are major
financial institutions. The Company uses commercial rating agencies to evaluate
the credit quality of the counterparties, and the Company does not anticipate a
loss resulting from any credit risk of these institutions.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. SFAS 133 will require the Company to record all
derivatives on the balance sheet at fair value. For derivatives that are hedges,
changes in the fair value of derivatives will be offset by the change in fair
value of the hedged assets, liabilities, or firm commitments. The Company
believes the impact of adopting this standard will not be material to its
results of operations or equity. The Company will continue to evaluate the
adoption of such pronouncement.
Liquidity and Capital Resources
At March 31, 1999, combined cash, cash equivalents and short- and long-term
marketable securities totaled $82.0 million, a decrease of $0.2 million from the
end of 1998. Cash provided by operating activities during the three months ended
March 31, 1999 totaled $6.4 million and resulted primarily from net income; an
increase in unearned maintenance revenue related to annual renewal billings
which occur during the first quarter; and additions to net income for
depreciation and amortization expense offset by decreases in accounts payable
and accrued compensation. Cash used by investing activities totaled $15.5
million and was a result of capital expenditures and purchases of marketable
securities offset by sales and maturities of marketable securities. Cash
provided by financing activities totaled $0.7 million and was a result of
proceeds received from the exercise of employee stock options.
Accounts receivable decreased to $60.4 million at March 31, 1999 from $61.6
million at December 31, 1998. Days sales outstanding increased to 67 days as of
March 31, 1999 from 66 days as of December 31, 1998. Current liabilities
decreased to $72.6 million at March 31, 1999 from $76.5 million at December 31,
1998. The decrease in current liabilities is primarily a result of decreases in
accounts payable and accrued incentive compensation, offset by increases in
unearned maintenance and accrued royalties.
The Company has a $20 million unsecured line of credit with a commercial bank
that expires in May 1999 and is subject to the maintenance of certain financial
covenants. As of March 31, 1999, there were no borrowings outstanding against
the Company's credit line. The Company expects that it will be able to renew its
line of credit on comparable terms.
The Company anticipates that its present cash balances together with internally
generated funds and credit lines will be sufficient to meet its working capital
and capital expenditure needs for at least the next twelve months.
Other Matters
Year 2000. With the approach of the year 2000, the Company recognized that
significant issues could arise in connection with the computer software products
it licenses and the internal business systems which are essential to its
operations. In 1997, the Company implemented a year 2000 Integrity Program (the
Program) to ensure that the Company's computer software products and internal
business systems will function properly in the year 2000 and thereafter.
The Program, as it relates to the software products licensed to customers,
includes year 2000 compliance testing and certification of certain existing
software products. All new generations of the Company's software products will
be released as year 2000 compliant. Not all-current software products of the
Company are year 2000 compliant and the Company does not plan to make them so.
Accordingly, upgraded year 2000 compliant versions of such software products are
being made available to customers and resellers who will then bear the
responsibility for installing the upgraded software product in order to make
their systems year 2000 compliant. Some of the Company's customers are running
software product versions that are not year 2000 compliant. The Company has been
encouraging such customers to migrate to current software product versions. It
is possible that the Company may experience increased expenses in addressing
migration issues for such customers. The Company's customer support organization
initiated a program, Customer Service Profile 2000, to review the status of each
Company product currently installed at a customer location and it provided the
diagnostics used in this program to its resellers for their use at their
customer locations. Customers who have support agreements with the Company have
been directly informed as to whether or not the particular software products
they have installed are year 2000 compliant. All customers are kept informed of
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the release of year 2000 compliant updates and upgrades via the Company's
readiness disclosure statement on its Web site. The inability of any of the
Company's software products to properly manage and manipulate data in the year
2000 could result in increased warranty costs, customer satisfaction issues,
potential lawsuits and other costs and liabilities, as well as customers being
unable to run software licensed from the Company and incurring significant costs
from the resultant business interruption. The Company has spent an estimated
$1.1 million on year 2000 product related projects through March 31, 1999. The
expense for year 2000 product related projects is estimated to be approximately
$.5 million for the remainder of 1999. Demand for the Company's software
products could be adversely impacted to the extent customers and potential
customers are temporarily distracted by their year 2000 remediation efforts, as
such products compete for Information Technology (IT) resources that have been
diverted for such remedial efforts which may have higher priority than
implementing document management systems.
The Company has also initiated communications with significant third party
vendors of computer software with which the Company's systems interface or upon
which the Company's software products depend in order to coordinate efforts to
minimize the extent to which the Company's business will be vulnerable to such
third parties' failure to remediate their own year 2000 issues. Although the
Company's compliance testing utilizes the embedded third-party software as an
essential part of its software being tested, the Program does not include
certification of customer-developed applications which run on the Company's
software products or third party software which is incorporated in the Company's
software products. Customers and third party vendors will remain directly
responsible for year 2000 compliance testing of their software.
The Company requires that contingency plans be developed and validated in the
event that any of its products cannot be updated and certified year 2000
compliant before its scheduled release date. The Company expects to have its
contingency plans in place by October 31, 1999. In addition, the Company is
forming a rapid response team as part of its Customer Services and IT groups
that will respond to any problems during the year 2000 date change period.
The Program also includes a review of all internal IT systems for year 2000
compliance. This year 2000 compliance effort for IT systems is divided into
three categories: 1) applications development and support; 2) IT production
services and operations; and 3) business communications (data, voice and video).
The program methodology consists of four phases: I) assessment; II) potential
impact analysis; III) compliance integration; and IV) update, assessment, and
contingency plan.
The Company's significant business systems (financial, operational, marketing,
customer support, etc.) have been reviewed and are either currently year 2000
compliant or will be upgraded and/or replaced so as to be year 2000 tested and
compliant during 1999. All of the hardware and software deployed in the
Company's technical infrastructure is either fully year 2000 tested and
compliant or is scheduled to be replaced with year 2000 compliant components by
October 31, 1999. The Company is also evaluating IT related environmental
systems (heating, air conditioning, security, etc.) and intends to make all such
systems year 2000 compliant by October 31, 1999. To the extent possible, the
Company will develop and execute contingency plans designed to allow continued
operation in the event of failure of the Company's or third parties' systems by
October 31, 1999. Contingency plans are being developed in certain key areas, in
particular finance, IT and customer service to ensure that any potential
business interruptions caused by the year 2000 issue are mitigated. Such
contingency plans may include identification of alternative sources for
processing data and managing customer support issues. Business teams will be
monitoring the critical systems, and service centers to react immediately to
facilitate repairs at the end of the year 1999. Data retention and recovery
procedures will be in place for critical business data to provide back-ups with
on-site and off-site data copies. For those business, infrastructure and
environmental systems that are to be upgraded in order to achieve year 2000
compliance, the majority were already scheduled for upgrade for other business
reasons. The Company's cost to fund solely year 2000 compliance projects has
been $0.3 million through March 31, 1999. The expense to complete these projects
is estimated to be approximately $0.5 million for the remainder of 1999.
Although the Company is not aware of any material operational issues or costs
associated with preparing its software products and internal systems for the
year 2000, there can be no assurance that there will not be a delay in, or
increased costs associated with, the implementation of the necessary systems and
changes to address the year 2000 issue. The Company's inability to implement
such systems and changes could have an adverse effect on future results of
operations. The costs of the Company's year 2000 project and the date on which
the Company believes it will be completed are based on management's best
estimates and include assumptions regarding third party modification plans.
However, in particular due to the potential impact of third party modification
plans, there can be no assurance that these estimates will be achieved and
actual results could differ materially from those anticipated.
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The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the nature and amount of programming required
to upgrade or replace each of the affected programs, and the success of the
Company's external customers, resellers, and vendors and suppliers in addressing
the year 2000 issue.
The EURO Conversion. On January 1, 1999, eleven of the fifteen-member countries
of the European Union established fixed conversion rates between their existing
sovereign currencies and the EURO. These countries have agreed to adopt the EURO
as their common legal currency from that date. The EURO will trade on currency
exchanges and be available for non-cash transactions. These countries will issue
sovereign debt exclusively in EURO and will redenominate outstanding sovereign
debt. Effective on January 1, 1999, these countries no longer control their own
monetary policies by directing independent interest rates for the legacy
currencies. Instead, the authority to direct monetary policy, including money
supply and official interest rates for the EURO, is exercised by the new
European Central Bank.
The legacy currencies are scheduled to remain legal tender in these countries as
a denomination of the EURO between January 1, 1999 and January 1, 2002 (the
"transition period"). During the transition period, public and private parties
may pay for goods and services using either the EURO or the country's legacy
currency on a "no compulsion, no prohibition" basis. However, conversion rates
will no longer be computed directly from one legacy currency to another.
Instead, a "triangulation" process will be applied whereby an amount denominated
in one legacy currency first will be converted into an amount denominated in
EURO, and the resultant EURO-denominated amount is converted into the second
legacy currency.
The Company has made the necessary changes to its internal business systems to
support transactions denominated in the EURO, including establishing EURO price
lists for affected countries. The Company is in the process of evaluating the
impact that the conversion to the EURO will have on its financial condition and
results of operations. Based on this evaluation to date, the Company currently
does not believe that there will be a material adverse impact on its financial
condition or results of operations as a result of the EURO conversion.
Environmental Matters. The Company is not aware of any issues related to
environmental matters that have, or are expected to, materially affect its
business.
Recent Accounting Pronoucements. In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal years beginning after June 15, 1999. SFAS 133 will require
the Company to record all derivatives on the balance sheet at fair value. For
derivatives that are hedges, changes in the fair value of derivatives will be
offset by the change in fair value of the hedged assets, liabilities, or firm
commitments. The Company believes the impact of adopting this standard will not
be material to its results of operations or equity. The Company will continue to
evaluate the adoption of such pronouncement.
Factors That May Affect Future Results
The Company's business, financial condition, operating results and prospects can
be impacted by a number of factors, including but not limited to those set forth
below and elsewhere in this report, any one of which could cause the Company's
actual results to differ materially from recent results or from the Company's
anticipated future results.
Rapid Technological Change; Product Development. The market for the Company's
products is characterized by rapid technological developments, evolving industry
standards, changes in customer requirements and frequent new product
introductions and enhancements. The Company's continued success will be
dependent upon its ability to continue to enhance its existing products, develop
and introduce, in a timely manner, new products incorporating technological
advances and respond to customer requirements, including without limitation
enhancements to certain specified Company software products to achieve year 2000
compliance. There can be no assurance that the Company will be successful in
developing and marketing new products or enhancements to its existing products
on a timely basis or that any new or enhanced products will adequately address
the changing needs of the marketplace. If the Company is unable to develop and
introduce new products or enhancements to existing products in a timely manner
in response to changing market conditions or customer requirements, including
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without limitation enhancements to certain existing software products to achieve
year 2000 compliance, the Company's business and operating results could be
adversely affected. From time to time, the Company or its competitors may
announce new products, capabilities or technologies that have the potential to
replace or shorten the life cycles of the Company's existing products. There can
be no assurance that announcements of currently planned or other new products
will not cause customers to delay their purchasing decisions in anticipation of
such products, which could have a material adverse effect on the Company's
business and operating results.
Uncertainty of Future Operating Results; Fluctuations in Quarterly Operating
Results. Prior growth rates in the Company's revenue and operating results
should not necessarily be considered indicative of future growth or operating
results. Future operating results will depend upon many factors, including the
demand for the Company's products; the effectiveness of the Company's efforts to
continue to integrate various products it has developed or acquired and to
achieve the desired level of sales from such product integration; the level of
product and price competition; the length of the Company's sales cycle;
improvements in the productivity of the Company's sales force; seasonality of
individual customer buying patterns; the size and timing of individual
transactions; the delay or deferral of customer implementations; the budget
cycles of the Company's customers; the timing of new product introductions and
product enhancements by the Company and its competitors; the mix of sales by
products, services and distribution channels; levels of international sales;
acquisitions by competitors; changes in foreign currency exchange rates
including EURO exchange rates beginning in 1999; the ability of the Company to
develop and market new products and control costs; and general domestic and
international economic and political conditions.
As a result of these factors, revenues and operating results for any quarter are
subject to variation and are not predictable with any significant degree of
accuracy. Therefore, the Company believes that period-to-period comparisons of
its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Moreover, such factors could
cause the Company's operating results in a given quarter to be below the
expectations of public market analysts and investors. In either case, the price
of the Company's common stock could be materially adversely affected.
Competition. The document imaging, workflow, computer output to laser disk and
electronic document management software markets are highly competitive, and
there are certain competitors of the Company with substantially greater sales,
marketing, development and financial resources. The Company believes that the
competitive factors affecting the market for its products and services include
vendor and product reputation; product quality, performance and price; the
availability of products on multiple platforms; product scalability; product
integration with other enterprise applications; product functionality and
features; product ease of use; and the quality of customer support services and
training. The relative importance of each of these factors depends upon the
specific customer involved. While the Company believes it competes favorably in
each of these areas, there can be no assurance that it will continue to do so.
Moreover, the Company's present or future competitors may be able to develop
products comparable or superior to those offered by the Company, offer lower
price products or adapt more quickly than the Company to new technologies or
evolving customer requirements. Competition is expected to intensify. In order
to be successful in the future, the Company must respond to technological
change, customer requirements and competitors' current products and innovations.
There can be no assurance that the Company will be able to continue to compete
effectively in its market or that future competition will not have a material
adverse effect on its business, financial condition or results of operations. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of the markets served by the
Company. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. Increased
competition may result in price reductions, reduced gross margins and loss of
market share, any of which could have a material adverse effect on the Company's
business, financial condition or results of operations.
Intellectual Property and other Proprietary Rights. The Company's success
depends, in part, on its ability to protect its proprietary rights to the
technologies used in its principal products. The Company relies on a combination
of copyrights, trademarks, trade secrets, confidentiality procedures and
contractual provisions to protect its proprietary rights. There can be no
assurance that the Company's existing or future copyrights, trademarks, trade
secrets or other intellectual property rights will be of sufficient scope or
strength to provide meaningful protection or a commercial advantage to the
Company. The Company has no software patents. Also, in selling certain of its
products, the Company relies on "shrink wrap" licenses that are not signed by
licensees and, therefore, may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries do not protect
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the Company's proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that such factors would not have a material
adverse effect on the Company's business, financial condition or results of
operations. In addition, the Company also relies on certain software that it
licenses from third parties, including software that is integrated with
internally developed software used in the Company's products to perform key
functions. There can be no assurance that such third parties will remain in
business, that they will continue to support their products, that their products
are, or will be, year 2000 compliant, or that their products will otherwise
continue to be available to the Company on commercially reasonable terms. The
loss or inability to maintain any of theses software licenses could result in
delays or reductions in product shipments until equivalent software can be
developed, identified, licensed and integrated, which could adversely affect the
Company's business, financial condition or results of operations.
The Company may, from time to time, be notified that it is infringing certain
patent or intellectual property rights of others. Combinations of technology
acquired through past or future acquisitions and the Company's technology will
create new products and technology that may give rise to claims of infringement.
While no actions other than those discussed below are currently pending against
the Company for infringement of patent or other proprietary rights of third
parties, there can be no assurance that third parties will not initiate
infringement actions against the Company in the future. Infringement actions can
result in substantial cost to, and diversion of, resources of the Company. If
the Company were found to infringe upon the rights of others, no assurance can
be given that licenses would be obtainable on acceptable terms or at all, that
significant damages for past infringement would not be assessed or that further
litigation relative to any such licenses or usage would not occur. The failure
to successfully defend any claims or obtain necessary licenses or other rights,
the ultimate disposition of any claims or the advent of litigation arising out
of any claims of infringement, could have a material adverse effect on the
Company's business, financial condition or results of operations.
In October 1994, Wang Laboratories, Inc. (Wang) filed a complaint in the United
States District Court for the District of Massachusetts alleging that the
Company is infringing five patents held by Wang (the FileNET Case). On June 23,
1995, Wang amended its complaint to include an additional related patent. On
July 2, 1996, Wang filed a complaint in the same court alleging that Watermark
Software Inc., formerly a wholly owned subsidiary that was merged into the
Company, is infringing three of the same patents asserted in the initial
complaint (the Watermark Case). On October 9, 1996, Wang withdrew its claim in
the FileNET Case that one of the patents it initially asserted is infringed by
certain of the Company's products, which were commercialized before the initial
complaint was filed. Wang reserved the right to assert that patent against the
Company's products commercialized after that date in a separate lawsuit.
In March 1997, Eastman Kodak Company (Kodak) purchased the Wang imaging business
unit that has responsibility for this litigation. The patents in the suit have
been transferred to a Kodak subsidiary, Kodak Limited of England, which, in
turn, has exclusively licensed them to another Kodak subsidiary, Eastman
Software, Inc. in the United States (Eastman). On July 30, 1997, the Court
permitted Eastman and Kodak Limited of England to be substituted in the
litigation in place of Wang.
The Company has moved for summary judgement on noninfringement as to each of the
five patents in the suit, and for summary judgment of invalidity as to one of
the patents. Eastman moved for summary judgment as to the Company's
unenforceability defense on one of the patents. In July 1998, the Magistrate
Judge assigned to the case, heard oral arguments on the Company's motion for
summary judgement that U.S. Patent 4,918,588 is not infringed and is invalid.
The Magistrate Judge has not yet decided these motions. The Company believes
that after he has ruled on these motions, he will hear oral arguments in the
remaining motions in the sequence in which they were filed. A trial date has not
been set.
If it should be determined that the patents at issue in the litigation are valid
and are infringed by any of the Company's products, including Watermark
products, the Company will, depending on the product, redesign the infringing
products or seek to obtain a license to market the products. There can be no
assurance that the Company will be able to obtain such a license on acceptable
terms. Based on the Company's analysis of these Eastman patents and their
respective file histories, the Company believes that it has meritorious defenses
to Eastman's claims; however, the ultimate outcome or any resulting potential
loss cannot be determined at this time.
Dependence on Certain Relationships. The Company has entered into a number of
key relationships with other companies such as Microsoft Corporation, IBM Global
Services, SAP AG, Hewlett-Packard Company, and Sun Microsystems, Inc. There can
be no assurance that these companies will not reduce or discontinue their
relationships with, or support of, the Company and its products.
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Dependence on Key Management and Technical Personnel. The Company's success
depends to a significant degree upon the continued contributions of its key
management, marketing, technical and operational personnel. In general, the
Company does not utilize employment agreements for its key employees. The loss
of the services of one or more key employees could have a material adverse
effect on the Company's operating results. The Company also believes its future
success will depend in large part upon its ability to attract and retain
additional highly skilled management, technical, marketing, product development,
consultants and operational personnel. Competition for such personnel,
particularly engineers and other technical personnel, is intense, and pay scales
in the software industry are increasing. There can be no assurance that the
Company will be successful in attracting and retaining such personnel.
International Sales. Historically, the Company has derived approximately
one-third of its total revenues from international sales. International business
is subject to certain risks including varying technical standards; tariffs and
trade barriers; political and economic instability; reduced protection for
intellectual property rights in certain countries; difficulties in staffing and
maintaining foreign operations; difficulties in managing foreign distributors;
varying requirements for localized products; potentially adverse tax
consequences; currency exchange fluctuations including those related to the EURO
beginning in 1999; the burden of complying with a wide variety of complex
foreign laws, regulations and treaties; and the possibility of difficulties in
collecting accounts receivable. In particular, the current economic crisis in
the Asia Pacific region and Latin America may limit future growth or cause a
decline in international revenues. There can be no assurance that any of these
factors will not have a material adverse effect on the Company's business,
financial condition or results of operations.
Product Liability. Products as complex as those sold by the Company are
susceptible to errors or failures, especially when first introduced or when new
versions are released. The Company's products are often intended for use in
applications that are critical to a customer's business. As a result, the
Company's customers may rely on the effective performance of the software to a
greater extent than the market for software products generally. The Company
conducts extensive product testing to ensure that its products are free of
significant errors and defects. In addition, the Company has designed and tested
the most current versions of its products to be year 2000 compliant. However,
some of the Company's customers are running earlier products that are not year
2000 compliant. Although the Company has been encouraging such customers to
migrate to current product versions, no assurance can be given that all of them
will do so in a timely fashion, if at all. Moreover, the Company also relies on
certain software that it licenses from third parties, including software that is
integrated with internally developed software and is used in the Company's
products to perform key functions. There can be no assurance that such
third-party software will be free of errors and defects or be year 2000
compliant in a timely fashion. Although the Company has not experienced any
material product liability claims to date, there can be no assurance that errors
or defects, whether associated with year 2000 functions or otherwise, will not
result in product liability claims against the Company in the future. The
Company's license agreements with customers typically contain provisions
designed to limit its exposure to potential product liability claims. However,
it is possible that such limitation of liability provisions may not be effective
under the laws of certain jurisdictions. Although the Company has not
experienced any product liability claims to date, the sale and support of
products may entail the risk of such claims, and there can be no assurance that
the Company will not be subject to such claims in the future. A successful
product liability claim brought against the Company could have a material
adverse effect upon the Company's business, operating results and financial
condition.
Stock Price Volatility. The Company believes that a variety of factors could
cause the trading price of its common stock to fluctuate, perhaps substantially,
including quarter-to-quarter variations in operating results; announcements of
developments related to its business; fluctuations in its order levels; general
conditions in the technology sector or the worldwide economy; announcements of
technological innovations, new products or product enhancements by the Company
or its competitors; key management changes; changes in joint marketing and
development programs; developments relating to patents or other intellectual
property rights or disputes; and developments in the Company's relationships
with its customers, distributors and suppliers. In addition, in recent years the
stock market in general, and the market for shares of high-technology stocks in
particular, have experienced extreme price fluctuations that have often been
unrelated to the operating performance of affected companies. Such fluctuations
could adversely affect the trading price of the Company's common stock.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Notes to Consolidated Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The list of exhibits contained in the accompanying Index to
Exhibits is herein incorporated by reference. (b) No reports on Form 8-K were
filed during the first quarter of 1999.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FILENET CORPORATION
May 11, 1999 By:______________/s/_____________________________
Date Mark S. St. Clare, Chief Financial Officer and
Sr. Vice President, Finance (Principal
Financial Officer)
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INDEX TO EXHIBITS
Exhibit No. Description
- ----------- ------------------------------------------------------------------
3.1* Restated Certificate of Incorporation, as amended (filed as
Exhibit 3.1 to Form S-4 filed on January 26, 1996; Registration
No. 333-00676).
3.1.1* Certificate of Amendment of Restated Certificate of Incorporation
(filed as Exhibit 3.1.1 to Form S-4 filed on January 26, 1996,
Registration No. 333-00676).
3.2* Bylaws (filed as Exhibit 3.2 of the Registrant's registration
statement on Form S-1, Registration No 33-15004 (the "Form S-1")).
4.1* Form of certificate evidencing Common Stock (filed as Exhibit 4.1
to the Form S-1, Registration No. 33-15004).
4.2* Rights Agreement, dated as of November 4, 1988 between FileNET
Corporation and the First National Bank of Boston, which includes
the form of Rights Certificate as Exhibit A and the Summary of
Rights to Purchase Common Shares as Exhibit B (filed as Exhibit
4.2 to Form S-4 filed on January 26, 1996; Registration No.
333-00676).
4.3* Amendment One dated July 31, 1998 and Amendment Two dated November
9, 1998 to Rights Agreements between FileNET Corporation and
BANKBOSTON N.A. formerly known as The First National Bank of
Boston (filed as Exhibit 4.3 to Form 10-Q for the quarter ended
September 30, 1998).
10.1* Second Amended and Restated Credit Agreement (Multicurrency) by
and among the Registrant and Bank of America National Trust and
Savings Association dated June 25, 1997, effective June 1,1997
(filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30,
1997).
10.2* Business Alliance Program Agreement between the Registrant and
Oracle Corporation dated July 1, 1996, as amended by Amendment One
thereto (filed as Exhibit 10.4 to Form 10-QA for the quarter
ended June 30, 1996).
10.3* Runtime Sublicense Addendum between the Registrant and Oracle
Corporation dated July 1, 1996; as amended by Amendment One
thereto (filed as Exhibit 10.4 to Form 10-QA for the quarter ended
June 30, 1996).
10.3.1* Runtime Sublicense Addendum between the Registrant and Oracle
Corporation dated July 1, 1996; as amended by Amendments Two
through Six thereto (filed as Exhibit 10.3.1 to Form 10-Q for the
quarter ended September 30, 1998).
10.4* Full Use and Deployment Sublicense Addendum between the Registrant
and Oracle Corporation dated July 1, 1996, as amended by Amendment
One thereto (filed as Exhibit 10.4 to Form 10-QA for the quarter
ended June 30, 1996).
10.5* Lease between the Registrant and C. J. Segerstrom & Sons for the
headquarters of the Company, dated April 30, 1987 (filed as
Exhibit 10.19 to the Form S-1).
10.6* Third Amendment to the Lease between the Registrant and C. J.
Segerstrom & Sons dated April 30, 1987, for additional facilities
at the headquarters of the Company, dated October 1, 1992 (filed
as exhibit 10.7 to Form 10-K filed on April 4, 1997).
10.7* Fifth Amendment to the Lease between the Registrant and C. J.
Segerstrom & Sons dated April 30, 1987, for the extension of the
term of the lease, dated March 28, 1997 (filed as exhibit 10.8 to
Form 10-Q for the quarter ended March 31, 1997).
10.8* 1989 Stock Option Plan for Non-Employee Directors of FileNET
Corporation, as amended by the First Amendment, Second Amendment,
Third Amendment thereto (filed as Exhibit 10.9 to Form S-4 filed
on January 26, 1996; Registration No. 333-00676).
10.9* Amended and Restated 1995 Stock Option Plan of FileNET (filed as
Exhibit 99.1 to Form S-8 filed on November 9, 1998; Registration
No. 333-66997).
- ---------------------------------------------
* Incorporated herein by reference
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Exhibit No. Description
- ----------- ------------------------------------------------------------------
10.10* Second Amended and Restated Stock Option Plan of FileNET
Corporation, together with the forms of Incentive Stock
Option Agreement and Non-Qualified Stock Option Agreements
(filed as Exhibits 4(a), 4(b) and 4(c), respectively, to the
Registrant's Registration Statement on Form S-8, Registration No.
33-48499), and an Amendment thereto (filed as Exhibit 4(d) to the
Registrant's Registration Statement on Form S-8, Registration
No. 33-69920), and the Second Amendment thereto (filed as Appendix
A to the Registrant's Proxy Statement for the Registrant's 1994
Annual Meeting of Stockholders, filed on April 29, 1994).
10.11* Non-Statutory Stock Option Agreement(with Notice of Grant of Stock
Option and Special Addendum) between Registrant and Mr. Lee
Roberts (filed as Exhibit 99.17 to Form S-8 on August 20, 1997).
10.12* Non-Statutory Stock Option Agreement(with Notice of Grant of Stock
Option and Special Addendum) between Registrant and Mr. Ron
Ercanbrack (filed as Exhibit 99.19 to Form S-8 on August 20,
1997).
10.13* Agreement for the Purchase of IBM products dated December 20, 1991
(filed on May 5, 1992 with the Form 8 amending the Company's Form
10-K for the fiscal year ended December 31, 1991).
10.14* Amendment #A1011-941003-01 dated September 30, 1994, to the
Agreement for the Purchase of IBM products dated December 20, 1991
(filed as Exhibit 10.12 to Form 10-K for the fiscal year ended
December 31, 1996).
10.15* Development and Initial Supply Agreement between the Registrant
and Quintar Company dated August 20, 1992 (filed as Exhibit 10.21
to Form 10-K for the year ended January 3, 1993).
10.16* Amendment dated December 22, 1992 to the Development and Initial
Supply Agreement between the Registrant and Quintar Company dated
August 20, 1992 (filed as Exhibit 10.22 to Form 10-K for the year
ended January 3, 1993).
10.17* Amendment 2 dated December 18, 1998 to the Product License
Agreement between the Registrant and Novell, Inc. dated May 16,
1995 (filed as Exhibit 10.17 to Form 10-K/A for the year ended
December 31, 1998).
10.18* Agreement and Plan of Merger between the Registrant and Watermark
Software Inc. dated July 18, 1995 (filed as Exhibit 10.27 to Form
10-Q for the quarter ended July 2, 1995).
10.19* Agreement and Plan of Merger between the Registrant and Saros
Corporation, as amended, dated January 17, 1996 (filed as Exhibits
2.1, 2.2, 2.3, and 2.4 to Form 8-K on March 13, 1996).
10.20* Stock Purchase Agreement by and among FileNET Corporation, IFS
Acquisition Corporation, Jawaid Khan and Juergen Goersch dated
January 17, 1996 and Amendment 1 to Stock Purchase Agreement dated
January 30, 1996 (filed as Exhibit 10.2 to Form 10-K for the year
ended December 31, 1995).
10.21* Amended and Restated FileNET Corporation 1998 Employee Stock
Purchase Plan (filed as Exhibit 99.15 to Form S-8, filed on
November 9, 1998; Registration No. 333-66997).
10.22* FileNET Corporation International Employee Stock Purchase Plan
(filed as Exhibit 99.16 to Form S-8, filed on November 9, 1998;
Registration No. 333-66997).
27 Financial Data Schedule.
- -----------------------------------------------
* Incorporated herein by reference
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Mar-31-1999
<CASH> 46,219
<SECURITIES> 14,301
<RECEIVABLES> 60,381
<ALLOWANCES> 0
<INVENTORY> 1,716
<CURRENT-ASSETS> 130,354
<PP&E> 122,577
<DEPRECIATION> 79,004
<TOTAL-ASSETS> 203,008
<CURRENT-LIABILITIES> 72,573
<BONDS> 0
0
0
<COMMON> 130,412
<OTHER-SE> 23
<TOTAL-LIABILITY-AND-EQUITY> 203,008
<SALES> 48,015
<TOTAL-REVENUES> 81,442
<CGS> 7,127
<TOTAL-COSTS> 27,431
<OTHER-EXPENSES> 52,547
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,925
<INCOME-TAX> 877
<INCOME-CONTINUING> 2,048
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,048
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
