-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FojcYLEb5eQhD5aprnUrs7Esfgd0svAOHe64wcTAIkH3P0G16v3CvLx/R0OP/of5 1usZOy7ZKZdaLZCNgqqp2w== 0000706015-98-000014.txt : 19980817 0000706015-98-000014.hdr.sgml : 19980817 ACCESSION NUMBER: 0000706015-98-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FILENET CORP CENTRAL INDEX KEY: 0000706015 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 953757924 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15997 FILM NUMBER: 98688876 BUSINESS ADDRESS: STREET 1: 3565 HARBOR BLVD CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7149663400 MAIL ADDRESS: STREET 1: 3565 HARBOR BLVD CITY: COSTA MESA STATE: CA ZIP: 926261420 10-Q 1 QUARTERLY REPORT FOR FILENET CORPORATION 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 June 30, 1998 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 0-15997 FILENET CORPORATION (Exact name of Registrant as specified in its charter) Delaware 95-3757924 - ------------------------------ ---------------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 3565 Harbor Boulevard, Costa Mesa, CA 92626 - ---------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (714) 966-3400 - ---------------------------------------------------------------------- (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| As of July 31, 1998, there were 31,520,271 shares of the Registrant's common stock outstanding. FILENET CORPORATION Index Page Number - -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION Item 1. Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997...................... 3 Consolidated Statements of Operations for the three and six month periods ended June 30, 1998 and 1997.................................................. 4 Consolidated Statements of Comprehensive Income for the three and six month periods ended June 30, 1998 and 1997......................................... 5 Consolidated Statements of Cash Flows for the six month periods ended June 30, 1998 and 1997......... 6 Notes to Consolidated Financial Statements..................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 10 PART II OTHER INFORMATION Item 1. Legal Proceedings.............................................. 17 Item 4. Submission of Matters to a Vote of Security Holders............ 17 Item 6. Exhibits and Reports on Form 8-K............................... 17 SIGNATURE...................................................... 18 INDEX TO EXHIBITS.............................................. 19 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements FILENET CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
June 30, December 31, 1998 1997 ----------------- --------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents.................. $ 50,101 $ 37,344 Short-term marketable securities........... 17,595 26,600 Accounts receivable, net................... 69,759 61,283 Inventories................................ 3,155 3,541 Prepaid expenses and other current assets.. 7,491 8,309 Deferred income taxes...................... 5,871 6,439 ------------ ----------- Total current assets....................... 153,972 143,516 Property, net................................ 33,551 27,587 Long-term marketable securities.............. 13,886 7,826 Other assets................................. 1,042 941 ------------ ----------- Total assets............................. $ 202,451 $ 179,870 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................... $ 16,192 $ 15,003 Accrued compensation....................... 17,362 14,845 Unearned maintenance revenue............... 14,474 8,848 Accrued royalties.......................... 2,092 2,743 Other accrued liabilities.................. 21,264 19,190 ------------ ----------- Total current liabilities.................. 71,384 60,629 Deferred income taxes........................ 437 430 Stockholders' equity: Preferred stock - $.10 par value; 7,000,000 shares authorized; none issued and outstanding Common stock - $.01 par value; 200,000,000 shares authorized; 31,290,285 and 31,121,676 shares outstanding at June 30, 1998 and December 31, 1997, respectively.......... 140,481 130,741 Retained earnings.......................... 9,507 2,348 Accumulated other comprehensive income..... (4,791) (4,146) ------------ ----------- 145,197 128,943 Treasury stock, at cost; 1,098,000 and 820,000 shares at June 30, 1998 and December 31, 1997, respectively.......... (14,567) (10,132) ------------ ----------- Total stockholders' equity................. 130,630 118,811 ============ =========== Total liabilities and stockholders' equity $ 202,451 $ 179,870 ============ ===========
See accompanying notes to consolidated financial statements. 3 FILENET CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three Months Six Months Ended June 30, Ended June 30, --------------------- --------------------- 1998 1997 1998 1997 --------- --------- ---------- ---------- Revenue: Software................. $ 44,403 $ 31,075 $ 87,650 $ 53,157 Service.................. 29,467 23,256 52,938 41,493 Hardware................. 6,502 8,119 13,393 15,362 --------- --------- --------- ---------- Total revenue............ 80,372 62,450 153,981 110,012 --------- --------- --------- ---------- Costs and expenses: Cost of software revenue.. 4,265 3,166 7,951 6,165 Cost of service revenue... 17,967 13,765 33,313 26,896 Cost of hardware revenue.. 3,238 4,838 6,598 10,167 Research and development.. 11,820 9,593 23,894 19,733 Selling, general and administrative............ 37,585 31,021 74,152 60,787 Restructuring and other costs..................... 6,000 6,000 ---------- --------- --------- ---------- Total costs and expenses.. 74,875 68,383 145,908 129,748 ---------- --------- --------- ---------- Operating income (loss)..... 5,497 (5,933) 8,073 (19,736) Other income, net........... 1,031 580 2,010 1,301 ---------- --------- --------- ---------- Income (loss) before income taxes...................... 6,528 (5,353) 10,083 (18,435) Provision (benefit) for income taxes...................... 1,893 (1,499) 2,924 (5,161) ---------- --------- --------- ---------- Net income (loss)........... $ 4,635 $ (3,854) $ 7,159 $ (13,274) ========== ========= ========= ========== Earnings (loss) per share: Basic..................... $ 0.15 $ (0.13) $ 0.23 $ (0.44) Diluted................... $ 0.14 $ (0.13) $ 0.21 $ (0.44) Weighted average shares outstanding: Basic..................... 30,801 30,390 30,501 30,240 Diluted................... 34,097 30,390 33,530 30,240
See accompanying notes to consolidated financial statements. 4 FILENET CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited)
Three Months Six Months Ended June 30, Ended June 30, ------------------- ----------------- 1998 1997 1998 1997 ----------- -------- -------- -------- Net income (loss)............... $ 4,635 $(3,854) $ 7,159 $(13,274) ----------- -------- -------- --------- Other comprehensive income: Foreign currency translation adjustments, net of tax..... 1,064 (1,553) (652) (3,818) Unrealized gains (losses) on securities: Unrealized holding gains (losses)arising during period, net of tax............... 7 42 12 (9) Reclassification adjustment for losses included in net income, net of tax................ (5) ----------- -------- -------- -------- Total other comprehensive income (loss)........................ 1,071 (1,511) (645) (3,827) ----------- --------- -------- -------- Comprehensive income (loss)..... $ 5,706 $ (5,365) $ 6,514 $(17,101) =========== ========= ======== =========
See accompanying notes to consolidated financial statements. 5 FILENET CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Six Months Ended June 30, -------------------------------------- 1998 1997 ------------------ ----------------- Cash flows from operating activities: Net income (loss).................... $ 7,159 $ (13,274) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.... 7,109 6,689 Provision for doubtful accounts.. 377 Deferred income taxes............ 575 (429) Changes in operating assets and liabilities: Accounts receivable............ (9,325) 29,580 Inventories.................... 386 2,852 Prepaid expenses and other current assets................. 764 145 Accounts payable............... 1,201 (7,457) Accrued compensation........... 2,551 2,430 Unearned maintenance revenue... 6,665 1,921 Accrued royalties.............. (651) (1,647) Other.......................... 881 (4,442) Net cash provided by operating ------------------ ----------------- activities......................... 17,692 16,368 ------------------ ----------------- Cash flows from investing activities: Proceeds from sale of equipment...... 422 124 Capital expenditures................. (13,586) (6,930) Purchases of marketable securities... (21,065) (16,215) Proceeds from sales and maturities of marketable securities........... 24,113 19,170 ------------------ ----------------- Net cash used by investing activities (10,116) (3,851) ------------------ ----------------- Cash flows from financing activities: Proceeds from issuance of common stock 9,740 1,497 Common stock repurchased............. (4,435) ------------------ ----------------- Net cash provided by financing activities.......................... 5,305 1,497 ------------------ ----------------- Effect of exchange rate changes on cash and cash equivalents.......... (124) (2,535) ------------------ ----------------- Net increase in cash and cash equivalents........................ 12,757 11,479 Cash and cash equivalents, beginning of year............................ 37,344 28,530 ================== ================= Cash and cash equivalents, end of period...................... $ 50,101 $ 40,009 ================== ================= Supplemental cash flow information: Interest paid........................ $ 60 $ 160 Income taxes paid.................... $ 516 $ 2,461
See accompanying notes to consolidated financial statements. 6 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 June 30, 1998 and the results of its operations, its comprehensive income and its cash flows for the three and six month periods ended June 30, 1998 and 1997. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission ("SEC"), although the Company believes that the disclosures in the consolidated financial statements are adequate to ensure the information presented is not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. The results of operations for the interim periods are not necessarily indicative of the operating results for the year. 2. In May 1998, the Company effected a two-for-one split of its common stock. All references in the consolidated financial statements to number of shares and per share amounts of the Company's common stock have been restated to reflect the split. 3. Certain reclassifications have been made to the prior year's consolidated financial statements to conform with the current year's presentation. 4. The following table is a reconciliation of the earnings and share amounts used in the calculation of basic earnings per share and diluted earnings per share for the three and six month periods ended June 30, 1998.
Per Net Share (In thousands, except per share Income Shares Amount amounts) ----------- ----------- ---------- Three months ended June 30, 1998 Basic earning per share............ $ 4,635 30,801 $ 0.15 Effect of dilutive stock options... 3,296 ----------- ----------- Diluted earnings per share......... $ 4,635 34,097 $ 0.14 =========== =========== Six months ended June 30, 1998 Basic earning per share............ $ 7,159 30,501 $ 0.23 Effect of dilutive stock options... 3,029 ----------- ----------- Diluted earnings per share......... $ 7,159 33,530 $ 0.21 =========== ===========
The weighted average number of shares outstanding during the three and six month periods ended June 30, 1997 was 30,390,000 and 30,240,000, respectively. Options to purchase shares of common stock were outstanding during these periods but were not included in the computation of diluted loss per share, as their effect was antidilutive. 7 5. In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires enterprises to report comprehensive income and its components in general-purpose financial statements. SFAS No. 130 is effective for the Company beginning January 1, 1998. Accordingly, the Company has prepared Statements of Comprehensive Income for the three and six month periods ended June 30, 1998 and 1997 (restatement of prior year financial statements is required by SFAS No. 130). Accumulated other comprehensive income as of June 30, 1998 is comprised of the following:
Accumulated Unrealized Gain Other Foreign on Marketable Comprehensive (In thousands) Currency Items Securities Income -------------- -------------- ------------ Balance, December 31, 1997 $ (4,121) $ (25) $ (4,146) Current period changes (652) 7 (645) -------------- -------------- ------------ Balance, June 30, 1998 $ (4,773) $ (18) $ (4,791) ============== ============== ============
6. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information"; which is effective for the year ending December 31, 1998. The Company has not yet determined the impact, if any, of adopting this standard on its financial statements. 7. In October 1994, Wang Laboratories, Inc. (Wang) filed a complaint in the United States District Court for the District of Massachusetts alleging that the Company is infringing five patents held by Wang (the FileNET Case). On June 23, 1995, Wang amended its complaint to include an additional related patent. On July 2, 1996, Wang filed a complaint in the same court alleging that Watermark, formerly a wholly owned subsidiary that was merged into the Company, is infringing three of the same patents asserted in the initial complaint (the Watermark Case). On October 9, 1996, Wang withdrew its claim in the FileNET Case that one of the patents it initially asserted is infringed by the Company's products that were commercialized before the initial complaint was filed. Wang reserved the right to assert that patent against the Company's products commercialized after that date in a separate lawsuit. In March 1997, Eastman Kodak Company (Kodak) purchased the Wang imaging business unit that has responsibility for this litigation. The patents in the suit have been transferred to a Kodak subsidiary, Kodak Limited of England, which, in turn, has exclusively licensed them to another Kodak subsidiary, Eastman Software, Inc. in the United States (Eastman). On July 30, 1997, the court permitted Eastman and Kodak Limited of England to be substituted in the litigation in place of Wang. FileNET has moved for summary 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 FileNET's unenforceability defense on one of the patents. A trial date has not been set. If it should be determined that the patents at issue in the litigation are valid and are infringed by any of the Company's products the Company will, depending on the product, redesign the infringing product or seek to obtain a license to market the product. There can be no assurance that the Company will be able to obtain such a license on acceptable terms. Based on the Company's analysis of these 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 December 20, 1996, plaintiff Michael I.Goldman (the Plaintiff) filed a class action complaint against the Company and certain of its officers and directors in the Superior Court of California, County of 8 Orange (the State Action). The action was purportedly filed on behalf of a class of purchasers of the Company's common stock during the period October 19, 1995 through July 2, 1996. The Plaintiff alleges that the Company and other defendants violated Cal. Corp. Code ss.ss. 25400 and 25500, Cal. Civ. Code ss.ss. 1709-1710 and Cal. Bus. & Prof. Code ss.ss. 17200 et seq. in connection with various public statements made by the Company and certain of its officers and directors during the putative class period. The complaint seeks unspecified compensatory and punitive damages, interest, payment of attorney's fees and costs, and equitable or injunctive relief. On April 1, 1997, the Plaintiff filed another class action complaint against the Company and certain of its officers and directors in the United States District Court for the Central District of California (the Federal Action). The action purportedly was filed on behalf of the same class of purchasers of the Company's common stock as the State Action. The allegations contained in the Federal Action are very similar to the allegations contained in the State Action, except that the Federal Action asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5. The complaint seeks unspecified compensatory damages, interest, attorneys' fees, expert witness fees, costs and equitable or injunctive relief. On July 2, 1997, the court granted plaintiff's motion to be appointed "lead plaintiff" under the Private Securities Litigation Reform Act. In the Federal Action, defendants have filed a motion to dismiss the complaint in its entirety. Plaintiff has filed a motion to stay the Federal Action, in light of the parallel State Action. The court is scheduled to hear both of these motions during August 1998. In the State Action, defendants moved to stay the action, in light of the parallel Federal Action. The trial court granted the motion to stay the action as to discovery on September 8, 1997. Defendants also demurred and moved to strike the complaint. The trial court overruled the demurrer and denied the motion to strike on October 21, 1997. On January 14, 1998, the court entered an order dismissing with prejudice two of plaintiff's three causes of action: the claims under Cal. Civ. Code ss.ss. 1709-1710 and Cal. Bus. & Prof. Code ss.ss. 17200 et seq. On January 30, 1998, the trial court in the State Action granted the Plaintiff's motion to certify a class composed of persons who bought FileNET stock in California only between October 19, 1995 and July 2, 1996. This ruling is subject to revision based on the decisions to be rendered by the California Supreme Court in Diamond Multimedia Systems, et al. v. Superior Court (Pass) and StorMedia, Inc., et al. v. Superior Court (Werczberger). The trial court also denied the Plaintiff's motion to lift the discovery stay. The Company believes that all of the allegations contained in the complaints filed in the State and Federal Actions are without merit and intends to defend the actions vigorously. The Company, in the normal course of business, is subject to various other legal matters. While the results of litigation and claims cannot be predicted with certainty, the Company believes that the final outcome of these other matters will not have a material adverse effect on the Company's consolidated results of operations or financial condition. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in Part I--Item 1 and Factors That May Affect Future Results in this item of this Quarterly Report, and with the audited consolidated financial statements, and notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. Results of Operations Revenue
Three Months Six Months Ended June 30, Ended June 30, -------------------------- ----------------------- 1998 1997 Change 1998 1997 Change --------- ------- ------- ------- ----- ------- (Dollars in millions) Software revenue Domestic $ 26.7 $ 23.3 15% $ 56.2 $ 36.4 54% International 17.7 7.8 127% 31.4 16.7 88% ------- ------- ------- ------- Total software revenue $ 44.4 31.1 43% $ 87.6 $ 53.1 65% ------- ------- ------- ------- Percentage of total revenue 55% 50% 57% 48% Service revenue Domestic $ 23.2 $ 17.7 31% $ 41.0 $ 31.9 29% International 6.3 5.5 15% 12.0 9.6 25% -------- ------- ------- ------- Total service revenue $ 29.5 $ 23.2 27% $ 53.0 $ 41.5 28% -------- ------- ------- ------- Percentage of total revenue 37% 37% 34% 38% Hardware revenue Domestic $ 4.6 $ 6.0 (23%) $ 9.6 $ 11.1 (14%) International 1.9 2.2 (14%) 3.8 4.3 (12%) -------- ------- ------- ------- Total hardware $ 6.5 $ 8.2 (21%) $ 13.4 $ 15.4 (13%) revenue -------- ------- ------- ------- Percentage of total revenue 8% 13% 9% 14% Total revenue Domestic $ 54.5 $ 47.0 16% $106.8 $ 79.4 35% International 25.9 15.5 67% 47.2 30.6 54% -------- ------- ------- -------- Total revenue $ 80.4 $ 62.5 29% $154.0 $110.0 40% ======== ======= ======= ========
Software revenue from the licensing of the Company's software products increased 43% and 65% for the three and six month periods, respectively, ended June 30, 1998 over the comparable periods of 1997. The increases were primarily attributable to an increase in the volume of product shipments, including the Company's Panagon product line that was released during the first quarter of 1998. The magnitude of the increase in year to date revenue over 1997 is partially attributable to weakness in orders during the first quarter of 1997 and is not necessarily indicative of future revenue growth. Service revenue consists of revenue from software maintenance services, professional services, training, repairs and supplies. Service revenue increased 27% and 28% for the three and six month periods, respectively, ended June 30, 1998 over the comparable periods of 1997. The increases were attributable to increased maintenance revenue due to the growth of the Company's installed base and to increased demand for the Company's professional service offerings. Hardware revenue is generated primarily from the sale of 12-inch optical storage and retrieval libraries (OSARs) and third-party hardware. Hardware revenue decreased by 21% and 13% for the three and six month periods, respectively, ended June 30, 1998 from the comparable periods of 1997 primarily due to decreases in new orders experienced both domestically and internationally and 10 the Company's focus on increasing its higher margin software revenues. The Company expects hardware revenue to continue to decline in both absolute dollars and as a percentage of total revenues as it continues to transition its business toward software-related revenue. International revenues constituted approximately 32% and 25% of total revenues in the three month periods ended June 30, 1998 and 1997, respectively. For the six month periods ended June 30, 1998 and 1997, international revenues constituted approximately 31% and 28% of total revenues, respectively. The increases in the proportion of international revenues is attributable to the higher level of growth experienced internationally. A portion of this growth is attributable to weakness in international orders during the first quarter of 1997 and is not necessarily indicative of future international revenue growth. Management expects that the Company's international operations will continue to account for a significant portion of total revenues. However, the current economic crisis in the Asia-Pacific region 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
Three Months Six Months Ended June 30, Ended June 30, ----------------------- ---------------------- 1998 1997 Change 1998 1997 Change ------ ------ ------- ------ ----- ------- (Dollars in millions) Cost of software revenue $ 4.3 $ 3.2 34% $ 8.0 $ 6.2 29% Percentage of software revenue 10% 10% 9% 12% Cost of service revenue $18.0 $13.8 30% $33.3 $26.9 24% Percentage of service revenue 61% 59% 63% 65% Cost of hardware revenue $ 3.2 $ 4.8 (33%) $ 6.6 $10.1 (35%) Percentage of hardware revenue 49% 59% 49% 66% Total cost of revenue $25.5 $21.8 17% $47.9 $43.2 11% Percentage of total revenue 32% 35% 31% 39%
The cost of software revenue includes royalties paid to third parties and the cost of software distribution. The cost of software revenue as a percentage of software revenue for the six months ended June 30, 1998 decreased to 9% from 12% for the comparable period in 1997. The decrease is primarily attributable to the low revenue levels in the first quarter of 1997 without a corresponding decrease in fixed distribution costs. Also contributing to the decrease was the fact that software localization costs which were classified as cost of revenue in 1997 have been classified as research and development in 1998. The cost of service revenue includes software support and professional services personnel, supplies, and the cost of third-party hardware maintenance. The cost of service revenue as a percentage of service revenue for the three month period ended June 30, 1998 increased to 61% from 59% in the comparable period of 1997. The increase is attributable to the higher proportion of lower margin professional services in the service revenue mix. The cost of service revenue for the six month period ended June 30, 1998 decreased to 63% from 65% for the comparable period of 1997. This decrease is attributable to improved international margins from those experienced in the first quarter of 1997. The cost of hardware revenue includes the cost of manufacturing OSARs; third-party purchased hardware and the cost of hardware integration personnel. The cost of hardware revenue as a percentage of hardware revenue for the three month period ended June 30, 1998 decreased to 49% from 59% for the comparable period of 1997. For the six month period ended June 30, 1998, cost of hardware revenue decreased to 49% from 66% for the comparable period of 1997. These decreases were due to improved product mix and a reduction in fixed manufacturing costs. 11 Operating Expenses
Three Months Six Months Ended June 30, Ended June 30, ----------------------- --------------------------- 1998 1997 Change 1998 1997 Change ------- ------ ------- -------- ------- -------- (Dollars in millions) Research and development $ 11.8 $ 9.6 23% $ 23.9 $ 19.7 21% Percentage of total 15% 15% 16% 18% revenue Selling, general and administrative $ 37.6 $ 31.0 21% $ 74.1 $ 60.8 22% Percentage of total 47% 50% 48% 55% revenue
Research and development expenses increased 23% and 21% for the three and six month periods ended June 30, 1998, respectively, compared to the comparable periods of 1997. The increases were due to a general increase in salaries and recruiting costs necessitated by the intense competitive environment for software engineers; increase in cost of contract developers; and the inclusion of software localization costs in research and development in 1998. As a percentage of total revenue, research and development expenses decreased to 16% for the six month period ended June 30, 1998 from 18% for the comparable period of 1997. This decrease is primarily attributable to the effects of the lower revenue levels in the first quarter of 1997. The Company expects that competition for qualified technical personnel will remain intense for the foreseeable future and may result in higher levels of compensation expense for the Company. The Company believes that research and development expenditures, including compensation of technical personnel, are essential to maintaining its competitive position and expects these costs to continue to constitute a significant percentage of revenues. Selling, general and administrative expenses increased 21% and 22% for the three and six month periods ended June 30, 1998, respectively, compared to the comparable periods of 1997. This increase was primarily due to overall increases in salaries, higher sales incentive compensation due to increased revenues, and increased marketing program costs. As a percentage of total revenue, selling, general and administrative expenses decreased to 48% for the six months ended June 30, 1998 from 55% for the comparable period of 1997 primarily due to the lower revenue levels in the first quarter of 1997. Provision for Income Taxes - The Company's combined federal, state and foreign annual effective tax rate for the six months ended June 30, 1998 was 29% (expense) compared to 28% (benefit) for the comparable period in 1997. 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 June 30, 1998, the Company had forward exchange contracts outstanding totaling approximately $8 million in 12 currencies. All of these contracts mature in three months. Other comprehensive income for the six months ended June 30, 1998 reflects a $652,000 increase in the unrealized loss due to foreign currency translation. This increase was primarily attributable to unrealized losses associated with the weakening of the Irish 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 and six month periods ended June 30, 1998 and 1997. Other Financial Instruments - The Company enters into forward foreign exchange contracts as a hedge against effects of fluctuating currency exchange rates on monetary assets and liabilities denominated in currencies other than the functional currency of the relevant entity. The Company is exposed to market 12 risk on the forward exchange contracts as a result of changes in foreign exchange rates; however, the market risk should be offset by changes in the valuation of the underlying exposures. Gains and losses on these contracts, which equal the difference between the forward contract rate and the prevailing market spot rate at the time of valuation, are recognized in the consolidated statement of operations. The counterparties to these instruments are major financial institutions. The Company uses commercial rating agencies to evaluate the credit quality of the counterparties, and the Company does not anticipate a loss resulting from any credit risk of these institutions. Liquidity and Capital Resources At June 30, 1998, combined cash, cash equivalents and short- and long-term marketable securities totaled $81.6 million, an increase of $9.8 million from the end of 1997. Cash provided by operating activities during the six months ended June 30, 1998 totaled $17.7 million and resulted primarily from net income; an increase in accounts payable associated with higher capital expenditures; an increase in accrued compensation related to sales commissions; an increase in unearned maintenance revenue related to growth in the Company's installed base; and additions to net income for depreciation and amortization expense. These operating cash inflows were offset by an increase in accounts receivable. Cash used by investing activities totaled $10.1 million and was a result of sales and maturities of marketable securities offset by capital expenditures. Cash provided by financing activities totaled $5.3 million and was a result of proceeds received from the exercise of employee stock options and purchases under the employee stock purchase plan offset by the repurchase of 139,000 shares of the Company's common stock. Accounts receivable increased to $69.8 million at June 30, 1998 from $61.3 million at December 31, 1997. Days sales outstanding increased to 77 days as of June 30, 1998 from 72 days as of December 31, 1997 primarily due to delays in collections by resellers from their customers. Current liabilities increased to $71.4 million at June 30, 1998 from $60.6 million at December 31, 1997. The increase is primarily a result of increases in deferred maintenance revenue and accrued incentive compensation. The Company has a $20 million unsecured line of credit with a commercial bank. This line of credit expires in May 1999 and is subject to the maintenance of certain financial covenants. The Company also has several borrowing arrangements with foreign banks that expire at various times during 1998 under which the Company may borrow approximately $2 million. As of June 30, 1998, there were no borrowings outstanding against any of the Company's credit lines. During the first quarter of 1998, the Company repurchased $4.4 million of its common stock, thereby completing its previously announced $10 million stock repurchase program. The Company anticipates that its present cash balances together with internally generated funds and credit lines will be sufficient to meet its working capital and capital expenditure needs for at least the next twelve months. Other Matters Year 2000 - The Company is assessing the internal readiness of its computer systems for handling the year 2000. The Company expects to implement successfully the systems and programming changes necessary to address year 2000 issues with respect to its internal systems and does not believe that the cost of such actions will have a material adverse effect on its financial condition or results of operations. Although the Company is not aware of any material operational issue or costs associated with preparing its internal systems for the year 2000, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of the necessary systems and changes to address the year 2000 issues, and the Company's inability to implement such systems and changes could have an adverse effect on future results of operations. Environmental Matters - The Company is not aware of any issues related to environmental matters that have, or are expected to, materially affect its business. 13 Factors That May Affect Future Results The Company's business, financial condition and operating results can be impacted by a number of factors, including but not limited to those set forth below and elsewhere in this report, any one of which could cause the Company's actual results to differ materially from recent results or from the Company's anticipated future results. Rapid Technological Change; Product Development - The market for the Company's products is characterized by rapid technological developments, evolving industry standards, changes in customer requirements and frequent new product introductions and enhancements. The Company's continued success will be dependent upon its ability to continue to enhance its existing products, develop and introduce, in a timely manner, new products incorporating technological advances and respond to customer requirements, including without limitation enhancements to certain specified Company software products to achieve year 2000 compliance. The Company could experience difficulties or delays in developing and introducing new products or integrating some or all of the technologies and products from acquisitions with the technologies and products from the Company. Delays in or non-completion of the development of newly integrated products, or lack of market acceptance of such products, could have an adverse impact on the Company's future results of operations and result in a failure to realize the anticipated benefits of the acquisitions. To the extent one or more of the Company's competitors introduce products that more fully address customer requirements, the Company's business could be adversely affected. There can be no assurance that the Company will be successful in developing and marketing enhancements to its existing products or new products on a timely basis or that any new or enhanced products will adequately address the changing needs of the marketplace. If the Company is unable to develop and introduce new products or enhancements to existing products in a timely manner in response to changing market conditions or customer requirements including without limitation enhancements to certain existing software products to achieve year 2000 compliance, the Company's business and operating results could be adversely affected. From time to time, the Company or its competitors may announce new products, capabilities or technologies that have the potential to replace or shorten the life cycles of the Company's existing products. There can be no assurance that announcements of currently planned or other new products will not cause customers to delay their purchasing decisions in anticipation of such products, which could have a material adverse effect on the Company's business and operating results. Uncertainty Of Future Operating Results; Fluctuations In Quarterly Operating Results - Prior growth rates in the Company's revenue and operating results should not necessarily be considered indicative of future growth or operating results. Future operating results will depend upon many factors, including the demand for the Company's products, the effectiveness of the Company's efforts to continue to integrate various products it has developed or acquired through acquisition of others and to achieve the desired levels of sales from such product integration, the level of product and price competition, the length of the Company's sales cycle, seasonality of individual customer buying patterns, the size and timing of individual transactions, the delay or deferral of customer implementations, the budget cycles of the Company's customers, the timing of new product introductions and product enhancements by the Company and its competitors, the mix of sales by products, services and distribution channels, levels of international sales, acquisitions by competitors, changes in foreign currency exchange rates, the ability of the Company to develop and market new products and control costs, and general domestic and international economic and political conditions. As a result of these factors, revenues and operating results for any quarter are subject to variation and are not predictable with any significant degree of accuracy. Therefore, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Moreover, such factors could cause the Company's operating results in a given quarter to be below the expectations of public market analysts and investors. In either case, the price of the Company's common stock could be materially adversely affected. Competition - The document imaging, workflow, computer output to laser disk and document management software markets are highly competitive, and there are certain competitors of the Company with substantially greater sales, marketing, development and financial resources. The Company believes that the competitive 14 factors affecting the market for its products and services include vendor and product reputation; product quality, performance and price; the availability of products on multiple platforms; product scalability; product integration with other enterprise applications; product functionality and features; product ease-of use; and the quality of customer support services and training. The relative importance of each of these factors depends upon the specific customer involved. While the Company believes it competes favorably in each of these areas, there can be no assurance that it will continue to do so. Moreover, the Company's present or future competitors may be able to develop products comparable or superior to those offered by the Company, offer lower price products or adapt more quickly than the Company to new technologies or evolving customer requirements. Competition is expected to intensify. In order to be successful in the future, the Company must respond to technological change, customer requirements and competitors' current products and innovations. There can be no assurance that it will be able to continue to compete effectively in its market or that future competition will not have a material adverse effect on its business, operating results and financial condition. Intellectual Property and Other Proprietary Rights - The Company's success depends in part on its ability to protect its proprietary rights to the technologies used in its principal products. The Company relies on a combination of copyrights, trademarks, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. There can be no assurance that the Company's existing or future copyrights, trademarks, trade secrets or other intellectual property rights will be of sufficient scope or strength to provide meaningful protection or commercial advantage to the Company. FileNET has no software patents. Also, in selling certain of its products, the Company relies on "shrink wrap" licenses that are not signed by licensees and, therefore, may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. There can be no assurance that such factors would not have a material adverse effect on the Company's business or operating results. The Company may from time to time be notified that it is infringing certain patent or intellectual property rights of others. Combinations of technology acquired through past or future acquisitions and the Company's technology will create new products and technology that may give rise to claims of infringement. While no actions other than the ones discussed below are currently pending against the Company for infringement of patent or other proprietary rights of third parties, there can be no assurance that third parties will not initiate infringement actions against the Company in the future. Infringement actions can result in substantial cost to and diversion of resources of the Company. If the Company were found to infringe upon the rights of others, no assurance can be given that licenses would be obtainable on acceptable terms or at all, that significant damages for past infringement would not be assessed or that further litigation relative to any such licenses or usage would not occur. The failure to successfully defend any claims or obtain necessary licenses or other rights, the ultimate disposition of any claims or the advent of litigation arising out of any claims of infringement, could have a material adverse effect on the Company's business, financial condition or results of operations. In October 1994, Wang filed a complaint in the United States District Court for the District of Massachusetts alleging that the Company is infringing five patents held by Wang. On June 23, 1995, Wang amended its complaint to include an additional related patent. On July 2, 1996, Wang filed a complaint in the same court alleging that Watermark, formerly a wholly-owned subsidiary that was merged into the Company, is infringing three of the same patents asserted in the initial complaint. On October 9, 1996, Wang withdrew its claim that one of the patents it initially asserted is infringed by the Company's products that were commercialized before the initial complaint was filed. Wang reserved the right to assert that patent against the Company's products commercialized after that date in a separate lawsuit. Based on the Company's analysis of these Wang patents and their respective file histories, the Company believes that it has meritorious defenses to Wang's claims; however, the ultimate outcome or any resulting potential loss cannot be determined at this time. In March 1997, Eastman Kodak Company ("Kodak") purchased the Wang imaging business unit that has responsibility for this litigation. The patents in the suit have been transferred to a Kodak subsidiary, Kodak Limited of England, which in turn has exclusively licensed them to another Kodak subsidiary, Eastman Software, Inc. in the United States. On July 30, 1997, the Court permitted Eastman Software, Inc. and Kodak Limited of England to be substituted in the litigation in place of Wang. The Company cannot predict what impact, if any, this will have on the litigation. 15 If it should be determined that the patents at issue in the litigation are valid and are infringed by any of the Company's products, including Watermark products, the Company will, depending on the product, redesign the infringing products or seek to obtain a license to market the products. There can be no assurance that the Company will be able to obtain such a license on acceptable terms. Dependence On Certain Relationships - The Company has entered into a number of co-marketing relationships with other companies such as Microsoft Corporation, Compaq Computer Corporation, SAP AG, Hewlett-Packard Company and Sun Microsystems, Inc. There can be no assurance that these companies will not reduce or discontinue their relationships with or support of the Company and its products. Dependence On Key Management and Technical Personnel - The Company's success depends to a significant degree upon the continued contributions of its key management, marketing, technical and operational personnel. In general, the Company does not utilize employment agreements for its key employees. The loss of the services of one or more key employees could have a material adverse effect on the Company's operating results. The Company also believes its future success will depend in large part upon its ability to attract and retain additional highly skilled management, technical, marketing, product development and operational personnel. Competition for such personnel, particularly engineers and other technical personnel, is intense, and pay scales in the Company's industry are increasing. There can be no assurance that the Company will be successful in attracting and retaining such personnel. International Sales - Historically, the Company has derived approximately one-third of its total revenues from international sales. International business is subject to certain risks including varying technical standards, tariffs and trade barriers, political and economic instability, reduced protection for intellectual property rights in certain countries, difficulties in staffing and maintaining foreign operations, difficulties in managing foreign distributors, potentially adverse tax consequences, currency exchange fluctuations, the burden of complying with a wide variety of complex operations, foreign laws, regulations and treaties and the possibility of difficulties in collecting accounts receivable. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business or operating results. Product Liability - The Company's license agreements with customers typically contain provisions designed to limit their exposure to potential product liability claims. However, it is possible that such limitation of liability provisions may not be effective under the laws of certain jurisdictions. Although the Company has not experienced any product liability claims to date, the sale and support of products by them may entail the risk of such claims, and there can be no assurance that the Company will not be subject to such claims in the future. A successful product liability claim brought against the Company could have a material adverse effect upon the Company's business, operating results and financial condition. Stock Price Volatility - The Company believes that a variety of factors could cause the trading price of its common stock to fluctuate, perhaps substantially, including quarter-to-quarter variations in operating results; announcements of developments related to its business; fluctuations in its order levels; general conditions in the technology sector or the worldwide economy; announcements of technological innovations, new products or product enhancements by the Company or its competitors; key management changes; changes in joint marketing and development programs; developments relating to patents or other intellectual property rights or disputes; and developments in the Company's relationships with its customers, distributors and suppliers. In addition, in recent years the stock market in general, and the market for shares of high technology stocks in particular, has experienced extreme price fluctuations which have often been unrelated to the operating performance of affected companies. Such fluctuations could adversely affect the trading price of the Company's common stock. 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings See Notes to Consolidated Financial Statements. Item 4. Subimission of Matters to a Vote of Security Holders (a) The 1998 Annual Meeting of Stockholders of the Company was held at 9:00 a.m. on May 15, 1998, in Costa Mesa, California. (b) At the meeting the following four individuals were elected to the Company's Board of Directors, constituting all members of the Board of Directors: Nominee Affirmative Votes Votes Withheld -------------------- --------------------------------------------- William P. Lyons 12,881,792 339,686 --------------------- ------------------ ------------------------- Lee D. Roberts 12,888,774 332,704 --------------------- ------------------ ------------------------- John C. Savage 12,888,639 332,839 --------------------- ------------------ ------------------------- Theodore J. Smith 12,882,733 338,745 --------------------- ------------------ ------------------------- (c) The Company's stockholders were asked to approve a series of amendments to the Company's 1995 Stock Option Plan (the "1995 Plan") to increase the number of shares of Common Stock issuable under the 1995 plan by an additional 600,000 shares and to revise certain provisions of the Automatic Option Grant Program. This proposal was approved in accordance with the following vote of stockholders: Broker Votes For Votes Against Abstentions Non-Votes ---------------- ---------------- -------------- -------------- 9,205,803 3,918,774 96,901 0 (d) The Company's stockholders were asked to approve the implementation of the 1998 Employee Stock Purchase Plan as the successor to the Company's existing 1988 Employee Qualified Stock Purchase Plan. This proposal was approved in accordance with the following vote of stockholders: Broker Votes For Votes Against Abstentions Non-Votes ---------------- ---------------- -------------- -------------- 12,711,169 418,392 91,917 0 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 second quarter of 1998. 17 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 August 14, 1998 By:_________________________________________________________ Date Mark S. St. Clare, Chief Financial Officer and Sr. Vice President, Finance (Principal Financial Officer) 18 INDEX TO EXHIBITS Exhibit No. Description ....................... ........................................................ 3.1* Restated Certificate of Incorporation, as amended (filed as Exhibit 3.1 to Form S-4 filed on January 26, 1996; Registration No. 333-00676) 3.1.1* Certificate of Amendment of Restated Certificate of Incorporation (filed as Exhibit 3.1.1 to Form S-4 filed on January 26, 1996, Registration No. 333-00676). 3.2* Bylaws (filed as Exhibit 3.2 of the Registrant's registration statement on Form S-1, Registration No. 33-15004 (the "Form S-1")). 4.1* Form of certificate evidencing Common Stock (filed as Exhibit 4.1 to the Form S-1, Registration No. 33-15004). 4.2* Rights Agreement, dated as of November 4, 1988 between FileNET Corporation and the First National Bank of Boston, which includes the form of Rights Certificate as Exhibit A and the Summary of Rights to Purchase Common Shares as Exhibit B (filed as Exhibit 4.2 to Form S-4 filed on January 26, 1996; Registration No. 333-00676). 10.1* 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). 10.4* 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 Corporation as approved by stockholders at the Registrant's Annual Meeting on May 15, 1998. (filed as Appendix A to the Registrant's Proxy Statement for the Registrant's 1998 Annual Meeting of Stockholders, filed on April 6, 1998). - -------------------------------------------- * Incorporated herein by reference 19 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* Product License Agreement between the Registrant and Novell, Inc. dated May 16, 1995 (filed as Exhibit 10.26 to Form 10-Q for the quarter ended July 2, 1995). 10.18* Agreement and Plan of Merger between the Registrant and Watermark Software Inc. dated July 18, 1995 (filed as Exhibit 10.27 to Form 10-Q for the quarter ended July 2, 1995). 10.19* Agreement and Plan of Merger between the Registrant and Saros Corporation, as amended, dated January 17, 1996 (filed as Exhibits 2.1, 2.2, 2.3, and 2.4 to Form 8-K on March 13, 1996). 10.20* Stock Purchase Agreement by and among FileNET Corporation, IFS Acquisition Corporation, Jawaid Khan and Juergen Goersch dated January 17, 1996 and Amendment 1 to Stock Purchase Agreement dated January 30, 1996 (filed as Exhibit 10.2 to form 10-K for the year ended December 31, 1995). 10.21 1998 Employee Stock Purchase Plan as approved by stockholders at the Registrant's Annual Meeting on May 15, 1998. (filed as Appendix B to the Registrant's Proxy Statement for the Registrant's 1998 Annual Meeting of Stockholders, filed on April 6, 1998). 27 Financial Data Schedule. - --------------------------------------------- * Incorporated herein by reference 20 EX-27 2 FINANCIAL DATA SCHEDULE
5 1000 6-MOS Dec-31-1998 Jun-30-1998 50,101 17,595 69,759 0 3,155 153,972 123,214 (89,663) 202,451 71,384 0 0 0 125,914 4,716 202,451 101,043 153,981 14,549 47,862 98,046 0 0 10,083 2,924 7,159 0 0 0 7,159 .23 .21
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