-----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, F9n1BFd6D1cxmgJtxZbNgeg5QO1SIwBeUcOO27hhJaiZ8WOqXpKb0DeHghaMggh0 tG/uTu5ao5+kAF926wcU2g== /in/edgar/work/20000814/0000706015-00-000010/0000706015-00-000010.txt : 20000921 0000706015-00-000010.hdr.sgml : 20000921 ACCESSION NUMBER: 0000706015-00-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FILENET CORP CENTRAL INDEX KEY: 0000706015 STANDARD INDUSTRIAL CLASSIFICATION: [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: 699005 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 0001.txt 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, 2000 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 of organization) 3565 Harbor Boulevard, Costa Mesa, CA 92626 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (714) 327-3400 - -------------------------------------------------------------------------------- (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 August 4, 2000, there were 34,306,344 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, 2000 (unaudited) and December 31, 1999........ 3 Consolidated Statements of Income (unaudited) For the three and six month periods ended June 30, 2000 and 1999...................................................... 4 Consolidated Statements of Comprehensive Income(unaudited) For the three and six month periods ended June 30, 2000 and 1999...................................................... 5 Consolidated Statements of Cash Flows (unaudited) For the six month periods ended June 30, 2000 and 1999........ 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............................................. 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Material Events 18 Item 6. Exhibits and Reports on Form 8-K.............................. 18 SIGNATURE..................................................... 19 INDEX TO EXHIBITS............................................. 20 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements FILENET CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
June 30, December 31, 2000 1999 ------------ -------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 83,267 $ 71,528 Short-term investments 39,133 31,581 Accounts receivable, net 70,004 72,736 Inventories, net 3,069 3,399 Prepaid expenses and other current assets 9,974 8,080 Deferred income taxes 1,041 938 ----------- ------------ Total current assets 206,488 188,262 Property, net 43,775 40,593 Long-term investments 1,881 5,542 Intangible assets, net 14,710 - Deferred income taxes 4,735 4,752 Other assets 1,663 1,743 ----------- ------------ Total assets $ 273,252 $ 240,892 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 11,022 $ 16,642 Accrued compensation and benefits 21,213 24,079 Unearned maintenance revenue 25,188 16,286 Income taxes payable 9,528 7,808 Other accrued liabilities 20,577 21,670 ----------- ------------ Total current liabilities 87,528 86,485 Unearned maintenance revenue 5,906 3,949 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; 35,377,871 and 33,578,642 shares outstanding at June 30, 2000 and December 31, 1999, respectively 167,502 149,779 Retained earnings 36,471 22,981 Accumulated other comprehensive operations (9,588) (7,735) ----------- ------------ 194,385 165,025 Treasury stock, at cost; 1,098,000 shares at June 30, 2000 and December 31, 1999 respectively (14,567) (14,567) ----------- ------------ Total stockholders' equity 179,818 150,458 ----------- ------------ Total liabilities and stockholders' equity $ 273,252 $ 240,892 =========== ============ See accompanying notes to consolidated financial statements.
3
FILENET CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30, ------------------------------- -------------------------------- 2000 1999 2000 1999 ------------- -------------- --------------- -------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue: Software $ 49,629 $ 48,651 $ 97,741 $ 90,635 Service 40,686 33,893 80,168 67,320 Hardware 4,764 3,545 9,972 9,576 ------------- ------------- ------------- ------------ Total revenue 95,079 86,089 187,881 167,531 ------------- ------------- ------------- ------------ Costs and expenses: Cost of software revenue 4,275 4,663 8,564 8,624 Cost of service revenue 23,076 20,515 46,181 40,819 Cost of hardware revenue 3,535 1,867 6,426 5,033 Research and development 13,931 13,234 28,069 26,336 Amortization of intangibles 254 - 254 - Selling, general and administrative 39,350 40,746 80,296 80,191 Purchased in process research and development 2,984 - 2,984 - ------------- ------------- ------------- ------------ Total costs and expenses 87,405 81,025 172,774 161,003 ------------- ------------- ------------- ------------ Operating income 7,674 5,064 15,107 6,528 Other income, net 1,328 499 2,520 1,960 ------------- ------------- ------------- ------------ Income before income taxes 9,002 5,563 17,627 8,488 Provision for income taxes 1,980 1,669 4,136 2,546 ------------- ------------- ------------- ------------ Net income $ 7,022 $ 3,894 $ 13,491 $ 5,942 ============= ============= ============= ============ Earnings per share: Basic $ 0.21 $ 0.12 $ 0.40 $ 0.19 Diluted $ 0.19 $ 0.12 $ 0.37 $ 0.18 Weighted average shares outstanding: Basic 34,183 32,066 33,763 31,990 Diluted 36,602 32,563 36,731 32,558 See accompanying notes to consolidated financial statements.
4 FILENET CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
Three Months Ended June 30, Six Months Ended June 30, -------------------------------- -------------------------------- 2000 1999 2000 1999 -------------- --------------- -------------- --------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net income $ 7,022 $ 3,894 $ 13,491 $ 5,942 -------------- --------------- -------------- --------------- Other comprehensive income(loss): Foreign currency translation adjustments1 (183) (1,702) (1,878) (4,355) Unrealized gains (losses) on securities: Unrealized holding gains (losses)2 32 (64) 25 (80) -------------- --------------- -------------- --------------- Total other comprehensive income (loss) (151) (1,766) (1,853) (4,435) -------------- --------------- -------------- --------------- Comprehensive income $ 6,871 $ 2,128 $ 11,638 $ 1,507 ============== =============== ============== =============== - -------------------------------------------------------------------------------------------------------------------- 1net of tax effect of $122 and $1,135 for the three months ended June 30, 2000 and 1999, respectively and net of tax effect of $1,252 and $2,903 for the six months ended June 30, 2000 and 1999, respectively 2net of tax benefit of $(21) and tax effect of $43 for the three months ended June 30, 2000 and 1999, respectively and net of tax benefit of $(17) and tax effect of $53 for the six months ended June 30, 2000 and 1999, respectively See accompanying notes to consolidated financial statements.
5 FILENET CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six Months Ended June 30, ----------------------------------- 2000 1999 --------------- ----------------- (unaudited) (unaudited) Cash flows from operating activities: Net income $ 13,491 $ 5,942 Adjustments to reconcile net loss to net cash provided by operating activities: Purchased in-process research and development 2,984 - Depreciation and amortization 8,877 8,688 Provision for doubtful accounts 158 202 Deferred income taxes (86) 59 Changes in operating assets and liabilities, net of acquisition: Accounts receivable 1,066 (9,263) Inventories 330 (695) Prepaid expenses and other current assets (1,936) 783 Accounts payable (5,513) (5,687) Accrued compensation and benefits (2,622) 734 Unearned maintenance revenue 10,954 10,682 Income taxes payable 1,850 1,845 Other (3,649) 7,737 ------------- ------------ Net cash provided by operating activities 25,904 21,027 ------------- ------------ Cash flows from investing activities: Capital expenditures (12,568) (8,898) Proceeds from sale of equipment 419 1,313 Cash paid for acquisitions (20,000) - Purchases of marketable securities (16,521) (28,048) Proceeds from sales and maturities of marketable securities 17,842 15,600 ------------- ------------ Net cash used by investing activities (30,828) (20,033) ------------- ------------ Cash flows from financing activities: Proceeds from issuance of common stock 17,723 2,340 ------------ ------------ Net cash provided by financing activities 17,723 2,340 ------------ ------------ Effect of exchange rate changes on cash and cash equivalents (1,060) (1,658) ------------ ------------ Net increase in cash and cash equivalents 11,739 1,676 Cash and cash equivalents, beginning of year 71,528 55,820 ------------ ------------ Cash and cash equivalents, end of period $ 83,267 $ 57,496 ============ ============ Supplemental cash flow information: Interest paid $ 14 $ 9 Income taxes paid $ 2,336 $ 46 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, 2000 and the results of its operations, its comprehensive operations and its cash flows for the three month and six month periods ended June 30, 2000 and 1999. 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, 1999 and the Company's Quarterly Report on form 10Q for the quarter ended March 31, 2000. The results of operations for the interim periods are not necessarily indicative of the operating results for the year. 2. On May 18, 2000, the Company acquired certain assets from Application Partners Incorporated (API) for $20.0 million. The acquisition was accounted for as an asset purchase, and the purchase price was allocated as follows (in thousands): Assembled workforce $ 386 Goodwill 14,578 In-process research and development 2,984 Prepaid expense 2,000 Fixed assets 78 ------------ Total purchase price $ 20,026 ============ The amount allocated to assembled workforce is being amortized over an estimated useful life of three years. The amount allocated to goodwill is being amortized over an estimated useful life of five years. Additionally, retention payments of $2.0 million were recorded as a prepaid asset and will be expensed based upon defined future employment requirements. Based upon an independent third party appraisal, the Company allocated $3.0 million to in-process research and development which was an element of the purchase price. The in-process research and development expenses related to new product projects that were under development at the date of the acquisition and were expected to eventually lead to new products but had not yet established feasibility and for which no future alternative use was identified. The valuation of the in-process research and development projects was based upon the discounted expected future net cash flows of the products over their expected life, reflecting the estimated percent of completion of the projects and an estimate of the costs to complete the projects. New product development projects underway at API at the time of the acquisition included Sequis, an eService application which we estimated was 88% complete at the date of the acquisition. The estimated cost to complete the project will aggregate approximately $300,000 and will be incurred over a three-month period. Since the date of acquisition, we have incurred approximately $80,000 related to the project. 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 months ended June 30, 2000 and 1999.
Three Months ended June 30, Six Months ended June 30, ------------------------------------------------------------------ 2000 1999 2000 1999 --------------- --------------- --------------- --------------- Net income $ 7,022 $ 3,894 $ 13,491 $ 5,942 =============== =============== =============== ============== 7 Weighted average basic shares outstanding 34,183 32,066 33,763 31,990 Effect of dilutive stock options 2,419 497 2,968 568 --------------- --------------- --------------- --------------- Weighted average diluted shares outstanding 36,602 32,563 36,731 32,558 =============== =============== =============== =============== Basic earnings per share 0.21 0.12 0.40 0.19 Diluted earnings per share 0.19 0.12 0.37 0.18
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 was effective for the Company beginning January 1, 1998. Accordingly, the Company has prepared Statements of Comprehensive Operations for the six month period ended June 30, 2000. Accumulated other comprehensive operations as of June 30, 2000 is comprised of the following:
Accumulated Foreign Currency Unrealized Other Translation Holding Comprehensive (In thousands) Adjustment Gains (Losses) Operations ----------------- ----------------- ----------------- Balance, December 31, 1999 $ (7,638) $ (97) $ (7,735) Current period changes (1,878) 25 (1,853) ----------------- ----------------- ----------------- Balance June 30, 2000 $ (9,516) $ (72) $ (9,588) ================= ================= =================
6. The Company has prepared operating segment information in accordance with SFAS 131, "Disclosures about Segments of an Enterprise and Related Information", to report components that are evaluated regularly by the Company's chief operating decision-maker, or decision making groups, 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 consistent with its internal reporting which is not the same as GAAP reporting. Operating segments data for the three and six month periods ended June 30, 2000 and 1999 are as follows:
Three months ended June 30, Six months ended June 30, In thousands 2000 1999 2000 1999 ------------------------------ ---------------------------- Software Revenue $ 49,629 $ 48,651 $ 97,741 $ 90,635 Operating income (loss) 1,456 939 1,175 (2,725) Customer Support Revenue $ 25,657 $ 19,629 $ 50,503 $ 39,522 Operating income 6,497 3,269 13,759 7,646 Professional Services and Education Revenue $ 13,669 $ 12,542 $ 27,071 $ 23,936 Operating income (loss) (267) 309 (324) 373 Hardware Revenue $ 4,765 $ 3,545 $ 9,972 $ 9,576 Operating income (loss) (252) 397 156 919 Other Revenue $ 1,359 $ 1,722 $ 2,594 $ 3,862 Operating income 240 150 341 315 8 Total Revenue $ 95,079 $ 86,089 $ 187,881 $ 167,531 Operating income 7,674 5,064 15,107 6,528
Included in software revenue is $21.0 million related to Web based product for the three months period ended June 30, 2000 and $34.4 million for the six months period ended June 30, 2000. 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. In March 1997, Eastman Kodak Company ("Kodak") purchased the Wang imaging business unit that has responsibility for this litigation. 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 judgment on noninfringement as to each of the five patents in the suit, and for summary judgment of invalidity as to one of the patents. Eastman moved for summary judgment as to 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 judgment 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 yet 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 successfully redesign the infringing products or obtain a license on acceptable terms. Based on the Company's analysis of these patents and their respective file histories, the Company believes that it has meritorious defenses to these claims; however, the ultimate outcome or any resulting potential loss cannot be determined at this time. Subsequent to December 31, 1998, the former shareholders of Saros filed a demand for mandatory arbitration to release approximately two hundred thousand shares of FileNET stock which were held in escrow pursuant to the Agreement and Plan of Merger dated January 17, 1996, among FileNET Corporation, FileNET Acquisition Corporation, and Saros, and for damages. Mandatory arbitration is scheduled for January 9, 2001. The Company believes that it has meritorious reasons for not releasing the shares and other defenses to the claims; however, the ultimate or any resulting potential loss cannot be presently determined. In the normal course of business, the Company 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 Item 2 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and our Quarterly Report on form 10Q for the quarter ended March 31, 2000. Results of Operations Revenue
Three Months Ended June 30, Six Months Ended June 30, ------------------------------------ ------------------------------------ (Dollars in millions) 2000 1999 % Change 2000 1999 % Change ------------ ----------- ---------- ----------- ------------ ----------- Software revenue Domestic $ 35.6 $ 32.9 8% $ 67.5 $ 59.7 13% International 14.0 15.8 (11%) 30.2 31.0 (3%) ----------- ---------- ----------- ----------- Total software revenue $ 49.6 $ 48.7 2% $ 97.7 $ 90.7 8% ----------- ---------- ----------- ----------- Percentage of total revenue 52% 57% 52% 54% Customer Support Domestic $ 20.4 $ 15.7 30% $ 39.6 $ 31.5 26% International 5.3 4.0 33% 11.0 8.1 36% ----------- ---------- ----------- ----------- Total customer support revenue $ 25.7 $ 19.7 30% $ 50.6 $ 39.6 28% ----------- ---------- ----------- ----------- Percentage of total revenue 27% 23% 27% 24% Professional Services and Education Domestic $ 10.6 $ 9.0 18% $ 20.9 $ 16.8 24% International 3.1 3.5 (11%) 6.2 7.0 (11%) ----------- ---------- ----------- ----------- Total professional services and education revenue $ 13.7 $ 12.5 10% $ 27.1 $ 23.8 14% ----------- ---------- ----------- ----------- Percentage of total revenue 14% 14% 15% 14% Hardware revenue Domestic $ 3.6 $ 2.3 57% $ 8.0 $ 7.1 13% International 1.2 1.2 0% 2.0 2.4 (17%) ------------ ---------- ----------- ----------- Total hardware revenue $ 4.8 $ 3.5 37% $ 10.0 $ 9.5 5% ------------ ---------- ----------- ----------- Percentage of total revenue 5% 4% 5% 6% Other revenue Domestic $ 1.1 $ 1.3 (15%) $ 2.2 $ 3.1 (29%) International 0.2 0.4 (50%) 0.3 0.8 (63%) ------------ ---------- ----------- ----------- Total other revenue $ 1.3 $ 1.7 (24%) $ 2.5 $3.9 (36%) ------------ ---------- ----------- ----------- Percentage of total revenue 1% 2% 1% 2% ------------ ---------- ----------- ----------- Total revenue Domestic $ 71.3 $ 61.2 17% $ 138.2 $ 118.2 17% International 23.8 24.9 (4%) 49.7 49.3 1% ------------ ----------- ----------- ----------- Total revenue $ 95.1 $ 86.1 10% $ 187.9 $ 167.5 12% ============ =========== =========== ===========
Software revenue from the licensing of our software products increased 2% and 8% for the three and six month periods, respectively, ended June 30, 2000 over the comparable periods of 1999. Software revenue growth was adversely affected by a decline in international sales. 10 Customer support revenue consists of revenue from maintenance contracts and "fee for service" revenues. Customer support revenue increased 30% and 28% for the three and six month periods, ended June 30, 2000 over the same periods of 1999 due to increased maintenance revenue from the growth of our installed base. Professional services and education revenue is generated primarily from consulting and implementation services provided to end users of our software products, technical consulting services provided to our resellers, and training services. Such services are primarily performed on a time and material basis. Professional services and education revenue increased 10% and 14% for the three and six month periods ended June 30, 2000 over the comparable period of 1999 and is a result of an increase in consulting services and custom development projects along with an increase in sales of pre-packaged service offerings which include both consulting and training. Hardware revenue is generated primarily from the sale of 12-inch optical storage and retrieval libraries (OSAR). Hardware revenue increased by 37% and 5% for the three and six month periods ended June 30, 2000 over the comparable period of 1999 due to an increase in 30 gigabyte drive orders. Hardware revenue, however, is expected to continue to decline as a percentage of total revenue. Other revenue is generated from the sale of spare parts, supplies and third party products. Other revenue decreased 24% and 36% for the three and six month periods, respectively, ended June 30, 2000 compared to the same periods in 1999 due to diminished demand for spares and expected decreased orders for third party product. International revenue represented 25% and 29% of total revenues in the three month periods ended June 30, 2000 and 1999, respectively. For the six month periods ended June 30 2000 and 1999 international revenue constituted 26% and 29%, respectively. Although weaker performance in our international operations has resulted in a lower proportion of revenue being generated internationally, management expects that international operations will continue to account for a significant portion of total revenues. However, international revenues are subject to certain risks including but not limited to political and economic instability and currency fluctuation. Cost of Revenue
Three Months Ended June 30, Six Months Ended June 30, -------------------------------------- ----------------------------------- % % 2000 1999 Change 2000 1999 Change (Dollars in millions) -------------------------------------- ----------------------------------- Cost of software revenue $ 4.3 $ 4.7 (9%) $ 8.6 $ 8.6 0% Percentage of software revenue 9% 10% 9% 9% Cost of customer support revenue $ 10.2 $ 9.2 11% $ 20.8 $ 17.9 16% Percentage of customer support revenue 40% 47% 41% 45% Cost of professional services and education revenue $ 11.9 $ 9.9 20% $ 23.4 $ 19.7 19% Percentage of professional services and education revenue 87% 79% 86% 83% Cost of hardware revenue $ 3.5 $ 1.8 94% $ 6.4 $ 5.0 28% Percentage of hardware revenue 73% 51% 64% 53% Cost of other revenue $ 1.0 $ 1.4 (29%) $ 2.0 $ 3.2 (38%) Percentage of other revenue 77% 82% 80% 82% Total cost of revenue $ 30.9 $ 27.0 14% $ 61.2 $ 54.4 13% Percentage of total revenue 32% 31% 33% 32%
The cost of software revenue includes royalties paid to third parties and the cost of software distribution. The cost of software revenue as a percentage of software revenue for the three month period ended June 30, 2000 decreased to 9% from 10% in the same period of 1999. The cost of software revenue as a percentage of software revenue for the six month period ended June 30, 2000 remained constant at 9% for the same period in 1999. The cost of customer support revenue includes customer support personnel, supplies, and the cost of third party hardware maintenance. The cost of customer 11 support revenue as a percentage of customer support revenue for the three month period ended June 30, 2000 decreased to 40% from 47% in the same period of 1999. The cost of customer support revenue for the six month period ended June 30, 2000 decreased to 41% from 45% for the comparable period of 1999. The decrease is attributable to increased revenue without a proportional increase in cost. The cost of professional services and education revenue consists primarily of professional services personnel, training personnel and third party contractors. The cost of professional services and education revenue as a percentage of professional services and education revenue for the three month period ended June 30, 2000 increased to 87% from 79% in the same period of 1999. The cost of professional services and education revenue for the six month period ended June 30, 2000 increased 86% from 83% for the comparable period of 1999. The increase was due primarily to an increase in the number of personnel, the cost of which has not been fully absorbed by proportional revenue growth. 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 three month period ended June 30, 2000 increased to 73% from 51% for the comparable period of 1999. The cost of hardware revenue as a percentage of hardware revenue for the six month period ended June 30, 2000 increased to 64% from 53% for the comparable period of 1999. The increase is due to higher costs associated with upgrading and providing warranty coverage for certain products. The cost of other revenue includes the cost of supplies, spare parts and third party product. The cost of other revenue as a percentage of other revenue for the three months ended June 30, 2000 decreased to 77% from 82% in the same period of 1999. The cost of other revenue as a percentage of other revenue for the six month period ended June 30, 2000 decreased 80% from 82% for the comparable period of 1999. The decrease in cost of other revenue is the result of a reduction in fixed costs. Operating Expenses
Three Months Ended June 30, Six Months Ended June 30, ------------------------------------- ------------------------------------ (Dollars in millions) 2000 1999 % Change 2000 1999 % Change ----------------------- ----------- ---------------------- ----------- Research and development $ 13.9 $ 13.2 5% $ 28.0 $ 26.3 6% Percentage of total revenue 15% 15% 15% 16% Selling, general and administrative $ 39.3 $ 40.8 (4%) $ 80.3 $ 80.2 0% Percentage of total revenue 41% 47% 43% 48%
Research and development expenses increased 5% and 6% for the three and six month periods ended June 30, 2000, respectively, compared to the comparable periods of 1999. The increases in absolute dollars were due to a general increase in salaries. As a percentage of total revenue, research and development expenses were at 15% for the three-month period ended June 30, 2000 and 1999, respectively and 15% compared to 16% for the six month period ended June 30, 2000 and 1999, respectively. We expect that competition for qualified technical personnel will remain intense for the foreseeable future and may result in higher levels of compensation expense. We believe that research and development expenditures, including compensation of technical personnel, are essential to maintaining our competitive position and expect these costs to continue to constitute a significant percentage of revenues. Selling, general and administrative expenses decreased 4% and 0% for the three and six month periods ended June 30, 2000 compared to the same periods of 1999. The decrease was primarily due overall reduced spending. As a percentage of total revenue, selling, general and administrative expenses decreased to 41% for the three month period ended June 30, 2000 from 47% in the same period of 1999. For the six month period ended June 30, 2000 selling , general administration expenses decreased to 43% compared to 48% for the same period in 1999 due to expense levels growing at a lower rate than revenue. Amortization of intangibles and in-process research and development. On May 18, 2000, we acquired certain assets from Application Partners Incorporated (API) for $20.0 million. The acquisition was accounted for as a purchase. Amortization expense for the purchased intangible assets was $254,000 for the period ended June 30, 2000, compared with none in the same period of 1999. Based upon an independent third party appraisal, $3.0 million of the purchase price was allocated to in-process research and development which was immediately expensed. The in-process research and development expenses related to new product projects that were under development at the date of the acquisition and were expected to 12 eventually lead to new products but had not yet established feasibility and for which no future alternative use was identified. The valuation of the in-process research and development projects was based upon the discounted expected future net cash flows of the products over their expected life, reflecting the estimated percent of completion of the projects and an estimate of the costs to complete the projects. New product development projects underway at API at the time of the acquisition included Sequis, an eService application which we estimated was 88% complete at the date of the acquisition. The estimated cost to complete the project will aggregate approximately $300,000 and will be incurred over a three-month period. Since the date of acquisition, we have incurred approximately $80,000 related to the project. Uncertainties that could impede the progress of converting a development project to a developed technology include the availability of financial resources to complete the project, failure of the technology to function properly, continued economic feasibility of developed technologies, failure to convert technology into a repetitively manufacturable product, customer acceptance, customer demand, and customer qualification of such new technology, and general competitive conditions in the industry. There can be no assurance that the in-process research and development projects will be successfully completed and commercially introduced. Provision for Income Taxes. The combined federal, state and foreign annual effective tax rate for the three months ended June 30, 2000 was 22% compared to 30% for the comparable period in 1999. The combined federal, state and foreign annual tax rate for the six months ended June 30, 2000 was 23% compared to 30% for the comparable period in 1999. The decrease in the rate is attributable to the utilization of domestic net operating loss carryforwards as a result of the increase in domestic revenue. Foreign Currency Fluctuations and Inflation. Our 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, 2000, we had forward exchange contracts outstanding totaling approximately $2.9 million in 9 currencies. All of these contracts mature in three months. Other comprehensive loss reflects an increase of $0.2 million for the three months ended June 30, 2000 and an increase of $1.9 million for the six months ended June 30, 2000 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 its products, the cost of its materials, or its operating results for the three months ended June 30, 2000 and 1999. Other Financial Instruments. We enter into forward foreign exchange contracts as a hedge against the effects of fluctuating currency exchange rates on monetary assets and liabilities denominated in currencies other than the functional currency of the relevant entity. We are exposed to market risk on the forward exchange contracts as a result of changes in foreign exchange rates; however, the market risk should be offset by changes in the valuation of the underlying exposures. Gains and losses on these contracts, which equal the difference between the forward contract rate and the prevailing market spot rate at the time of valuation, are recognized in the consolidated statement of operations. The counterparties to these contracts are major financial institutions. We use commercial rating agencies to evaluate the credit quality of the counterparties. We do not anticipate a material loss resulting from any credit risks related to any of these institutions. Liquidity and Capital Resources At June 30, 2000, combined cash, cash equivalents and investments totaled $124.3 million, an increase of $15.6 million from the end of 1999. Cash provided by operating activities during the six months ended June 30, 2000 totaled $25.9 million and resulted primarily from net income; an increase in unearned maintenance revenue related to prepaid maintenance contracts; and additions to net income for depreciation and amortization expense offset by decreases in accounts payable and accrued compensation and benefits. Cash used by investing activities totaled $30.8 million and was a result of capital expenditures of $12.6 million and the acquisition of certain assets and in-process research and development of $20.0 million. Cash provided by financing activities totaled $17.7 million and was a result of proceeds received from the exercise of employee stock options and the employee stock purchase plan. 13 Accounts receivable decreased to $70.0 million at June 30, 2000 from $72.7 million at December 31, 1999. Days sales outstanding decreased to 67 days as of June 30, 2000 from 70 days as of December 31, 1999. Current liabilities increased to $87.5 million at June 30, 2000 from $86.5 million at December 31, 1999. The increase in current liabilities is primarily a result of increases in unearned maintenance revenue and income taxes payable, offset by decreases in accounts payable, and accrued compensation and benefits. We have a $20 million commercial line of credit that expires in June 2001. Borrowings under the arrangement are unsecured and bear interest at one hundred basis points over the London Interbank Offered Rate. A commitment fee of fifteen basis points is assessed against any undrawn amounts. As of June 30, 2000, there were no borrowings outstanding against the credit line. We anticipate that our present cash balances together with internally generated funds and credit lines will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months. Recent Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants issued SOP No. 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use". We adopted SOP No. 98-1 effective January 1, 1999 with no significant effect on our results of operations and financial condition. In December 1999, Staff Accounting Bulletin No. 101 ("SAB 101") was issued to provide staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101, is effective no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. We are currently evaluating the impact this bulletin may have on our financial statements. In June 1998, the Financial Accounting Standards Board ("FASB") issued, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 as amended, is effective for fiscal years beginning after June 15, 2000 and will require us 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. We believe the impact of adopting this standard will not be material to our results of operations or equity. Other Matters Year 2000. In 1997, we implemented a year 2000 Integrity Program to ensure that our computer software products and internal business systems would function properly in year 2000 and thereafter. Since January 1, 2000 we have not experienced any problems with our software products or internal business systems to properly manage and manipulate data related to the year 2000. All new generations of our software products are released as year 2000 compliant. 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 trades on currency exchanges and is available for non-cash transactions. These countries will issue sovereign debt exclusively in EURO and will re-denominate outstanding sovereign debt. Effective on this date, these countries 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 no longer will be computed directly from one legacy currency to another. Instead, a "triangulation" process will be applied whereby an amount denominated in one legacy currency first will be converted into an amount denominated in EURO, and the resultant EURO-denominated amount is converted into the second legacy currency. We have made the necessary changes to our internal business systems to support transactions denominated in the EURO, including establishing EURO price lists for effected countries. We have evaluated the impact the conversion to the EURO will have on our financial condition and results of operations. Based on this evaluation to date, we currently do not believe that there will be a material impact on our financial condition or results of operations as a result of the 14 EURO conversion, except that we cannot currently assess the impact that a common EURO-based price list will have on how we market our products in Europe nor the impact, if any, on revenues generated in Europe. Environmental Matters. We are not aware of any issues related to environmental matters that have, or are expected to have, a material affect on our business. Factors That May Affect Future Results Our 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 our actual results to differ materially from recent results or from our anticipated future results. Rapid Technological Change; Product Development. The market for our software and services is characterized by rapid technological developments, evolving industry standards, changes in customer requirements and frequent new product introductions and enhancements. Our continued success will be dependent upon our ability to continue to enhance our existing software and services offerings, develop and introduce, in a timely manner, new software products incorporating technological advances and respond to customer requirements. There can be no assurance that we will be successful in developing and marketing new software products and services offerings or enhancements to our existing software on a timely basis or that any new or enhanced software and services offerings will adequately address the changing needs of the marketplace. If we are unable to develop and introduce new software and enhancements or new service offerings, in a timely manner in response to changing market conditions or customer requirements, our business and operating results could be adversely affected. From time to time, we or our competitors may announce new software products, capabilities or technologies that have the potential to replace or shorten the life cycles of our existing software products. There can be no assurance that announcements of currently planned or other new software products will not cause customers to delay their purchasing decisions in anticipation of such software products, which could have a material adverse effect on our business and operating results. Uncertainty of Future Operating Results; Fluctuations in Quarterly Operating Results. Prior growth rates in our 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 our products; the level of software product and price competition; the length of our sales cycle; variations in the productivity of our 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 our customers; the timing of new software introductions and software enhancements by us and our competitors; the mix of sales by products, software, services and distribution channels; levels of international sales; acquisitions by competitors; changes in foreign currency exchange rates, impact of the EURO currency; our ability to develop and market new software 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, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Moreover, such factors could cause our operating results in a given quarter to be below the expectations of public market analysts and investors. In either case, the price of our common stock could be materially adversely affected. Competition. The Web content management, integrated document management, imaging, workflow, computer output to laser disk and electronic document management software markets are highly competitive, and there are certain competitors of ours with substantially greater sales, marketing, development and financial resources. We believe that the competitive factors affecting the market for our software products and services include vendor and product reputation; product quality, performance and price; the availability of software products on multiple platforms; product scalability; product integration with other enterprise applications; software functionality and features; software ease of use; and the quality of professional services, customer support services and training. The relative importance of each of these factors depends upon the specific customer involved. While we believe we compete favorably in each of these areas, there can be no assurance that we will continue to do so. Moreover, our present or future competitors may be able to develop software products comparable or superior to those offered by us, offer lower price products or adapt more quickly than we do to new technologies or evolving customer requirements. Competition is expected to intensify. In order to be successful in the future, we must respond to technological change, customer requirements and competitors' current software products and innovations. There can be no assurance that we will be able to continue to compete effectively in our market or that future competition will not have a material adverse effect on our 15 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 us. 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 our business, financial condition or results of operations. Intellectual Property and other Proprietary Rights. Our success depends, in part, on our ability to protect our proprietary rights to the technologies used in our principal products. We rely on a combination of copyrights, trademarks, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights in our software products. There can be no assurance that our 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 us. We have no software patents. In addition, the laws of some foreign countries do not protect our 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 our business, financial condition or results of operations. In addition, we also rely on certain software that we license from third parties, including software that is integrated with internally developed software used in our 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 software products, or that their software products will otherwise continue to be available to us on commercially reasonable terms. The loss or inability to maintain any of these software licenses could result in delays or reductions in software shipments until equivalent software can be developed, identified, licensed and integrated, which could adversely affect our business, financial condition or results of operations. We may, from time to time, be notified that we are infringing certain patent or intellectual property rights of others. Combinations of technology acquired through past or future acquisitions and our technology will create new software products and technology that may give rise to claims of infringement. While no actions other than those discussed in Item I, Note 7, herein, are currently pending against us 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 us in the future. Infringement actions can result in substantial cost to, and diversion of, resources. If we were found to infringe upon the rights of others, no assurance can be given that we could redesign the infringing products or could obtain licenses 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 redesign our products 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 our business, financial condition or results of operations. Dependence on Certain Relationships. We have entered into a number of key relationships with other companies such as Microsoft Corporation, IBM Global Services, Siebel Systems Inc, 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, us and our products. Dependence on Key Management and Technical Personnel. Our success depends to a significant degree upon the continued contributions of our key management, marketing, technical and operational personnel. In general, we do not utilize employment agreements for our key employees. The loss of the services of one or more key employees could have a material adverse effect on our operating results. We also believe our future success will depend in large part upon our ability to attract and retain additional highly skilled management, technical, marketing, product development, operational personnel and consultants. Competition for such personnel, particularly software developers, professional service consultants and other technical personnel, is intense, and pay scales in the software industry have significantly increased. There can be no assurance that we will be successful in attracting and retaining such personnel. International Sales. Historically, we have derived approximately thirty percent of our 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; the burden of complying with a wide variety of complex 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 our business, financial condition or results of operations. Product Liability. Software and products as complex as those sold by us are susceptible to errors or failures, especially when first introduced or when new versions are released. Our software products are often intended for use in 16 applications that are critical to a customer's business. As a result, our customers may rely on the effective performance of the software to a greater extent than the market for software products generally. We conduct extensive software testing to ensure that our software is free of significant errors and defects. In addition, we have designed and tested the most current versions of our software products to be year 2000 compliant. However, some of our customers are running earlier software products that are not year 2000 compliant. Although we have been encouraging such customers to migrate to current software versions, no assurance can be given that all of them will do so. Moreover, we also rely on certain software that we license from third parties, including software that is integrated with internally developed software and is used in our 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. Although we have 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 us in the future. A successful product liability claim brought against us could have a material adverse effect upon our business, operating results and financial condition. Our license agreements with customers typically contain provisions designed to limit our 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. Stock Price Volatility. We believe that a variety of factors could cause the trading price of our common stock to fluctuate, perhaps substantially, including quarter-to-quarter variations in operating results; announcements of developments related to our business; fluctuations in our order levels; general conditions in the technology sector or the worldwide economy; announcements of technological innovations, new software products or product enhancements by us or our 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 our relationships with our customers, resellers 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 our common stock. 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings See Notes to Consolidated Financial Statements. Item 4. Submission of Matters to a Vote of Security Holders (a) The 2000 Annual Meeting of Stockholders of the Company was held at 9:00 a.m. on May 18, 2000, in Costa Mesa, California. (b) At the annual meeting, the following six individuals were elected to the Company's Board of Directors, constituting all members of the Board of Directors: ------------------------ -------------------------- ---------------------- Nominee Affirmative Votes Votes Withheld ------------------------ -------------------------- ---------------------- L. George Klaus 29,873,031 547,847 ------------------------ -------------------------- ---------------------- William P. Lyons 29,874,561 546,317 ------------------------ -------------------------- ---------------------- Lee D. Roberts 29,731,760 689,118 ------------------------ -------------------------- ---------------------- John C. Savage 29,917,244 503,634 ------------------------ -------------------------- ---------------------- Roger S. Siboni 29,872,230 548,648 ------------------------ -------------------------- ---------------------- Theodore J. Smith 29,907,627 513,251 ------------------------ -------------------------- ---------------------- (c) The Company's stockholders were asked to approve an amendment 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 1,350,000 shares. This proposal was approved in accordance with the following vote of stockholders: ------------------- ------------------ ------------------- ---------------- Broker Votes For Votes Against Abstentions Non-Votes ------------------- ------------------ ------------------- ---------------- 18,135,623 12,212,526 72,729 0 ------------------- ------------------ ------------------- --------------- (d) The Company's stockholders were asked to approve an amendment to the 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan") to increase the number of shares of Common Stock issuable under the 1998 Purchase Plan by an additional 340,000 shares. This proposal was approved in accordance with the following vote of stockholders: -------------------- ------------------ ------------------- --------------- Broker Votes For Votes Against Abstentions Non-Votes -------------------- ------------------ ------------------- --------------- 28,643,861 1,707,002 70,015 0 -------------------- ------------------ ------------------- --------------- Item 5. Other Material Events On May 18, 2000 the Company acquired certain assets from Application Partners, Inc. (API) for $20.0 million. The Purchase Agreement is hereby incorporated by reference in Exhibit 10.24 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 2000. 18 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, 2000 By:______________/s/_________________________ - ---------------- Date Lee D. Roberts, President and Chief Executive Officer (Principal Executive Officer) 19 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* 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 30, 1999, effective June 30, 1999 (filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 1999). 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 October 29, 1999; Registration No. 333-89983). - ---------------------------------------------- * Incorporated herein by reference 20 Exhibit No. Description - --------------- ---------------------------------------------------------------- 10.10* Second Amended and Restated Stock Optio n 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). 10.18* 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 October 29, 1999; Registration No. 333-89983). 10.22* FileNET Corporation International Employee Stock Purchase Plan (filed as Exhibit 99.16 to Form S-8, filed on October 29, 1999; Registration No. 333-89983). 10.23* Lease between the Registrant and C. J. Segerstrom & Sons for the headquarters of the Company, dated September 1, 1999 (filed as Exhibit 10.23 to Form 10Q for the quarter ended September 30, 1999). 10.24 Asset Purchase Agreement between the Registrant and Application Partners, Inc. dated May 18, 2000. 27.1 Financial Data Schedule. 27.2 Financial Data Schedule amneded for Quarter ended March 31, 2000 to reflect corrected date. - ----------------------------------------------- * Incorporated herein by reference 21 EX-10.24 2 0002.txt ASSET PURCHASE AGREEMENT - SEQUIS ASSET PURCHASE AGREEMENT between FILENET CORPORATION as Purchaser and APPLICATION PARTNERS, INC. as Seller Dated as of May 18, 2000 TABLE OF CONTENTS ANNEX A DESCRIPTION OF BUSINESS/LIST OF ASSETS ANNEX A-1 EQUIPMENT INCLUDED IN PURCHASED ASSETS ANNEX A-2 TRADEMARKS AND LOGOS INCLUDED IN PURCHASED ASSETS ANNEX A-3 INTELLECTUAL PROPERTY INCLUDED IN PURCHASED ASSETS ANNEX B ALLOCATION OF PURCHASE PRICE EXHIBIT A BILL OF SALE EXHIBIT B ASSUMPTION AGREEMENT EXHIBIT C SUBLEASE AGREEMENT EXHIBIT E CONSULTING AGREEMENT EXHIBIT F OFFER LETTERS EXHIBIT G ESCROW AGREEMENT EXHIBIT H MANAGEMENT PRINCIPAL AGREEMENTS EXHIBIT I SUPPORT AGREEMENTS DISCLOSURE SCHEDULES 2 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT, dated as of May 18, 2000 (as hereafter amended, modified or supplemented, this "Agreement"), between FileNET Corporation, a Delaware corporation ("Purchaser"), and Application Partners, Inc., a California Corporation ("Seller"). W I T N E S S E T H: WHEREAS, Seller owns and operates a business, a division of which conducts the activities described on Annex A hereto (the "Division"); and WHEREAS, Seller desires to sell to Purchaser, and Purchaser desires to purchase from Seller, the assets relating to the Division listed on Annex A hereto (the "Assets") and in connection therewith Purchaser is willing to assume certain liabilities of Seller relating thereto, all upon the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual agreements and covenants hereinafter set forth, and intending to be legally bound hereby, Purchaser and Seller hereby agree as follows: Article 1. DEFINITIONS Section 1.01 Certain Defined Terms. Unless the context otherwise requires, the following terms, when used in this Agreement, shall have the respective meanings specified below: "Acquisition Documents" shall mean this Agreement, the Ancillary Agreements, and any certificate, Financial Statement, report or other document delivered pursuant to this Agreement or the transactions contemplated hereby. "Action" shall mean any claim, action, suit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority. "Affiliate" shall mean, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person. "Ancillary Agreements" shall mean the Assumption Agreement, the Bill of Sale and the Sublease Agreement. "Assets" shall have the meaning specified in the recitals to this Agreement. "Assumed Liabilities" shall have the meaning specified in Section 2.02(a). 3 "Assumption Agreement" shall mean the Assumption Agreement to be executed by Purchaser and Seller on the Closing Date substantially in the form of Exhibit B. "Bill of Sale" shall mean the Bill of Sale and Assignment to be executed by Seller on the Closing Date substantially in the form of Exhibit A. "Business Day" shall mean any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by Law to be closed in California. "Cause" shall mean that Purchaser, acting in good faith based upon information then known to Purchaser, determines that a Division Employee or Division Contractor has: (1) committed a material breach of his duties and responsibilities (other than as a result of incapacity due to Disability); (2) been convicted of a felony; (3) materially failed to perform required duties and responsibilities or performed them unsatisfactorily or incompetently; (4) materially violated a Purchaser policy; (5) violated any fiduciary duty owed to Purchaser; or (6) violated any of the terms of the Proprietary Information and Inventions Agreement signed by such Division Employee or Division Contractor . "Closing" shall have the meaning specified in Section 2.04. "Closing Date" shall have the meaning specified in Section 2.04. "Code" shall mean the Internal Revenue Code of 1986, as amended through the date hereof. "Confidentiality Agreement" shall mean the letter agreement dated as of February 1, 2000 between Seller and Purchaser. "Consulting Agreement" shall mean the consulting agreement to be executed by Purchaser and Seller, attached hereto as Exhibit E. "Contract Software Engineers" shall have the meaning specified in Section 2.07(a)(3). "Control" (including the terms "controlled by" and "under common control with"), with respect to the relationship between or among two or more Persons, shall mean the possession, directly or indirectly or as trustee, personal representative or executor, of the power to direct or cause the direction of the affairs or management of a Person, whether through the ownership of voting securities, as trustee, personal representative or executor, by contract or otherwise, including, without limitation, the ownership, directly or indirectly, of securities having the power to elect a majority of the board of directors or similar body governing the affairs of such Person. "Disability" shall mean a physical or mental impairment which substantially limits a major life activity of a Division Employee or Division Contractor and which renders such Division Employee or Division Contractor unable to perform the essential functions of his or her position, even with reasonable accommodation which does not impose an undue hardship on the Purchaser. 4 "Disclosure Schedule" shall mean the Disclosure Schedules attached hereto, dated as of the date hereof, and forming a part of this Agreement. "Division" shall have the meaning specified in the recitals to this Agreement. "Division Contractors" shall mean those contract software engineers listed on Schedule 6.01. "Division Employees" shall mean those employee software engineers listed on Schedule 6.01. "Employee Software Engineers" shall have the meaning specified in Section 2.07(a)(3). "Equipment" shall have the meaning specified in Annex A. "ERISA" shall have the meaning specified in Section 3.12(a). "Escrow Agent" shall mean the Bank of San Francisco. "Escrow Agreement" shall mean the agreement to be executed by Purchaser, Seller, and the Escrow Agent, attached hereto as Exhibit G. "Excluded Liabilities" shall have the meaning specified in Section 2.02(b). "Financial Statements" shall have the meaning specified in Section 3.04(a)(i). "Governmental Authority" shall mean any national, federal, state, municipal or local or other government, governmental, regulatory or administrative authority, agency or commission or any court, tribunal, or judicial or arbitral body. "Governmental Order" shall mean any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority. "Holdback Payment" shall mean have the meaning specified in Section 2.07. "Indemnified Party" shall have the meaning specified in Section 9.04. "Indemnifying Party" shall have the meaning specified in Section 9.04. "Intellectual Property" shall mean, with respect to the Division, (i) all inventions listed in Annex A-3, whether or not patentable, whether or not reduced to practice, and whether or not yet made the subject of a pending patent application or applications, (ii) national (including the United States) and multinational statutory invention registrations, patents, patent registrations and patent applications listed on Annex A-3 (including all reissues, divisions, continuations, continuations-in-part, extensions and reexaminations) and all rights therein provided by international treaties or conventions and all improvements to the inventions disclosed in each such registration, patent or application, (iii) all trademarks, service marks, trade dress, logos, trade names, domain names and corporate names, whether or not registered, listed on Annex A-3(including the names and logos set forth on Annex A-2), including all common law rights, and registrations and applications for registration thereof, 5 (iv) all copyrights (registered or otherwise) and registrations, applications for registration and licenses thereof listed on Annex A-3, and all rights therein provided by international treaties or conventions, (v) all trade secrets and confidential, technical and business information (including ideas, formulas, compositions, inventions, and conceptions of inventions whether patentable or unpatentable and whether or not reduced to practice) listed on Annex A-3, (vi) copies and tangible embodiments of all the foregoing, in whatever form or medium, (vii) all rights to obtain and rights to apply for patents, and to register trademarks and copyrights related to the foregoing, and (viii) all rights to sue or recover and retain damages and costs and attorneys' fees for present and past infringement of any of the foregoing. "IRS" shall mean the Internal Revenue Service of the United States. "Law" shall mean any national, federal, state, municipal or local or other statute, law, ordinance, regulation, rule, code, order, other requirement or rule of law. "Leased Real Property" shall mean the real property related to the Division leased by Seller as tenant, together with, to the extent leased by Seller, all buildings and other structures, facilities or improvements currently or hereafter located thereon, all fixtures, systems, equipment and items of personal property of Seller related to the Division attached or appurtenant thereto, and all easements, licenses, rights and appurtenances relating to the foregoing. "Letter of Intent" shall mean that Letter of Intent executed by the Parties on April 3, 2000. "Liabilities" shall mean any and all debts, liabilities and obligations, whether accrued or fixed, absolute or contingent, matured or unmatured or determined or determinable, including, without limitation, those arising under any Law, Action or Governmental Order and those arising under any contract, agreement, arrangement, commitment or undertaking. "Licensed Intellectual Property" shall mean all Intellectual Property licensed or sublicensed by Seller from a third party, which can be used by Purchaser after the Closing and which is listed on Schedule 3.10. "Loss" shall have the meaning specified in Section 9.02(a). "Management Principals" shall mean James Hockett and Jun Huang. "Management Principal Agreements" shall mean the employment agreements to be executed by Purchaser and each Management Principal, attached hereto as Exhibit H. "Material Adverse Effect" shall mean any circumstance, change in, or effect on, the Division that, individually or in the aggregate with any other circumstances, changes in, or effects on, the Division (i) is, or could reasonably be expected to be, materially adverse to the business, operations, assets or liabilities (including, without limitation, contingent liabilities), employee relationships, customer or supplier relationships, results of operations or the financial condition of the Division or (ii) could reasonably be expected to materially adversely affect the ability of Purchaser to operate or conduct the Division in the manner in which it is currently operated or 6 conducted by Seller. A material adverse effect shall not include the following: (A) a reduction in the value of the Division of less than $1,000,000.00; or (B) changes, events and effects that are directly caused by (i) conditions affecting the United States economy as a whole; (ii) conditions affecting the software industry as a whole, which conditions (in the case of clause (i) or (ii) do not affect the Division in a disproportionate manner). "Material Contracts" shall mean all contracts and agreements, whether or not made in the ordinary course of business, which are (i) material to the conduct of the Division, (ii) related to the Assets, or (iii) the absence of which would have a Material Adverse Effect on the Division or the Assets. "Offer Letters" shall mean the offer by Purchaser to each Transferred Employee, attached hereto as Exhibit F. "Owned Intellectual Property" shall mean all Intellectual Property in and to which Seller has a right to hold right, title and interest. "Permitted Activities" shall mean marketing, sales and consulting activities by Seller with respect to each of the following products: (i) ClaimPro, Claims Processing Workstation, Image System Connectivity Program, Work Management Engine, and any derivative works, modifications and improvements to the foregoing made by Seller, its agents or licensees. "Person" shall mean any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity, as well as any syndicate or group that would be deemed to be a person under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended. "Plans" shall have the meaning specified in Section 3.12(a). "Purchase Price" shall have the meaning specified in Section 2.03. "Purchaser" shall have the meaning specified in the recitals to this Agreement. "Receivables" shall mean any and all accounts receivable, notes and other amounts receivable from third parties, including, without limitation, customers and employees, arising from the conduct of the Division before the Closing Date, whether or not in the ordinary course, together with any unpaid financing charges accrued thereon. "Reference Balance Sheet" shall have the meaning specified in Section 3.04(a)(ii). "Reference Balance Sheet Date" shall mean April 30, 2000. "Regulations" shall mean the Treasury Regulations (including Temporary Regulations) promulgated by the United States Department of Treasury with respect to the Code or other federal tax statutes. "Restricted Period" shall have the meaning specified in Section 5.07. 7 "Seller" shall have the meaning specified in the recitals to this Agreement. "Sublease Agreement" shall mean the Sublease Agreement to be executed by Purchaser and Seller on the Closing Date substantially in the form of Exhibit C. "Support Agreements" shall mean the agreements to be executed by Purchaser and each of the Support Principals, attached hereto as Exhibit I. "Support Principals" shall mean Jerry Goedicke and Lakshman Watawala. "Tax" or "Taxes" shall mean any and all taxes, fees, levies, duties, tariffs, imposts, and other charges of any kind (together with any and all interest, penalties, loss, damage, liability, expense, additions to tax and additional amounts or costs incurred or imposed with respect thereto) imposed by any government or taxing authority, to the extent Purchaser may be held liable for any such amount or to the extent any such amount constitutes a lien on the Assets or the Division. "Third Party Claims" shall have the meaning specified in Section 9.04(b). "Threshold Amount" shall have the meaning specified in Section 9.02(b). "Transferred Employee" shall have the meaning specified in Section 6.01. "Transferred Contractor" shall have the meaning specified in Section 6.01. Article 2. PURCHASE AND SALE Section 2.01 Assets to Be Sold. On the terms and subject to the conditions of this Agreement, Seller shall, on the Closing Date, sell, convey and assign to Purchaser, free and clear of all claims, liens and interests except as is provided for herein, all of Seller's right, title and interest in and to the Assets. Section 2.02 Assumption and Exclusion of Liabilities. (a) On the terms and subject to the conditions of this Agreement, Purchaser shall, on the Closing Date, assume the following Liabilities: (i) liabilities and obligations arising out of ownership, use and operation of the Assets after the Closing Date; and (ii) liabilities and obligations arising after the Closing Date under the terms of any real property lease agreement and license agreement that is assigned, sublet or sublicensed by Seller to Purchaser in connection with the execution of this Agreement or the Ancillary Agreements set forth on Schedule 2.02 (a) (the "Assumed Liabilities"). (b) Seller shall retain, and shall be responsible for paying, performing and discharging when due, and Purchaser shall not assume or have any responsibility for, all assets other than the Assets and all Liabilities of Seller or the Division as of the Closing Date other than the Assumed Liabilities 8 (the "Excluded Liabilities"), whether or not the Excluded Liabilities relate to the Division. Section 2.03 Purchase Price; Allocation of Purchase Price. The aggregate purchase price for the Assets shall be US$20,000,000.00 (the "Purchase Price"), subject to adjustment as set forth in Section 2.07, to be paid as follows: (i) $15,000,000.00 in cash paid by wire transfer from Purchaser to Seller on the Closing Date; and (ii) an aggregate of $5,000,000 in Holdback Payments which shall be deposited with the Escrow Agent on the Closing Date and released pursuant to the Escrow Agreement, if, as and when the conditions specified in Section 2.07 have been satisfied. Section 2.04 Closing. Subject to the terms and conditions of this Agreement, the sale and purchase of the Assets and the assumption of the Assumed Liabilities contemplated by this Agreement shall take place at a closing (the "Closing") to be held at the offices of Seller, at 10:00 A.M. California time on May 23, 2000 provided there has been satisfaction or waiver of all conditions to the obligations of the parties set forth in Article VIII, or at such other place or at such other time or on such other date as Seller and Purchaser may mutually agree upon in writing (the day on which the Closing takes place being the "Closing Date"). Section 2.05 Closing Deliveries by Seller. At the Closing, Seller shall deliver or cause to be delivered to Purchaser: (a) the Bill of Sale, and such other instruments, in form and substance satisfactory to Purchaser, as may be requested by Purchaser to transfer the Assets to Purchaser or evidence such transfer on the public records; (b) executed counterparts of the Consulting Agreement, the Management Principal Agreements, the Offer Letters and the Support Agreements; (c) a receipt for the Purchase Price; and (d) the opinions, certificates and other documents required to be delivered pursuant to Section 8.02. Section 2.06 Closing Deliveries by Purchaser. At the Closing, Purchaser shall deliver to Seller: (a) $15,000,000.00 by wire transfer in immediately available funds; 9 (b) $5,000,000.00 by wire transfer into an escrow account established for the payment of the Holdback described in Section 2.07, below, with directions to retain, hold, and dispose of these funds in accordance with the terms of the Escrow Agreement attached hereto as Exhibit H. (c) executed Offer Letters and executed counterparts of the Consulting Agreement, the Management Principal Agreements and the Support Agreements; and (d) the opinions, certificates and other documents required to be delivered pursuant to Section 8.01. Section 2.07 Holdback; Adjustment of Purchase Price (a) Upon completion of certain product objectives, worker transfers and worker retention milestones, as described below, Purchaser shall authorize the Escrow Agent to pay the following amounts (the "Holdback Payments") to Seller at the time of such completion: 1. $1,500,000, upon the achievement of release readiness objectives for Sequis 1.0, as described on Schedule 2.07(a)(1). 2. $1,500,000, upon the transfer of the workers designated on Schedule 2.07(a)(2) to full-time employment or service status with Purchaser by the dates indicated on Schedule 2.07(a)(2). If any such transfer shall be delayed by any immigration related Law, Seller shall offer such affected workers to Purchaser by contract, at Seller's actual cost, in satisfaction of this section. 3. $2,000,000, twelve months after the Closing, provided that (x) both of the Management Principals, and (y) 8 of the combined group of 11 Employee Software Engineers (the "Employee Software Engineers") and Contract Software Engineers (the "Contract Software Engineers") designated on Schedule 2.07(a)(3) remain actively employed by, or in active service with, as applicable, Purchaser on such date. (b) If the conditions of Section 2.07(a)(2) are not met within three months of the dates required therefor, none of the $1,500,000 provided for in that Section will be paid to Seller or the designated employees. If the conditions are not met by the dates required therefor, but are met within three months of such required dates, the Holdback Payment to be made to Seller and the designated employees will be prorated, based on the ratio of the number of man-days that such employees were available to Purchaser over the number of man-days that such employees would have been available to Purchaser had the conditions been met by the required dates. (c) If the conditions of Section 2.07(a)(3) are not met, but (i) both of the Management Principals and (ii) at least 6 of the combined group of 11 Employee Software Engineers and Contract Software Engineers remain actively 10 employed by, or in active service with, as applicable, Purchaser twelve months after the Closing, then the Holdback Payment provided for in Section 2.07(a)(3) shall be reduced to $1,500,000. If either (i) one of the Management Principals or (ii) more than 5 of the Employee Software Engineers and Contract Software Engineers, collectively, are not actively employed by, or in active service with, as applicable, Purchaser twelve months after the Closing, no Holdback Payment shall be made under Section 2.07(a)(3). (d) For purposes of Section 2.07(a)(3) only, if any Contract Software Engineers leave within 12 months of the Closing, reasonable accommodations shall be made to replace such Contract Software Engineers, and any mutually agreed replacement Contract Software Engineers shall count in favor of satisfaction of the requirements of Section 2.07(a)(3). (e) Notwithstanding anything in this Section 2.07 to the contrary, if the number of Management Principals, Employee Software Engineers or Contract Software Engineers is not adequate to satisfy the conditions necessary for the payment of the Holdback Payments, due to acts or omissions of the Purchaser such as termination without Cause, an office relocation beyond fifteen miles, staff reduction due to budgetary constraints or unusually adverse employment conditions, or, with respect to 2.07(a)(3) only, is due to the death or Disability of a Transferred Employee, Management Principal or, within thirty days prior to the relevant date of determination provided for in Section 2.07(a)(3), a Transferred Contractor, such conditions shall be deemed met and no reduction shall be made in the Holdback Payments as a result of the failure to meet such conditions. (f) The Holdback Payments shall be paid in accordance with the procedures set forth in the Escrow Agreement. (g) Any reduction in the Holdback Payments pursuant to this Section 2.07 shall be treated for all purposes as an adjustment to the Purchase Price. Article 3. REPRESENTATIONS AND WARRANTIES OF SELLER As an inducement to Purchaser to enter into this Agreement, Seller hereby represents and warrants to Purchaser as follows: Section 3.01 Organization, Authority and Qualification of Seller. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all necessary corporate power and authority to enter into this Agreement and the Ancillary Agreements, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. Seller is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the properties owned or leased by it or the operation of its business makes such licensing or qualification necessary. The execution and 11 delivery of this Agreement and the Ancillary Agreements by Seller, the performance by Seller of its obligations hereunder and thereunder and the consummation by Seller of the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of Seller and its shareholders. This Agreement has been, and upon their execution the Ancillary Agreements will be, duly executed and delivered by Seller, and (assuming due authorization, execution and delivery by Purchaser) this Agreement constitutes, and upon their execution the Ancillary Agreements will constitute, legal, valid and binding obligations of Seller enforceable against Seller in accordance with their respective terms. Section 3.02 No Conflict. The execution, delivery and performance of this Agreement and the Ancillary Agreements by Seller (a) do not and will not violate, conflict with or result in the breach of any provision of the charter or by-laws (or similar organizational documents) of Seller, (b) do not conflict with or violate (or cause an event which could have a Material Adverse Effect as a result of) any Law or Governmental Order applicable to Seller or any of its assets, properties or businesses, including, without limitation, the Assets and the Division, or (c) except as set forth in Schedule 3.02, do not and will not conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, or result in the creation of any encumbrance on any of the assets or properties of Seller pursuant to, any note, bond, mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which Seller is a party or by which any of such assets or properties is bound or affected. Section 3.03 Governmental Authority and Approvals. The execution, delivery and performance of this Agreement and each Ancillary Agreement by Seller do not and will not require Seller to obtain any consent, approval, authorization or other order of, action by, filing with or notification to, any Government Authority, except as described in Schedule 3.03; Section 3.04 Financial Information; Books and Records. Schedule 3.04(a)(i) sets forth true and complete copies of (i) the unaudited balance sheet of Seller for the fiscal years ended as of December 31, 1999, and the related statements of income (collectively, the "Financial Statements") and (ii) the unaudited balance sheet of the Division as of April 30, 2000 (the "Reference Balance Sheet") has been delivered by Seller to Purchaser. The Financial Statements and the Reference Balance Sheet (A) were prepared in accordance with the books of account and other financial records of Seller, (B) present fairly the financial condition and results of operations of Seller related to the Division as of the dates thereof or for the periods covered thereby, (C) have been prepared in accordance with prudent accounting principles applied on a basis consistent with the past practices of Seller and throughout the periods involved, and (D) will include all adjustments (consisting only of normal recurring accruals) that are necessary for a fair 12 presentation of the financial condition of Seller related to the Division and the results of the operations of Seller related to the Division as of the dates thereof for the periods covered thereby. (a) The books of account and other financial records of Seller as they relate to the Division: (i) reflect all items of income and expense and all assets and Liabilities required to be reflected therein in accordance with prudent accounting principles applied on a basis consistent with the past practices of Seller and throughout the periods involved, (ii) are in all material respects complete and correct, and do not contain or reflect any material inaccuracies or discrepancies, and (iii) have been maintained in accordance with good business and accounting practices. Section 3.05 No Undisclosed Liabilities. There are no Liabilities of Seller related to the Division other than Liabilities (i) reflected or reserved against on the Reference Balance Sheet, (ii) disclosed in Schedule 3.05, or (iii) incurred since the date of this Agreement in the ordinary course of business, consistent with past practice, of Seller related to the Division and which do not and could not be reasonably expected to have a Material Adverse Effect. Section 3.06 Conduct in the Ordinary Course; Absence of Certain Changes, Events and Conditions. Since the Reference Balance Sheet Date, except as disclosed in Schedule 3.06, the Division has been conducted in the ordinary course and consistent with past practice. Since the Reference Balance Sheet Date, Seller has not permitted or suffered any liens or encumbrances on the Assets, made any unusual payments, purchases, transactions, capital expenditures or agreements. As amplification and not limitation of the foregoing, since the Reference Balance Sheet Date, except as disclosed on Schedule 3.06, Seller has not: (i) written down or written up (or failed to write down in accordance with prudent accounting principles consistent with past practice) the value of any Inventories or Receivables or revalued any assets of Seller related to the Division other than in the ordinary course of business consistent with past practice and in accordance with prudent accounting principles; (ii) (A) granted any increase, or announced any increase, in the wages, salaries, compensation, bonuses, incentives, pension or other benefits payable by Seller related to the Division to any of its employees, including, without limitation, any increase or change pursuant to any Plan, or (B) established or increased or promised to increase any benefits under any Plan, in either case except as required by Law or any collective bargaining agreement and involving ordinary increases consistent with the past practice of Seller related to the Division; or (iii) to the best of Seller's knowledge, suffered any Material Adverse Effect related to the Division. 13 Section 3.07 Litigation. Except as set forth in Schedule 3.07, there are no Actions by or against Seller related to the Division, or affecting any of the Assets or the Division, pending before any Governmental Authority (or, to the best knowledge of Seller without duty of inquiry, threatened to be brought by or before any Governmental Authority). Except as set forth in Schedule 3.07, neither Seller nor any of its assets or properties, including, without limitation, the Assets, is subject to any Governmental Order (nor, to the best knowledge of Seller without duty of inquiry, are there any such Governmental Orders threatened to be imposed by any Governmental Authority). Section 3.08 Compliance with Laws. To the best of Seller's knowledge, it has conducted and continues to conduct the Division in accordance with all Laws and Governmental Orders applicable to Seller or any of its properties or assets, including, without limitation, the Assets and the Division, and Seller is not in violation of any such Law or Governmental Order. Section 3.09 Material Contracts. Except as disclosed in Schedule 3.09, each Material Contract: (i) is legal, valid and binding on the respective parties thereto and is in full force and effect, (ii) is freely and fully assignable to Purchaser without penalty or other adverse consequences, and (iii) upon consummation of the transactions contemplated by this Agreement and the Ancillary Agreements, except to the extent that any consents set forth in Schedule 3.02 are not obtained, shall continue in full force and effect without penalty or other adverse consequence. Seller is not in breach of, or default under, any Material Contract. Section 3.10 Intellectual Property.(a) The rights of Seller in or to the Owned Intellectual Property do not conflict with or infringe on the rights of any other Person and Seller has not received any claim or written notice from any Person to such effect. To the best of Seller's knowledge, which does not include any investigation or inspection of the validity of such licenses, the Licensed Intellectual Property do not conflict with or infringe on the rights of any other Person and Seller has not received any claim or written notice from any Person to such effect. (i) Except as disclosed in Schedule 3.10(a): all the Owned Intellectual Property is owned by Seller, free and clear of any encumbrance and (ii) no Actions have been made or asserted (nor, to the best knowledge of Seller is any action pending nor has any such Action been threatened) against Seller either (A) based upon or challenging or seeking to deny or restrict the use by Seller of any of the Owned Intellectual Property or (B) alleging that any services provided, or products manufactured or sold by 14 Seller are being provided, manufactured or sold in violation of any patents or trademarks, or any other rights of any Person. To the best knowledge of Seller, no Person is using any trademarks, service marks, trade names or similar property that are confusingly similar to the Owned Intellectual Property or any patents, copyrights trademarks, service marks, trade names, trade secrets or similar property that infringe upon the Owned Intellectual Property or upon the rights of Seller therein. (ii) Except as disclosed in Schedule 3.10(b): (i) no Actions have been made or asserted (nor, to the knowledge of Seller is any Action pending or has any Action been threatened) against Seller either (A) based upon or challenging or seeking to deny or restrict the use by Seller of any of the Licensed Intellectual Property or (B) alleging that any Licensed Intellectual Property is being licensed, sublicensed or used in violation of any patents or trademarks, or any other rights of any Person; and (ii) to the best knowledge of Seller, no Person is using any trademarks, service marks, trade names or similar property that are confusingly similar to the Licensed Intellectual Property or any patents, copyrights, trademarks, service marks, trade names, trade secrets or similar property that infringe upon the Licensed Intellectual Property or upon the rights of Seller therein. Section 3.11 Assets. (a) Except as disclosed in Schedule 3.11(a), Seller owns, leases or has the legal right to use all the Assets and has good and marketable title to, or, in the case of leased or subleased Assets, valid and subsisting leasehold interests in, all the Assets, free and clear of all encumbrances. (b) The Assets and Leased Real Properties constitute all the properties, assets and rights forming a part of, used, held or intended to be used in, and all such properties, assets and rights as are necessary in the conduct of, the Division. (c) Except as set forth in Schedule 3.10(b), 3.11(a) or 3.11(c), and subject to the consent of third parties disclosed elsewhere in the Disclosure Schedule, Seller has the complete and unrestricted power and unqualified right to sell, assign, transfer, convey and deliver the Assets to Purchaser without penalty or other adverse consequences. Section 3.12 Employee Benefit Matters. (a) Plans and Material Documents. Schedule 3.12(a) lists all employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and all bonus, stock option, stock purchase, restricted stock, incentive, deferred compensation, retiree medical or life insurance, supplemental retirement, severance or other benefit plans, programs or arrangements, and all employment, termination, severance or other contracts or agreements, whether legally enforceable or not, to which Seller is a party with respect to the Division, with respect to which Seller has any 15 obligation or which are maintained, contributed to or sponsored by Seller for the benefit of any current or former employee, officer or director of Seller with respect to the Division (collectively, "Plans"). (b) Absence of Certain Liabilities and Events. There has been no prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) with respect to any Plan. Seller has not incurred any liability for any excise tax arising under Section 4971, 4972, 4980 or 4980B of the Code and to the best of Seller's knowledge no fact or event exists which could give rise to any such liability. Seller has not incurred any liability under, arising out of or by operation of Title IV of ERISA (other than liability for premiums to the Pension Benefit Guaranty Corporation arising in the ordinary course), including, without limitation, any liability in connection with (i) the termination or reorganization of any employee benefit plan subject to Title IV of ERISA, or (ii) the withdrawal from any Multiemployer Plan or Multiple Employer Plan, and no fact or event exists which could give rise to any such liability. No complete or partial termination has occurred within the five years preceding the date hereof with respect to any Plan. No reportable event (within the meaning of Section 4043 of ERISA) has occurred or is expected to occur with respect to any Plan subject to Title IV of ERISA. No Plan had an accumulated funding deficiency (within the meaning of Section 302 of ERISA or Section 412 of the Code), whether or not waived, as of the most recently ended plan year of such Plan. Section 3.13 Labor Matters. Except as set forth in Schedule 3.13, (a) Seller is not a party to any collective bargaining agreement or other labor union contract applicable to persons employed by Seller with respect to the Division, and, to Seller's knowledge, currently there are no organizational campaigns, petitions or other unionization activities seeking recognition of a collective bargaining unit which could affect the Division; (b) there are no controversies, strikes, slowdowns or work stoppages pending or, to the best knowledge of Seller after due inquiry, threatened between Seller and any of the employees of the Division, and Seller has not experienced any such controversy, strike, slowdown or work stoppage within the past three years; (c) Seller has not breached or otherwise failed to comply with the provisions of any collective bargaining or union contract with respect to the Division and there are no grievances outstanding against Seller under any such agreement or contract; (d) there are no unfair labor practice complaints pending against Seller with respect to the Division before the National Labor Relations Board or any other Governmental Authority or any current union representation questions involving employees of the Division; (e) Seller is currently in compliance with all applicable Laws relating to the employment of labor, including those related to wages, hours, collective bargaining, employee benefits and the payment and withholding of taxes and other sums as required by the appropriate Governmental Authority with respect to the Division and has withheld and paid to the appropriate Governmental Authority or is holding for payment not yet due to such Governmental Authority all amounts required to be withheld from employees of the Division and is not liable for any arrears of wages, taxes, penalties or other sums for failure to comply with any of the foregoing; (f) Seller has paid in full to all employees of the Division or adequately accrued for in accordance with prudent accounting principles consistently applied all wages, salaries, commissions, bonuses, benefits and other compensation due to or on behalf of such employees; (g) there is no claim with respect to payment of wages, salary or overtime pay that has been asserted or is now pending or threatened before any Governmental Authority with respect 16 to any Persons currently or formerly employed by Seller in the Division; (h) Seller is not a party to, or otherwise bound by, any consent decree with, or citation by, any Governmental Authority relating to employees or employment practices with respect to the Division; (i) there is no charge or proceeding with respect to a violation of any occupational safety or health standards that has been asserted or is now pending or threatened with respect to the Division; and (j) there is no charge of discrimination in employment or employment practices, for any reason, including, without limitation, age, gender, race, religion or other legally protected category, which has been asserted or is now pending or threatened before the United States Equal Employment Opportunity Commission, or any other Governmental Authority in any jurisdiction in which Seller has employed or currently employs any Person with respect to the Division. Section 3.14 Taxes. All returns and reports in respect of Taxes required to be filed have been timely filed and all Taxes required to be shown on such returns and reports or otherwise due have been timely paid. All such returns and reports are true, correct and complete in all material respects. There are no Tax liens on the Assets. Section 3.15 Insurance. All material assets and properties of the Division are, and for the past five years have been, covered by valid and, except for policies that have expired under their terms in the ordinary course, currently effective insurance policies or binders of insurance (including, without limitation, general liability insurance, property insurance and workers' compensation insurance) issued in favor of Seller, in each case with responsible insurance companies and in adequate amounts, covering such risks as are consistent with customary practices and standards of companies engaged in businesses and operations similar to those of Seller with respect to the Division. Section 3.16 Full Disclosure. None of the warranties made by Seller, or made in any Disclosure Schedule, Financial Statement, Reference Balance Sheet or any other certificate furnished or to be furnished by Seller, contains or will contain any untrue statement of a material fact, or omits to state a material fact necessary to prevent the statements from being misleading. Section 3.17 Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement or the Ancillary Agreements based upon arrangements made by or on behalf of Seller. 17 Section 3.18 Vote Required. The affirmative vote of the board of directors and of the shareholders of Seller are necessary to approve this Agreement and the transactions contemplated hereby. The board of directors and the shareholders of Seller have approved this Agreement and the transactions contemplated hereby. Article 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER As an inducement to Seller to enter into this Agreement, Purchaser hereby represents and warrants to Seller as follows: Section 4.01 Organization and Authority of Purchaser. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all necessary corporate power and authority to enter into this Agreement and the Ancillary Agreements, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Ancillary Agreements by Purchaser, the performance by Purchaser of its obligations hereunder and thereunder and the consummation by Purchaser of the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of Purchaser. This Agreement has been, and upon their execution the Ancillary Agreements will be, duly executed and delivered by Purchaser, and (assuming due authorization, execution and delivery by Seller) this Agreement constitutes, and upon their execution the Ancillary Agreements will constitute, legal, valid and binding obligations of Purchaser, enforceable against Purchaser in accordance with their respective terms. Section 4.02 No Conflict. Assuming the making and obtaining of all filings, notifications, consents, approvals, authorizations and other actions referred to in Section 4.03, except as may result from any facts or circumstances relating solely to Seller, the execution, delivery and performance of this Agreement and the Ancillary Agreements by Purchaser, do not and will not (a) violate, conflict with or result in the breach of any provision of the Articles of Incorporation or by-laws (or other organizational documents) of Purchaser, or (b) conflict with or violate any Law or Governmental Order applicable to Purchaser. Section 4.03 Governmental Consents and Approvals. The execution, delivery and performance of this Agreement and each Ancillary Agreement to which it is a party by Purchaser do not and will not require any consent, approval, authorization or other order of, action by, filing with, or notification to, any Governmental Authority. 18 Section 4.04 Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement or the Ancillary Agreements based upon arrangements made by or on behalf of Purchaser. Section 4.05 Vote Required. No vote of the shareholders of the Purchaser is required to approve this Agreement and the transactions contemplated hereby. The board of directors of Purchaser has approved this Agreement and the transactions contemplated hereby. Article 5. ADDITIONAL AGREEMENTS Section 5.01 Conduct of Business Prior to the Closing. Seller covenants and agrees that, between the date hereof and the Closing, Seller shall conduct the operations of the Division in the ordinary course and consistent with Seller's past practice. Section 5.02 Access to Information. From the date hereof until the Closing, upon reasonable notice, Seller shall: (i) afford Purchaser reasonable access, during normal business hours, to Seller's offices, other facilities, books and records and to Seller's agents regarding the Assets, and (ii) furnish to the Purchaser such additional financial and operating data, reasonable access to Seller's books and records and other information regarding the Assets of Seller as Purchaser may from time to time reasonably request. In order to facilitate the resolution of any claims made by or against or incurred by Purchaser after the Closing or for any other reasonable purpose, for a period ending on the close of business on the 120th day following the expiration of the applicable statute of limitations with respect to Tax liabilities, Seller shall (i) retain all books and records of Seller which are not transferred to Purchaser pursuant to this Agreement and which relate to Seller, its Division or the Assets for periods prior to the Closing and which shall not otherwise have been delivered to Purchaser, and (ii) upon reasonable notice, afford the officers, employees and authorized agents and representatives of Purchaser reasonable access (including the right to make photocopies at Purchaser's expense), during normal business hours, to such books and records. 19 Section 5.03 Confidentiality. The parties acknowledge that Purchaser and Seller have previously executed the Confidentiality Agreement, which Confidentiality Agreement shall continue in full force and effect in accordance with its terms. If this Agreement is terminated for any reason, the Confidentiality Agreement shall survive, and neither party shall use any Information obtained from the other party (as defined in the Confidentiality Agreement) for any purposes. Section 5.04 Regulatory and Other Authorizations; Notices and Consents. Purchaser and Seller shall use commercially reasonable efforts to obtain all authorizations, consents, orders and approvals of all Governmental Authorities and officials, customers, vendors and other parties who may have or be able to assert legal rights with respect to this transaction that may be or become necessary for execution and delivery of this Agreement, and the performance of Purchaser's and Seller's obligations pursuant to, this Agreement and the Ancillary Agreements and will cooperate fully with each other in promptly seeking to obtain all such authorizations, consents, orders and approvals. Purchaser is responsible for conducting an independent investigation in order to determine whether the Acquisition Agreement and the transactions contemplated thereunder are subject to compliance with the Hart-Scott-Rodino Act, and for taking all required action if such compliance is necessary. Seller hereby acknowledges that Purchaser has made or will make such determination in reliance upon the Seller's balance sheet and financial statements, each dated as of December 31, 1999 and provided by Seller. Section 5.05 Notice of Developments. Prior to the Closing, Seller shall promptly notify Purchaser in writing of (a) all events, circumstances, facts and occurrences arising subsequent to the date of this Agreement which are reasonably likely to have a Material Adverse Effect on the Division, and (b) all other material developments affecting the Assets, Liabilities, business, financial condition, operations, results of operations, customer or supplier relations, employee relations of the Division. Section 5.06 Use of Intellectual Property. Except as set forth in Schedule 5.06, from and after the Closing, Seller shall not use any of the Owned Intellectual Property or the Licensed Intellectual Property. Section 5.07 Non-Competition. (a) For a period of one (1) year after the Closing (the "Restricted Period"), the Seller shall not engage, directly or indirectly, in any business anywhere in the world that produces or supplies products or services substantially similar to the Assets of the Division nor, without the prior written consent of Purchaser, directly or indirectly, own an interest in, manage, operate, join, control, lend money or render financial or other assistance to or participate in or be connected with, as an officer, employee, 20 partner, stockholder, consultant or otherwise, any person or entity that competes with the aspect of the Division related to the Assets by producing or supplying products or services of the kind produced or supplied by the Assets of the Division; provided, however, (i) this Section 5.07 shall not apply to Permitted Activities, and (ii) for the purposes of this Section 5.07, ownership of securities having no more than five percent (5%) of the outstanding voting power of any competitors which are listed on any national securities exchange or traded actively in the national over-the-counter market shall not be deemed to be in violation of this Section 5.07 so long as the Seller has no other connection or relationship with such competitor. The fact that the Seller has specified that an activity is a Permitted Activity is not to be interpreted as an admission that such activity would otherwise be a competitive activity under this Section. (a) Seller acknowledges that the covenants of Seller set forth in this Section 5.07 are an essential element of this Agreement and that, but for the agreement of Seller to comply with these covenants, Purchaser would not have entered into this Agreement. Seller acknowledges that this Section 5.07 constitutes an independent covenant and shall not be affected by performance or nonperformance of any other provision of this Agreement by Purchaser. (b) Seller has independently consulted with its counsel and after such consultation agrees that the covenants set forth in this Section 5.07 are reasonable and proper. Section 5.08 Sublease. Purchaser agrees to sublet a portion of Seller's premises for a minimum period of one (1) year after Closing, under the terms and conditions of the Sublease Agreement attached hereto as Exhibit C. Section 5.09 Bulk Transfer Laws. Purchaser hereby waives compliance by Seller with any applicable bulk sale or bulk transfer laws of any jurisdiction in connection with the sale of the Assets to Purchaser (other than any obligations with respect to the application of the proceeds herefrom). Pursuant to Article IX, Seller has agreed to indemnify Purchaser against any and all liabilities which may be asserted by third parties against Purchaser as a result of Seller's noncompliance with any such law. Section 5.10 Further Action. Each of the parties hereto shall use all reasonable efforts to take, or cause to be taken, all appropriate action, do or cause to be done all things necessary, proper or advisable under applicable Laws, including obtaining any necessary consents or approvals from, or making any necessary filings with any domestic or foreign regulatory agencies, and execute and deliver such documents and other papers, as may be required to carry out the provisions of this Agreement and consummate and make effective the transactions contemplated by this Agreement. 21 Article 6. EMPLOYEE MATTERS Section 6.01 Offer of Employment. Schedule 6.01 contains a true and complete list of all Division Employees of the date hereof and sets forth their position, current salary, (proposed) retention bonus, and status. Schedule 6.01 also contains a true and complete list of all Division Contractors as of the date hereof and sets forth the entity which employes each such Division Contractor. Seller shall update such information with as much notice to Buyer as possible prior to the Closing Date. As of the Closing Date, Purchaser shall offer employment to each of the then current Division Employees. Each employee who accepts such offers of employment effective as of the Business Day immediately following the Closing Date(or such later date as Seller and Purchaser shall agree) shall be referred to herein as a "Transferred Employee." Seller makes no representation or warranty as to whether any or all of the Division's employees will accept Purchaser's offers of employment. Seller shall also reassign the services, to the extent that it is permitted under its agreement with each Division Contractor's employer, of each Division Contractor listed on Schedule 2.07(a)(3) under the heading "Contract Software Engineers" to the Purchaser as of the Closing Date (or such later date as Seller and Purchaser shall agree). Each Division Contractor that is assigned to Purchaser shall be referred to as a "Transferred Contractor". Seller will take all steps reasonably necessary to effect such reassignments including, but not limited to, the execution of the Consulting Agreement. Seller shall invoice Purchaser monthly for its actual cost of providing such Transferred Contractors to Purchaser. Section 6.02 Accrued Wages, Salaries and Vacation; Benefits. Seller shall pay to each Transferred Employee all wages, salaries, business expenses and compensation for accrued vacation, insurance benefits and COBRA premiums, if applicable, earned by him or her prior to the Closing Date. Seller shall retain all liability under, and responsibility for, the Plan listed (or required to be listed) in Schedule 3.12(a) and Purchaser shall have no obligation under or with respect to any such plan or arrangement. Article 7. TAX MATTERS Section 7.01 Indemnity. Seller agrees to indemnify and hold harmless Purchaser against the following Taxes and against any loss, damage, liability or expense, including reasonable fees for attorneys and other outside consultants, incurred in contesting or otherwise in connection with any such Taxes: (i) Taxes imposed on Purchaser (excluding any taxes attributable to assets or businesses of Purchaser other than the Assets or the Division) with respect to taxable periods ending on or before the Closing Date; (ii) with respect to taxable periods beginning before the Closing Date and ending after the Closing Date, Taxes imposed on 22 Purchaser (excluding any taxes attributable to assets or businesses of Purchaser other than the Assets or the Division) which are allocable to the portion of such period ending on the Closing Date; and (iii) Taxes imposed on Purchaser as a result of any breach of warranty or misrepresentation under Section 3.14 of this Agreement. Purchaser shall be responsible for Taxes of the Division for periods after the Closing Date. Section 7.02 Conveyance Taxes. Seller shall be responsible for any real property transfer or gains, use, transfer, value added, stock transfer, and stamp taxes, any transfer, recording, registration, and other fees, and any similar Taxes which become payable in connection with the transactions contemplated by this Agreement and the Ancillary Agreements. Notwithstanding the foregoing, Purchaser shall be responsible for any sales tax incurred in connection with the transactions contemplated by this Agreement and the Bill of Sale. Section 7.03 Miscellaneous. (a) Seller and Purchaser agree to treat all payments made by either to or for the benefit of the other under this Article VII, under other indemnity provisions of this Agreement and for any misrepresentations or breach of warranties or covenants, as adjustments to the Purchase Price or as capital contributions for Tax purposes and that such treatment shall govern for purposes hereof except to the extent that the laws of a particular jurisdiction provide otherwise, in which case such payments shall be made in an amount sufficient to indemnify the relevant party on an after-Tax basis. (a) Notwithstanding any provision in this Agreement to the contrary, the obligations of Seller to indemnify and hold harmless Purchaser pursuant to this Article VII, and the representations and warranties contained in Section 3.14, shall terminate at the close of business on the 120th day following the expiration of the applicable statute of limitations with respect to the Tax liabilities in question (giving effect to any waiver, mitigation or extension thereof). (b) For purposes of this Article VII, "Purchaser" and "Seller", respectively, shall include each member of the affiliated group of corporations of which it is or becomes a member. Article 8. CONDITIONS TO CLOSING Section 8.01 Conditions to Obligations of Seller. The obligations of Seller to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to the Closing, of each of the following conditions: 23 (a) Representations, Warranties and Covenants. The representations and warranties of Purchaser contained in this Agreement shall have been true and correct when made and shall be true and correct in all material respects as of the Closing, with the same force and effect as if made as of the Closing Date, other than such representations and warranties as are made as of another date, the covenants and agreements contained in this Agreement to be complied with by Purchaser on or before the Closing shall have been complied with in all material respects, and Seller shall have received a certificate from Purchaser to such effect signed by a duly authorized officer thereof; (b) No Proceeding or Litigation. No Action shall have been commenced by or before any Governmental Authority against either Seller or Purchaser, seeking to restrain or materially and adversely alter the transactions contemplated by this Agreement which, in the reasonable, good faith determination of Seller, is likely to render it impossible or unlawful to consummate such transactions; (c) Ancillary Agreements. Purchaser shall have executed and delivered to Seller each of the Ancillary Agreements to which it is a party; and (d) Management Principal Agreements, Consulting Agreement, Offer Letters and Support Agreements. Purchaser shall have executed and delivered to Seller each of the Management Principal Agreements, the Consulting Agreement, the Offer Letters and the Support Agreements. Section 8.02 Conditions to Obligations of Purchaser. The obligations of Purchaser to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to the Closing, of each of the following conditions: (a) Representations, Warranties and Covenants. The representations and warranties of Seller contained in this Agreement shall have been true and correct when made and shall be true and correct as of the Closing with the same force and effect as if made as of the Closing Date, other than such representations and warranties as are made as of another date, the covenants and agreements contained in this Agreement to be complied with by Seller on or before the Closing shall have been complied with, and Purchaser shall have received a certificate of Seller to such effect signed by a duly authorized officer thereof; (b) No Proceeding or Litigation. No Action shall have been commenced or threatened by or before any Governmental Authority against either Seller or Purchaser, seeking to restrain or materially and adversely alter the transactions contemplated hereby which in the good faith determination of Purchaser is likely to render it impossible or unlawful to consummate the transactions contemplated by this Agreement or otherwise render inadvisable, in the good faith determination of the Board of Directors of Purchaser based on information not known to Purchaser as of the date hereof, the consummation by Purchaser of the transactions contemplated by this Agreement; provided, however, that the provisions of this Section 8.02(b) shall not apply if Purchaser has caused, solicited or encouraged any such Action; 24 (c) Resolutions of Seller. Purchaser shall have received a true and complete copy, certified by the Secretary or an Assistant Secretary of Seller, of the resolutions duly and validly adopted by the Board of Directors of Seller evidencing its authorization of the execution and delivery of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby; (d) Consents and Approvals. Purchaser and Seller shall have received, each in form and substance reasonably satisfactory to Purchaser in its sole and absolute discretion, all authorizations, consents, orders and approvals of all Governmental Authorities and officials and all third party consents and estoppel certificates which Purchaser reasonably deems necessary or desirable for the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements; (e) Ancillary Agreements. Seller shall have executed and delivered to Purchaser each of the Ancillary Agreements to which it is a party; (f) Management Principal Agreements, Consulting Agreement, Offer Letters and Support Agreements. Seller shall have delivered to Purchasers the Management Principal Agreements, the Consulting Agreement, the Offer Letters and the Support Agreements, executed by the respective parties thereto ; provided, that if the combination of Management Principal Agreements and Offer Letters delivered pursuant to this Section, together with the number of Transferred Contractors pursuant to Section 6.01, is sufficient to satisfy the requirement of Section 2.07(a)(2), then this condition shall be deemed satisfied. (g) Material Contracts. Purchaser shall have received, each in form and substance reasonably satisfactory to Purchaser, amendments or novations of each Material Contract identified in Schedule 3.09 which Purchaser reasonably deems necessary or desirable for the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements and the ongoing operation of the Division, including, without limitation, all third party consents required under any Material Contracts; and (h) No Material Adverse Effect. No circumstance, change in, or effect on the Division shall have occurred which has a Material Adverse Effect. Article 9. INDEMNIFICATION Section 9.01 Survival of Representations and Warranties. The representations and warranties of Seller contained in this Agreement and the Ancillary Agreements, and all statements contained in the Acquisition Documents, shall survive the Closing until twelve (12) months thereafter; provided, however, that (a) the representations and warranties dealing with Tax matters shall survive as provided in Section 7.03(a), (b) insofar as any claim is made by Purchaser for the breach of any representation or warranty of Seller contained herein, which claim is attributable to products shipped, or activities or omissions related to Intellectual Property that occur on or prior to the 25 Closing Date, such representations and warranties shall, for purposes of such claim by Purchaser, survive the Closing until five (5) years thereafter, and (c) insofar as any claim is made by Purchaser for the breach of any representation or warranty of Seller contained herein, which claim arises out of allegations of personal injury suffered by any third party on or prior to the Closing Date, such representations and warranties shall, for purposes of such claim by Purchaser, survive until thirty (30) calendar days after the expiration of the applicable statute of limitations governing such claims. Neither the period of survival nor the liability of Seller with respect to Seller's representations and warranties shall be reduced by any investigation made at any time by or on behalf of Purchaser. If written notice of a claim has been given prior to the expiration of the applicable representations and warranties by Purchaser to Seller, then the relevant representations and warranties shall survive as to such claim until the claim has been finally resolved. Section 9.02 Indemnification by Seller. (a) Indemnifiable Losses. Subject to Section 9.02(b) below, Purchaser and its Affiliates, officers, directors, employees, agents, successors and assigns shall be indemnified and held harmless by Seller for any and all Liabilities, losses, damages, claims, costs and expenses, interest, awards, judgments and penalties actually suffered or incurred by them (including, without limitation, any Action brought or otherwise initiated by any of them) (a "Loss"), arising out of or resulting from the following: (i) the breach of any representation or warranty made by Seller contained in the Acquisition Documents; (ii) the breach of any covenant or agreement by Seller contained in the Acquisition Documents; (iii) any and all Losses suffered or incurred by Purchaser by reason of or in connection with any claim or cause of action of any third party to the extent arising out of any action, inaction, event, condition, liability or obligation of Seller occurring or existing prior to the Closing which would constitute a breach of a representation or covenant of Seller hereunder; and (iv) without limiting the generality of the foregoing, any and all Losses suffered or incurred by Purchaser by reason of or in connection with any claim or cause of action of the Freedom Group arising out of Purchaser's use or ownership of the Assets, including any Intellectual Property. Notwithstanding the foregoing, Seller shall not be responsible for any Losses resulting from Purchaser's modification or alteration of the Assets, including any Intellectual Property, or responsible for any Losses incurred by Purchaser for punitive damages or claimed by Purchaser as a loss of profits. (b) Claims. Threshold Amount. Notwithstanding the foregoing, Seller shall have no liability with respect to the matters described in paragraph (a) above unless and until the aggregate amount of Losses thereunder of which Seller receives written notice exceeds $250,000.00 (the "Threshold Amount"). At such 26 time as the aggregate Losses suffered by Purchaser with respect to matters described in paragraph(i) exceed the Threshold Amount, Purchaser shall be indemnified to the full extent of all such Losses (including Losses counted in determining whether the aggregate Losses equal or exceed the Threshold Amount); provided, however, that Seller shall be liable for any such Losses arising out of any fraudulent breach of any representation or warranty. Section 9.03 Indemnification by Purchaser. Purchaser will indemnify, defend and hold harmless Seller and each of its affiliates, officers, directors, employees, agents, successors and assigns for any and all Losses arising out of or resulting (i) from Purchaser's breach or misrepresentation of any representation, warranty, covenant or agreement of Purchaser contained in the Acquisition Documents which has not been expressly waived by Seller in writing; (ii) any act or omission of Purchaser, or any of its successors or assigns, after the closing date, that constitutes a breach or default under any of the Assumed Liabilities; and (iii) any Losses resulting from Purchaser's modification or alteration of the Assets. Section 9.04 Indemnification Procedures. For purposes of this Section 9.04, "Indemnified Party" shall mean (i) each of Purchaser and its Affiliates, officers, directors, employees, agents, successors and assigns, when being indemnified by Seller pursuant to Section 9.02, and (ii) each of the Seller, its affiliates and its officers, directors, employees, agents, successors and assigns, when being indemnified by Purchaser pursuant to Section 9.03, and "Indemnifying Party" shall mean (x) Seller when indemnifying Purchaser and its Affiliates, officers, directors, employees, agents, successors and assigns pursuant to Section 9.02, and (y) Purchaser when indemnifying Seller, its affiliates and their officers, directors, employers, agents, successors and assigns pursuant to Section 9.03: (a) An Indemnified Party shall give the Indemnifying Party notice of any matter which an Indemnified Party has determined has given or could give rise to a right of indemnification under this Agreement, within sixty (60) days of such determination, stating the amount of the Loss, if known, and method of computation thereof, a brief description of the facts upon which such claim is based and containing a reference to the provisions of this Agreement in respect of which such right of indemnification is claimed or arises. If, after the amount of the claim is specified by the Indemnified Person, the Indemnifying Party objects to any such claim, it may give written notice to the Indemnified Person within thirty (30) days of the later of (i) receipt of the Indemnified Person's notice of claim or (ii) the specification by the Indemnified Person of the amount of the claim, advising the Indemnified Person of its objection. If no such notice is timely received from the Indemnifying Party by the Indemnified Person, the Indemnified Person will be entitled to payment from the Indemnifying Party in the amount of the Loss arising out of the claim specified in its notice of claim. If the Indemnifying Party advises the Indemnified Person within such thirty (30) day period that it objects to such claim, the Indemnified Person and the Indemnifying Party shall promptly meet and use their best efforts to settle the dispute in writing. If the Indemnified 27 Person and the Indemnifying Party are unable to reach agreement within thirty (30) days after the Indemnifying Party objects to the claim, then the disputed portion of the claim shall be submitted to the resolution process provided in Section 11.12. If the arbiter shall determine that the Indemnified Person is entitled to indemnification with respect to the dispute submitted, the Indemnified Person will be entitled to obtain payment from the Indemnifying Party within thirty (30) days in the amount determined by the arbitrator. (b) The obligations and Liabilities of the Indemnifying Party under this Article IX with respect to Losses arising from claims of any third party which are subject to the indemnification provided for in this Article IX ("Third Party Claims") shall be governed by and contingent upon the following additional terms and conditions: if an Indemnified Party shall receive notice of any Third Party Claim, the Indemnified Party shall give the Indemnifying Party notice of such Third Party Claim within thirty days of the receipt by the Indemnified Party of such notice; provided, however, that the failure to provide such notice shall not release the Indemnifying Party from any of its obligations under this Article IX except to the extent the Indemnifying Party is materially prejudiced by such failure and shall not relieve the Indemnifying Party from any other obligation or Liability that it may have to any Indemnified Party otherwise than under this Article IX. If the Indemnifying Party acknowledges in writing its obligation to indemnify the Indemnified Party hereunder against any Losses that may result from such Third Party Claim, then the Indemnifying Party shall be entitled to assume and control the defense of such Third Party Claim at its expense and through counsel of its choice if it gives notice of its intention to do so to the Indemnified Party within five days of the receipt of such notice from the Indemnified Party; provided, however, that if there exists or is reasonably likely to exist a conflict of interest that would make it inappropriate in the judgment of the Indemnified Party, in its reasonable discretion, for the same counsel to represent both the Indemnified Party and the Indemnifying Party, then the Indemnified Party shall be entitled to retain its own counsel, at its own expense, in each jurisdiction for which the Indemnified Party determines counsel is required. In the event the Indemnifying Party exercises the right to undertake any such defense against any such Third Party Claim as provided above, the Indemnified Party shall cooperate with the Indemnifying Party in such defense and make available to the Indemnifying Party at the Indemnifying Party's expense, all witnesses, pertinent records, materials and information in the Indemnified Party's possession or under the Indemnified Party's control relating thereto as is reasonably required by the Indemnifying Party. Similarly, in the event the Indemnified Party is, directly or indirectly, conducting the defense against any such Third Party Claim, the Indemnifying Party shall cooperate with the Indemnified Party in such defense and make available to the Indemnified Party, at the Indemnifying Party's expense, all such witnesses, records, materials and information in the Indemnifying Party's possession or under the Indemnifying Party's control relating thereto as is reasonably required by the Indemnified Party. No such Third Party Claim may be settled by the Indemnifying Party without the prior written consent of the Indemnified Party. If the Indemnifying Party refuses to defend against the Third Party Claim, then the Indemnified Party may defend against the Third Party Claim at the expense of the Indemnifying Party. If an Indemnified Party does not participate in the defense of the Third Party Claim, the Indemnified Party may not bring a claim against the Indemnifying Party for negligently or otherwise failing to adequately defend against the Third Party Claim. (c) To the extent that the Indemnifying Parties' undertakings set forth in this Article IX may be unenforceable, the Indemnifying Parties shall be obligated, jointly and severally, to contribute the maximum amount 28 that it is permitted to contribute under applicable Law to the payment and satisfaction of all Losses incurred by the Indemnified Parties. Section 9.05 Limitation of Liability. Except for Third Party Claims of infringement on Intellectual Property rights, in no event will either party's liability to indemnify the other party pursuant to this Section 9 exceed the amount of $10,000,000.00. Article 10. TERMINATION AND WAIVER Section 10.01 Termination. This Agreement may be terminated at any time prior to the Closing: (a) by Purchaser if, between the date hereof and the time scheduled for the Closing an event or condition occurs that has resulted in or that Purchaser reasonably believes may result in a Material Adverse Effect; (b) by either Seller or Purchaser if the Closing shall not have occurred by June 30, 2000; provided, however, that the right to terminate this Agreement under this Section 10.01(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Closing to occur on or prior to such date; (c) by either Purchaser or Seller in the event that any Governmental Authority shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable; or (d) by the mutual written consent of Seller and Purchaser. Section 10.02 Effect of Termination. In the event of termination of this Agreement as provided in Section 10.01, this Agreement shall forthwith become void and there shall be no liability on the part of either party hereto except (i) as set forth in Sections 5.03, and 11.01 and (ii) that nothing herein shall relieve either party from liability for any willful breach of this Agreement. Notwithstanding the foregoing, if the Closing does not occur due to the Purchaser's breach of this Agreement, the Purchaser will pay the Seller, within 30 days of the Purchaser's failure to close, the amount of $1,000,000 as and for liquidated damages. 29 Section 10.03 Waiver. Either party to this Agreement may (a) extend the time for the performance of any of the obligations or other acts of the other party, (b) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document delivered by the other party pursuant hereto, or (c) waive compliance with any of the agreements or conditions of the other party contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party to be bound thereby. Any waiver of any term or condition shall not be construed as a waiver of any subsequent breach or a subsequent waiver of the same term or condition, or a waiver of any other term or condition, of this Agreement. The failure of any party to assert any of its rights hereunder shall not constitute a waiver of any of such rights. Article 11. MISCELLANEOUS Section 11.01 Expenses. Except as otherwise specified in this Agreement, all costs and expenses, including, without limitation, fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses, whether or not the Closing shall have occurred. Section 11.02 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, or by courier service, cable, telecopy, telegram, or registered or certified mail (postage prepaid, return receipt requested) to the respective parties hereto at their addresses set forth on the signature pages to this Agreement (or at such other address for a party hereto as shall be specified in a notice given in accordance with this Section 11.02). Section 11.03 Public Announcements. No party to this Agreement shall make, or cause to be made, any press release or public announcement in respect of this Agreement or the transactions contemplated hereby or otherwise communicate with any news media without the prior written consent of the other party and the parties shall cooperate as to the timing and contents of any such press release or public announcement. No such announcement shall be made at any time prior to the execution of this Agreement. 30 Section 11.04 Headings. The descriptive headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning, construction or interpretation of this Agreement. Section 11.05 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any Law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible. Section 11.06 Entire Agreement. This Agreement (including the Annexes, Exhibits and Disclosure Schedules) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements (including the Letter of Intent, but excluding the Confidentiality Agreement) representations, undertakings and understandings, both written and oral, between Seller and Purchaser with respect to the subject matter hereof. Section 11.07 Assignment. This Agreement may not be assigned by operation of Law or otherwise without the express written consent of Seller and Purchaser (which consent may be granted or withheld in the sole discretion of Seller and Purchaser); provided, however, that Purchaser may assign its rights under this Agreement to an Affiliate of Purchaser without the consent of Seller. No such assignment by Purchaser to its Affiliate will relieve Purchaser of any of its obligations or duties under this Agreement. Section 11.08 No Third Party Beneficiaries. This Agreement shall be binding upon and inure solely to the benefit of the parties hereto and their permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person, including, without limitation, any union or any employee or former employee of Seller, any legal or equitable right, benefit or remedy of any nature whatsoever, including, without limitation, any rights of employment for any specified period, under or by reason of this Agreement. 31 Section 11.09 Amendment. This Agreement may not be amended, modified or supplemented except (a) by an instrument in writing signed by, or on behalf of, Seller and Purchaser or (b) by a waiver in accordance with Section 10.03. Section 11.10 Non-Solicitation. For a period of one year from the Closing Date, neither party shall solicit the employees of the other for employment on their own behalf or on behalf of others, including, without limitation, their Affiliates. In addition, for a period of one year from the expiration of the Sublease, unless or until Seller has ceased doing business, Purchaser shall not solicit the employees of Seller. Section 11.11 Governing Law. IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE OBLIGATIONS OF EACH PARTY ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS EXECUTED IN AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES THEREOF REGARDING CONFLICT OF LAWS, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. Section 11.12 Dispute Resolution; Arbitration. Any controversy or claim (for purposes of this Section 11.12, an "Issue") arising out of or relating to this Agreement (including without limitation its enforcement or interpretation, or because of an alleged breach, default, or misrepresentation in connection with any of its provisions) or any of the Ancillary Agreements, shall be subject to the following process, in order: (a) The Issue shall be presented to an officer of Purchaser and Jerry Goedicke for review and deliberation. If such persons agree on an appropriate remedy, Purchaser and Seller agree to be bound by such remedy. If not, then (b) The Issue shall be presented to the President or Chief Executive Officer of Purchaser, the Senior Engineer of Purchaser, Jerry Goedicke and James Hockett. If a majority of such persons agree on an appropriate remedy, Purchaser and Seller agree to be bound by such remedy. If not, then (c) The Issue shall be subject to non-binding mediation. The mediator shall be selected by mutual agreement of Purchaser and Seller. If no mediator can be mutually agreed, then each of Purchaser and Seller shall select a mediator, and those mediators shall select a third mediator. If no agreement can be reached in mediation, then 32 (d) The Issue shall be submitted to arbitration, to be held in Orange County, California, in accordance with California Civil Procedure Code ss.ss. 1282-1284.2. In the event either party institutes mediation or arbitration under this Agreement, the party prevailing in any such mediation or arbitration shall be entitled, in addition to all other relief, to reasonable attorneys' fees relating to such mediation or arbitration. The non-prevailing party shall be responsible for all costs of the mediation or arbitration, including but not limited to, the mediation or arbitration fees, court reporter fees, etc. In the event that a party hereto seeks an injunctive or equitable remedy under this Agreement or the Ancillary Agreements, then a proceeding therefor may be commenced and maintained in Orange County Superior Court in California. The parties consent to and waive all objections to such jurisdiction. Section 11.13 Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. Signatures may be transmitted via facsimile. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 33 IN WITNESS WHEREOF, Seller and Purchaser have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. APPLICATION PARTNERS, INC. By_____________________________ /s/Jerry Goedicke President 210 Porter Drive, Suite 120 San Ramon, CA 94583 Attention: Jerry Goedicke Telephone: (925) 552-8230 Telecopy: (925) 552-8231 FILENET CORPORATION By_____________________________ /s/Bruce Waddington Executive Vice President 3565 Harbor Boulevard Costa Mesa, CA 92626 Attention: Mary Carrington Telephone: (714) 327-3956 Telecopy: (714) 327-3232 ANNEX A DESCRIPTION OF BUSINESS/LIST OF ASSETS I. Division: Division shall mean the development, manufacture and distribution of all products listed in Part IV of this Annex A (the "Products") II. Included Assets: The Assets include all assets and property used in, or necessary for the operation of, the Division, including, without limitation goodwill, intangible assets and the assets and property described below: Approvals shall mean all permits, authorizations, licenses (including software licenses) and other governmental and third party rights and privileges necessary for proper ownership and operation of the Assets and/or the Division. Contracts shall mean any and all contracts and other rights used in, or necessary for the ongoing operation of the Assets and/or the Division, including the sublease attached as Exhibit C and the assumption of the agreement with AAA (Missouri) attached as Exhibit B . Documents shall mean all books, records, diskettes or other electronics media, logos and manuals owned or, to the extent legally transferable, related to proper ownership and operation of the Assets and/or the Division (subject to sharing and copyright rights). Such documentation shall be delivered to Purchaser in electronic form on the Closing Date. Equipment shall mean all furniture, fixtures and all equipment used for the operation of the Assets and/or the Division (including remanufactured equipment) including without limitation the equipment listed on Annex A-1. Intellectual Property means that Intellectual Property (as such term is defined in Article I of the Agreement) used primarily in connection with the ownership and operation of the Assets and/or Division including, but not limited to, the patents, copyrights, logos and other Intellectual Property listed on Annex A-2. Intellectual Property shall be delivered to Purchaser in electronic form on the Closing Date. Sequis Computers shall mean all personal computers and computer-related equipment and related supplies owned or, to the extent legally transferable, used by Seller which are located at the real property Asset locations and support the Assets and/or are necessary to operate the Division. III. Excluded Assets. The Assets shall exclude those assets not identified above. IV. Products: Sequis(TM) Sequis is a web based work portal for managing the flow of work through insurance carriers, agents, customers, and suppliers. Sequis includes the following modules (described with their commercial names): Sequis Work Portal (Web Desktop); Sequis Web Server (Web Server with Application Layer); Sequis Data Server (Relational Database Server); Sequis Administration (System Administration, Configuration and Security); Sequis Scan (FileNET Scanning Upgrade); Sequis Media Blender (Industrial strength image and media routing); and Sequis WorkFlo: FileNET Visual WorkFlo Middleware. See Schedule 2.07(a)(i) for specific technical and functional information regarding the Sequis program. ANNEX A-1 EQUIPMENT INCLUDED IN PURCHASED ASSETS ANNEX A-2 TRADEMARKS AND LOGOS INCLUDED IN PURCHASED ASSETS Sequis(TM) Logo Attached ANNEX A-3 INTELLECTUAL PROPERTY INCLUDED IN PURCHASED ASSETS 1. Sequis software, including source code and object code. 2. Sequis trademark, including the name "Sequis" and the related logo included in Annex A-2. ANNEX B ALLOCATION OF PURCHASE PRICE Plant, property and equipment US$ 77,296.64 Assumed Liabilities (4,817.59) Intangible Assets, including Goodwill 19,926,890.95 Total $20,000,000.00 Schedule 2.07(a)(1) Release Readiness Objectives Schedule 2.07(a)(2) Workers to be Transferred By July 30, 2000 Quiping Lu Manoj Kumar Chandra Pradeep Sharma By October 1, 2000 Rekha Gupta Suraj Prakash Schedule 2.07(a)(3) Worker Retention Management Principals James Hockett Jun Huang Employee Software Engineers Rambabu Uppu Qiuping Lu Pradeep Sharma Rekha Gupta Eric Vonheim Wes Thompson Contract Software Engineers Parameswaran Pavar Parameswar Raidu Vuppu Manoj Kumar Chandra Suraj Prakash Siddharth Khare EX-27.1 3 0003.txt FINANCIAL DATA SCHEDULE
5 1000 6-MOS Dec-31-1999 Jun-30-2000 83,267 39,133 70,004 0 3,069 206,488 140,007 (96,232) 273,252 87,528 0 0 0 152,935 26,883 273,252 107,713 187,881 14,990 61,171 111,603 0 0 17,627 4,136 13,491 0 0 0 13,491 .40 .37
EX-27.2 4 0004.txt FINANCIAL DATA SCHEDULE - CORRECTED DATE
5 1000 3-MOS Dec-31-1999 Mar-31-2000 84,913 41,755 76,166 0 2,605 214,580 131,961 (92,462) 263,441 87,001 0 0 0 149,873 20,012 263,441 53,320 92,802 7,180 30,285 55,084 0 0 8,625 2,156 6,469 0 0 0 6,469 .19 .18
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