-----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, VYb5QI3cgeWDNShuUk5Iki4E8uKxZJ5IvLrQtPTz++/xfjAeEYG7l1+Qv+9IGO4z t+ZCCqB8f0BegvTyXDbQ6A== 0000706015-98-000017.txt : 19981123 0000706015-98-000017.hdr.sgml : 19981123 ACCESSION NUMBER: 0000706015-98-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 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: 98752913 BUSINESS ADDRESS: STREET 1: 3565 HARBOR BLVD CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7149663400 MAIL ADDRESS: STREET 1: 3565 HARBOR BLVD CITY: COSTA MESA STATE: CA ZIP: 926261420 10-Q 1 QUARTERLY REPORT FOR FILENET CORPORATION FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 0-15997 FILENET CORPORATION (Exact name of Registrant as specified in its charter) Delaware 95-3757924 - - ------------------------------ ---------------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 3565 Harbor Boulevard, Costa Mesa, CA 92626 - - ---------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (714) 966-3400 - - ---------------------------------------------------------------------- (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| As of October 31, 1998, there were 31,815,512 shares of the Registrant's common stock outstanding. FILENET CORPORATION Index Page Number - - -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION Item 1. Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997................. 3 Consolidated Statements of Operations for the three and nine month periods ended September 30, 1998 and 1997.................................................. 4 Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, 1998 and 1997.................................... 5 Consolidated Statements of Cash Flows for the nine month periods ended September 30, 1998 and 1997... 6 Notes to Consolidated Financial Statements..................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 10 PART II OTHER INFORMATION Item 1. Legal Proceedings.............................................. 19 Item 6. Exhibits and Reports on Form 8-K............................... 19 SIGNATURE...................................................... 20 INDEX TO EXHIBITS.............................................. 21 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements FILENET CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
September 30, December 31, 1998 1997 ---------------- ---------------- (Unaudited) ASSETS Current assets: Cash and short-term marketable securities $ 69,839 $ 63,944 Accounts receivable, net 62,149 61,283 Inventories 3,030 3,541 Prepaid expenses and other current assets 9,096 8,309 Deferred income taxes 5,885 6,439 ---------------- --------------- Total current assets 149,999 143,516 Property, net 37,452 27,587 Long-term marketable securities 12,454 7,826 Other assets 1,049 941 ---------------- --------------- Total assets $ 200,954 $ 179,870 ================ =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 16,606 $ 15,003 Accrued compensation 15,959 14,845 Unearned maintenance revenue 13,473 8,848 Accrued royalties 1,766 2,743 Other accrued liabilities 22,478 19,190 --------------- --------------- Total current liabilities 70,282 60,629 Deferred income taxes 460 430 Stockholders' equity: Preferred stock - $.10 par value; 7,000,000 shares authorized; none issued and outstanding Common stock - $.01 par value; 100,000,000 shares authorized; 31,686,928 and 31,121,676 shares outstanding at September 30, 1998 and December 31, 1997, respectively 143,567 130,741 Retained earnings 3,727 2,348 Accumulated other comprehensive income (2,515) (4,146) ---------------- --------------- 144,779 128,943 Treasury stock, at cost; 1,098,000 and 820,000 shares at September 30, 1998 and December 31, 1997, respectively (14,567) (10,132) ---------------- --------------- Total stockholders' equity 130,212 118,811 ---------------- --------------- Total liabilities and stockholders' equity $ 200,954 $ 179,870 ================ =============== See accompanying notes to consolidated financial statements.
3 FILENET CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ----------------------------------------------------------------------- 1998 1997 1998 1997 ---------------- ---------------- --------------- ----------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue: Software $ 36,128 $ 34,684 $ 123,777 $ 87,841 Service 29,763 23,713 82,702 65,206 Hardware 5,261 6,614 18,654 21,976 ---------------- --------------- ---------------- ----------------- Total revenue 71,152 65,011 225,133 175,023 Costs and expenses: Cost of software revenue 4,850 4,058 12,801 10,223 Cost of service revenue 18,712 14,010 52,025 40,906 Cost of hardware revenue 3,043 5,063 9,641 15,230 Research and development 12,915 9,613 36,808 29,346 Selling, general and administrative 40,877 30,624 115,030 91,411 Restructuring and other costs 6,000 --------------- --------------- -------------- ----------------- Total costs and expenses 80,397 63,368 226,305 193,116 --------------- --------------- -------------- ----------------- Operating income (loss) (9,245) 1,643 (1,172) (18,093) Other income, net 1,102 984 3,113 2,285 --------------- --------------- -------------- ----------------- Income (loss) before (8,143) 2,627 1,941 (15,808) income taxes Provision (benefit) for income taxes (2,364) 736 560 (4,425) --------------- --------------- -------------- ---------------- Net income (loss) $ (5,779) $ 1,891 $ 1,381 $ (11,383) ================ =============== ============== ================ Earnings (loss) per share: Basic $ (0.18) $ 0.06 $ 0.04 $ (0.38) Diluted $ (0.18) $ 0.06 $ 0.04 $ (0.38) Weighted average shares outstanding: Basic 31,526 30,512 30,843 30,331 Diluted 31,526 31,230 33,733 30,331
See accompanying notes to consolidated financial statements. 4 FILENET CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ------------------------------------- ----------------------------------- 1998 1997 1998 1997 ----------------- ---------------- ---------------- ---------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net income (loss) (5,779) 1,891 1,381 (11,383) ---------------- ---------------- ---------------- ---------------- Other comprehensive income: Foreign currency translation adjustments, net of tax (2,238) (1,371) 1,580 (5,190) Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period, net of tax (37) (66) 43 (75) Reclassification adjustment for gains (losses)included in net income, net of tax 7 ---------------- ---------------- ---------------- ---------------- Total other comprehensive income (loss) (2,275) (1,437) 1,630 (5,265) ---------------- ---------------- ---------------- ---------------- Comprehensive income (loss) (8,054) 454 3,011 (16,648) ================ ================ ================ ================
See accompanying notes to consolidated financial statements. 5 FILENET CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine Months Ended Sept. 30, ---------------------------------- 1998 1997 -------------- ---------------- (Unaudited) (Unaudited) Cash flows from operating activities: Net income (loss) 1,380 (11,383) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 11,090 9,947 Provision for doubtful accounts 694 264 Deferred income taxes 598 586 Changes in operating assets and liabilities, net of acquisition: Accounts receivable (388) 23,826 Inventories 511 3,395 Prepaid expenses and other current assets (714) 882 Accounts payable 1,463 (3,888) Accrued compensation 983 2,257 Unearned maintenance revenue 4,652 1,819 Accrued royalties (977) (2,029) Other 2,676 (7,316) -------------- ---------------- Net cash provided by operating activities 21,968 18,360 -------------- ---------------- Cash flows from investing activities: Proceeds from sale of equipment 446 407 Capital expenditures (21,117) (9,184) Purchases of marketable securities (25,601) (22,462) Proceeds from sales and maturities of marketable securities 37,044 26,921 -------------- ---------------- Net cash used by investing activities (9,228) (4,318) -------------- ---------------- Cash flows from financing activities: Proceeds from issuance of common stock 12,827 2,338 Common stock repurchased (4,435) - -------------- ---------------- Net cash provided by financing activities 8,392 2,338 -------------- ---------------- Effect of exchange rate changes on cash and cash equivalents 613 (2,108) -------------- ---------------- Net increase in cash and cash equivalents 21,745 14,272 Cash and cash equivalents, beginning of year 37,344 28,530 -------------- ---------------- Cash and cash equivalents, end of period 59,089 42,802 ============== ================ Supplemental cash flow information: Interest paid 67 187 Income taxes paid (refund) (281) 2,768
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 September 30, 1998 and the results of its operations, its comprehensive income and its cash flows for the three and nine month periods ended September 30, 1998 and 1997. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission ("SEC"), although the Company believes that the disclosures in the consolidated financial statements are adequate to ensure the information presented is not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 1998. The results of operations for the interim periods are not necessarily indicative of the operating results for the year. 2. In May 1998, the Company effected a two-for-one split of its common stock. All references in the consolidated financial statements to number of shares and per share amounts of the Company's common stock have been restated to reflect the split. 3. Certain reclassifications have been made to the prior year's consolidated financial statements to conform with the current year's presentation. 4. The following table is a reconciliation of the earnings and share amounts used in the calculation of basic earnings per share and diluted earnings per share for the three and six-month periods ended September 30, 1998.
Per Net Share (In thousands, except per share amounts) Income Shares Amount ------------ ---------- ----------- Three months ended September 30, 1998 Basic earnings per share $ (5,779) $ 31,526 $ (0.18) Effect of dilutive stock options 2,612 ------------ ---------- Diluted earnings per share $ (5,779) $ 34,138 $ (0.17) ============ ========== Three months ended September 30, 1997 Basic earnings per share $ 1,891 $ 30,512 $ 0.06 Effect of dilutive stock options - ------------ ---------- Diluted earnings per share $ 1,891 $ 30,512 $ 0.06 ============ ========== Nine months ended September 30, 1998 Basic earnings per share $ 1,380 $ 30,843 $ 0.04 Effect of dilutive stock options 2,890 ------------ ---------- Diluted earnings per share $ 1,380 $ 33,733 $ 0.04 ============ ========== Nine months ended September 30, 1997 Basic earnings per share $ (11,383) $ 30,331 $ (0.38) Effect of dilutive stock options - ------------ ---------- Diluted earnings per share $ (11,383) $ 30,331 $ (0.38) ============ ==========
7 5. In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires enterprises to report comprehensive income and its components in general-purpose financial statements. SFAS No. 130 is effective for the Company beginning January 1, 1998. Accordingly, the Company has prepared Statements of Comprehensive Income for the three and nine month periods ended September 30, 1998 and 1997 (restatement of prior year financial statements is required by SFAS No. 130). Accumulated other comprehensive income as of September 30, 1998 is comprised of the following:
Accumulated Unrealized Gain Other Foreign on Marketable Comprehensive (In thousands) Currency Items Securities Income ----------------- ----------------- ------------------ Balance, December 31, 1997 $ (4,121) $ (25) $ (4,146) Current period changes 1,586 44 1,630 ----------------- ----------------- ------------------ Balance, Sept. 30, 1998 $ (2,535) $ 19 $ (2,516) ================= ================= ==================
6. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which is effective for the year ending December 31, 1998. The Company has not yet determined the impact, if any, of adopting this standard on its financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal years beginning after June 15, 1999. SFAS 133 will require the Company to record all derivatives on the balance sheet at fair value. For derivatives that are hedges, changes in the fair value of derivatives will be offset by the change in fair value of the hedged assets, liabilities, or firm commitments. The Company has not yet determined the impact, if any, of adopting this standard on its financial statements. 7. In October 1994, Wang Laboratories, Inc. (Wang) filed a complaint in the United States District Court for the District of Massachusetts alleging that the Company is infringing five patents held by Wang (the FileNET Case). On June 23, 1995, Wang amended its complaint to include an additional related patent. On July 2, 1996, Wang filed a complaint in the same court alleging that Watermark, formerly a wholly-owned subsidiary that was merged into the Company, is infringing three of the same patents asserted in the initial complaint (the Watermark Case). On October 9, 1996, Wang withdrew its claim in the FileNET Case that one of the patents it initially asserted is infringed by the Company's products that were commercialized before the initial complaint was filed. Wang reserved the right to assert that patent against the Company's products commercialized after that date in a separate lawsuit. In March 1997, Eastman Kodak Company (Kodak) purchased the Wang imaging business unit that has responsibility for this litigation. The patents in the suit have been transferred to a Kodak subsidiary, Kodak Limited of England, which, in turn, has exclusively licensed them to another Kodak subsidiary, Eastman Software, Inc. in the United States (Eastman). On July 30, 1997, the court permitted Eastman and Kodak Limited of England to be substituted in the litigation in place of Wang. FileNET has moved for summary judgment on noninfringement as to each of the five patents in the suit, and for summary judgment of invalidity as to one of the patents. Eastman moved for summary judgment as to FileNET's unenforceability defense on one of the patents. A trial date has not been set. If it should be determined that the patents at issue in the litigation are valid and are infringed by any of the Company's products the Company will, depending on the product, redesign the infringing product or seek to obtain a license to market the product. There can be no assurance that the Company will be able to obtain such a license on acceptable terms. Based on the Company's analysis of these patents and their respective file histories, the Company believes that it has meritorious defenses to claims at issue; however, the ultimate outcome or any resulting potential loss cannot be determined at this time. On December 20, 1996, plaintiff Michael I. Goldman filed a class action complaint against the Company and certain of its officers and directors in the Superior Court of California, County of Orange (the Goldman State Action). The action was purportedly filed on behalf of a class of purchasers of the Company's common stock during the period October 19, 1995 through July 2, 1996. The plaintiff alleges that the Company and other defendants violated Cal. Corp. Code ss.ss. 25400 and 25500, Cal. Civ. Code ss.ss. 1709-1710 and Cal. Bus. & Prof. Code ss.ss. 17200 et seq. in connection with various public statements made by the Company and certain of its officers and directors during the putative class period. On September 30, 1998, the Court entered an order dismissing this action without prejudice. On April 1, 1997, plaintiff Michael I. Goldman filed another class action complaint against the Company and certain of its officers and directors in the United States District Court for the Central District of California (the Goldman Federal Action). The action purportedly was filed on behalf of the same class of purchasers of the Company's common stock as the Goldman State Action. The allegations contained in the Goldman Federal Action are very similar to the allegations contained in the Goldman State Action, except that the Goldman Federal Action asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5On September 23, 1998, the Court entered an order dismissing this action in its entirety without prejudice. On October 23, 1998, plaintiff Avram Gart filed a class action complaint against the Company and certain of its officers and directors in the Superior Court of California, County of Orange (the Gart State Action). The action was purportedly filed on behalf of a class of purchasers of the Company's common stock during the period January 13, 1998 through October 7, 1998. The plaintiff alleges that the Company and the other defendants violated Cal. Corp. Code ss.ss. 25400 and 25500 in connection with various public statements made by the Company and certain of its officers and directors during the putative class period. The complaint seeks unspecified compensatory damages, rescission, interest, attorneys' fees, expert witness fees and costs, and equitable or injunctive relief. The Company has not been served with the complaint. On October 27, 1998, plaintiff Thomas P. Nyquist filed a class action complaint against the Company and certain of its officers and directors in the United States District Court for the Central District of California (the Nyquist Federal Action). The action was purportedly filed on behalf of a class of purchasers of the Company's common stock during the period April 16, 1998 through October 7, 1998. The plaintiff alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 in connection with various public statements made by the Company and certain of its officers and directors during the putative class period. The complaint seeks unspecified compensatory damages, interest, attorneys' fees, expert witness fees and costs. The Company believes that all of the allegations contained in the Gart State Action and the Nyquist Federal Action are without merit and intends to defend the actions vigorously. The Company, in the normal course of business, is subject to various other legal matters. While the results of litigation and claims cannot be predicted with certainty, the Company believes that the final outcome of these other matters will not have a material adverse effect on the Company's consolidated results of operations or financial condition. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in Part I--Item 1 and Factors That May Affect Future Results in this item of this Quarterly Report, and with the audited consolidated financial statements and notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. Results of Operations Revenue
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- 1998 1997 Change 1998 1997 Change ---------- ---------- --------- ---------- ----------- --------- (Dollars in millions) Software revenue Domestic $ 22.2 $ 21.9 1% $ 78.4 $ 58.3 35% International 13.9 12.9 8% 45.3 29.6 53% ---------- ---------- ---------- ----------- Total software revenue $ 36.1 $ 34.8 4% $ 123.7 $ 87.9 41% ---------- ---------- ---------- ----------- Percentage of total revenue 51% 54% 55% 50% Service revenue Domestic $ 23.1 $ 17.9 29% $ 64.1 $ 49.8 29% International 6.7 5.8 16% 18.7 15.4 21% ---------- ---------- ---------- ----------- Total service revenue $ 29.8 $ 23.7 26% $ 82.8 $ 65.2 27% ---------- ---------- ---------- ----------- Percentage of total revenue 42% 36% 37% 37% Hardware revenue Domestic $ 4.1 $ 4.6 (11%) $ 13.6 $ 15.7 (13%) International 1.2 1.9 (37%) 5.0 6.2 (19%) ---------- ---------- ---------- ----------- Total hardware revenue $ 5.3 $ 6.5 (18%) $ 18.6 $ 21.9 (15%) ---------- ---------- ---------- ----------- Percentage of total revenue 7% 10% 8% 13% Total revenue Domestic $ 49.4 $ 44.4 11% $ 156.1 $ 123.8 26% International 21.8 20.6 6% 69.0 51.2 35% ---------- ---------- ---------- ----------- Total revenue $ 71.2 $ 65.0 10% $ 225.1 $ 175.0 29% ========== ========== ========== ===========
Software revenue from the licensing of the Company's software products increased 4% and 41% for the three and nine month periods, respectively, ended September 30, 1998 over the comparable periods of 1997. The increases were primarily attributable to an increase in the volume of product shipments, including the Company's Panagon product line which was released during the first quarter of 1998. Revenue in the third quarter of 1998 was impacted negatively by reduced add-on sales of the Company's Image Management System (IMS) line of products. The magnitude of the increase in year to date revenue over 1997 is partially attributable to weakness in orders during the first quarter of 1997 and is not indicative of future revenue growth. Service revenue consists of revenue from software maintenance services, professional services, training, repairs and supplies. Service revenue increased 26% and 27% for the three and nine month periods, respectively, ended September 30, 1998 over the comparable periods of 1997. The increases were attributable to increased maintenance revenue due to the growth of the Company's installed base and to increased demand for the Company's professional service offerings. 10 Hardware revenue is generated primarily from the sale of 12-inch optical storage and retrieval libraries (OSARs) and third-party hardware. Hardware revenue decreased by 18% and 15% for the three and nine month periods, respectively, ended September 30, 1998 from the comparable periods of 1997 primarily due to decreases in new orders experienced both domestically and internationally and the Company's focus on increasing its higher margin software revenues. The Company expects hardware revenue to continue to decline in both absolute dollars and as a percentage of total revenues as it continues to transition its business toward software and service-related revenue. International revenues constituted approximately 31% and 32% of total revenues in the three month periods ended September 30, 1998 and 1997, respectively. For the nine month periods ended September 30, 1998 and 1997, international revenues constituted approximately 31% and 29% of total revenues, respectively. The increases in the proportion of international revenues for the nine months ended September 30, 1998 is attributable to the higher level of growth experienced internationally. A portion of this growth is attributable to weakness in international orders during the first quarter of 1997 and is not indicative of future international revenue growth. Management expects that the Company's international operations will continue to account for a significant portion of total revenues. However, the ongoing global economic crisis could adversely affect international revenues. In addition, international revenues could be adversely affected if the U.S. dollar strengthens against international currencies. Cost of Revenue
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ---------------------------------- ---------------------------------- 1998 1997 Change 1998 1997 Change ---------- ---------- --------- ---------- ----------- --------- (Dollars in millions) Cost of software revenue $ 4.8 $ 4.0 20% $ 12.8 $ 10.2 25% Percentage of software revenue 13% 11% 10% 12% Cost of service revenue $ 18.7 $ 14.0 34% $ 52.0 $ 40.9 27% Percentage of service revenue 63% 59% 63% 63% Cost of hardware revenue $ 3.1 $ 5.1 (39%) $ 9.7 $ 15.2 (36%) Percentage of hardware revenue 58% 78% 52% 69% Total cost of revenue $ 26.6 $ 23.1 $ 74.5 $ 66.3 12% Percentage of total revenue 37% 36% 33% 38%
The cost of software revenue includes royalties paid to third parties and the cost of software distribution. The cost of software revenue as a percentage of software revenue for the three months ended September 30, 1998 increased to 13% from 11% for the comparable period in 1997. The increase was primarily due to increased third party royalty costs. The cost of software revenue as a percentage of software revenue for the nine months ended September 30, 1998 decreased to 10% from 12% for the comparable period in 1997. The decrease is primarily attributable to the low revenue levels in the first quarter of 1997 without a corresponding decrease in fixed distribution costs. Also contributing to the decrease was the fact that software localization costs which were classified as cost of revenue in 1997 have been classified as research and development in 1998. The cost of service revenue includes software support and professional services personnel, supplies, and the cost of third-party hardware maintenance. The cost of service revenue as a percentage of service revenue for the three month period ended September 30, 1998 increased to 63% from 59% in the comparable period of 1997. The increase is attributable to the higher proportion of lower margin professional services in the service revenue mix. The cost of hardware revenue includes the cost of manufacturing OSARs, third-party purchased hardware and the cost of hardware integration personnel. The cost of hardware revenue as a percentage of hardware revenue for the three month period ended September 30, 1998 decreased to 58% from 78% for the comparable period of 1997. For the nine month period ended September 30, 1998, cost of hardware revenue decreased to 52% from 69% for the comparable period of 1997. These decreases were due to improved product mix and a reduction in fixed manufacturing costs. Operating Expenses
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ---------------------------------- ---------------------------------- 1998 1997 Change 1998 1997 Change ---------- ---------- --------- ---------- ----------- --------- (Dollars in millions) Research and development $ 12.9 $ 9.6 34% $ 36.8 $ 29.3 26% Percentage of total revenue 18% 15% 16% 17% Selling, general and administrative $ 40.9 $ 30.6 34% $ 115.0 $ 91.4 26% Percentage of total revenue 57% 47% 51% 52%
Research and development expenses increased 34% and 26% for the three and nine month periods ended September 30, 1998, respectively, compared to the comparable periods of 1997. The increases were due to a general increase in salaries and recruiting costs necessitated by the intense competitive environment for software engineers; increase in cost of contract developers; and the inclusion of software localization costs in research and development in 1998. As a percentage of total revenue, research and development expenses increased to 18% for the three month period ended September 30, 1998 from 15% for the comparable period of 1997. The increase was attributable to lower revenue growth rates in the third quarter of 1998. As a percentage of total revenue, research and development expenses decreased to 16% for the nine month period ended September 30, 1998 from 17% for the comparable period of 1997. This decrease is primarily attributable to the effects of the lower revenue levels in the first quarter of 1997. The Company expects that competition for qualified technical personnel will remain intense for the foreseeable future and may result in higher levels of compensation expense for the Company. The Company believes that research and development expenditures, including compensation of technical personnel, are essential to maintaining its competitive position and expects these costs to continue to constitute a significant percentage of revenues. Selling, general and administrative expenses increased 34% and 26% for the three and nine month periods ended September 30, 1998, respectively, compared to the comparable periods of 1997. This increase was primarily due to overall increases in salaries, higher sales incentive compensation due to increased revenues a change in the sales channel mix, and increased marketing program costs. As a percentage of total revenue, selling, general and administrative expenses increased to 57% for the three months ended September 30, 1998 from 47% for the comparable period of 1997 primarily due to sales productivity growing at a lesser rate than sales related expenses. Provision for Income Taxes The Company's combined federal, state and foreign annual effective tax rate for the nine months ended September 30, 1998 was 29% (expense) compared to 28% (benefit) for the comparable period in 1997. Foreign Currency Fluctuations and Inflation The Company's performance can be affected by changes in foreign currency values relative to the U.S. dollar in relation to the Company's revenue and operating expenses. The impact to net income from foreign exchange transactions and hedging activities is immaterial for all periods reported. As of September 30, 1998, the Company had forward exchange contracts outstanding totaling approximately $5 million in 11 currencies. All of these contracts mature in three months. Other comprehensive income for the three and nine month periods ended September 30, 1998 reflects decreases of $2,238,000 and $1,580,000, respectively, in the unrealized loss due to foreign currency translation. These decreases were primarily attributable to unrealized gains associated with the strengthening of the Irish currency against the U.S. dollar during the respective periods. Management believes that inflation has not had a significant impact on the prices of the Company's products, the cost of its materials, or its operating results for the three and nine month periods ended September 30, 1998 and 1997. Other Financial Instruments The Company enters into forward foreign exchange contracts as a hedge against effects of fluctuating currency exchange rates on monetary assets and liabilities denominated in currencies other than the functional currency of the relevant entity. The Company is exposed to market risk on the forward exchange contracts as a result of changes in foreign exchange rates; however, the market risk should be offset by changes in the valuation of the underlying exposures. Gains and losses on these contracts, which equal the difference between the forward contract rate and the prevailing market spot rate at the time of valuation, are recognized in the consolidated statement of operations. The counterparties to these instruments are major financial institutions. The Company uses commercial rating agencies to evaluate the credit quality of the counterparties, and the Company does not anticipate a loss resulting from any credit risk of these institutions. Liquidity and Capital Resources At September 30, 1998, combined cash, cash equivalents and short- and long-term marketable securities totaled $82.3 million, an increase of $10.5 million from the end of 1997. Cash provided by operating activities during the nine months ended September 30, 1998 totaled $18.7 million and resulted primarily from an increase in unearned maintenance revenue related to growth in the Company's installed base; and additions to net income for depreciation and amortization expense. Cash used by investing activities totaled $9.2 million and was a result of capital expenditures offset by sales and maturities of marketable securities. Cash provided by financing activities totaled $8.4 million and was a result of proceeds received from the exercise of employee stock options and purchases under the employee stock purchase plan offset by the repurchase of 139,000 shares of the Company's common stock. Accounts receivable increased to $62.1 million at September 30, 1998 from $61.3 million at December 31, 1997. Days sales outstanding increased to 79 days as of September 30, 1998 from 72 days as of December 31, 1997. The increase is attributable to slower payments being experienced internationally and in the Company's reseller channel. Current liabilities increased to $70.3 million at September 30, 1998 from $60.6 million at December 31, 1997. The increase in current liabilities is primarily a result of increases in accounts payable, accrued incentive compensation, unearned maintenance revenue and cooperative marketing cost accruals. The Company has a $20 million unsecured line of credit with a commercial bank. This line of credit expires in May 1999 and is subject to the maintenance of certain financial covenants. The Company also has several borrowing arrangements with foreign banks which expire at various times during 1998 under which the Company may borrow approximately $2 million. As of September 30, 1998, there were no borrowings outstanding against any of the Company's credit lines. During the first quarter of 1998, the Company repurchased $4.4 million of its common stock, thereby completing its previously announced $10 million stock repurchase program. The Company anticipates that its present cash balances together with internally generated funds and credit lines will be sufficient to meet its working capital and capital expenditure needs for at least the next twelve months. Other Matters Year 2000 With the approach of the year 2000, the Company recognized that significant issues could arise in connection with the computer software products it licenses and the internal business systems which are essential to its operations. As a result, the Company implemented a year 2000 Integrity Program ("the Program") in 1997 to ensure that the Company's computer software products and internal business systems will function properly in the year 2000 and thereafter. The Program as it relates to the software products licensed by the Company includes year 2000 compliance testing and certification of certain existing software products. All new generations of the Company's software products will be released as year 2000 compliant. Not all current software products of the Company are year 2000 compliant and the Company does not plan to make them so. Upgraded, year 2000 compliant versions of such software products are being made available to customers and resellers who will then bear the responsibility for installing the upgraded software product in order to make their systems year 2000 compliant. Some of the Company's customers are running software product versions that are not year 2000 compliant. The Company has been encouraging such customers to migrate to current software product versions. It is possible that the Company may experience increased expenses in addressing migration issues for such customers. The Company's customer support organization initiated a program, Customer Service Profile 2000, to review the status of each Company's product currently installed at a customer location and it provided the same diagnostics to its resellers for their use at their customer locations. Customers who have support agreements with the Company have been directly informed as to whether or not the particular software products they have installed are year 2000 compliant. All customers are kept informed of the release of year 2000 compliant updates and upgrades via the Company's web site. Risks from the inability of any of the Company's software products to properly manage and manipulate data in the year 2000 could result in increased warranty costs, customer satisfaction issues, potential lawsuits and other costs and liabilities, as well as customers being unable to run software licensed from the Company and incurring significant costs from the resultant business interruption. Demand for the Company's software products could be adversely impacted to the extent customers and potential customers are temporarily distracted by their year 2000 remediation efforts, as it competes for information technology resources that have been diverted for such remedial efforts which may have higher priority than implementing document management systems. The Company has also initiated communications with its significant third party vendors of computer software with which the Company's systems interface or upon whom the Company's software products depend, in order to coordinate efforts with these outside third parties to minimize the extent to which its business will be vulnerable to such third parties' failure to remediate their own year 2000 issues. Although the Company's compliance testing utilizes the embedded third-party software as an essential part of its software being tested, the Program does not include certification of customer-developed applications which run on the Company's software products or third-party software which is incorporated in the Company's software products. Customers and third-party vendors will remain directly responsible for year 2000 compliance testing of their software. The Program also includes a review of all internal systems for year 2000 compliance. The Company's significant business systems (financial, operational, customer support) are under review and are either currently year 2000 compliant or will be upgraded and/or replaced so as to be year 2000 compliant by July 1999. All of the hardware and software deployed in the Company's technical infrastructure is either fully year 2000 compliant or is scheduled to be replaced with year 2000 compliant components by the end of 1998. The Company is also evaluating its environmental systems (heating, air conditioning, security) and intends to make all such systems year 2000 compliant by the end of 1998. To the extent possible, the Company will be developing and executing contingency plans designed to allow continued operation in the event of failure of the Company's or third parties' systems. For those business, infrastructure and environmental systems that are to be upgraded in order to achieve year 2000 compliance, the majority were already scheduled for upgrade for other business reasons and any additional implementation costs directly associated with the year 2000 problem are not material. Although the Company is not aware of any material operational issues or costs associated with preparing its software products and internal systems for the year 2000, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of the necessary systems and changes to address the year 2000 issues, and the Company's inability to implement such systems and changes could have an adverse effect on future results of operations. The costs of the Company's year 2000 project and the date on which the Company believes it will be completed are based on management's best estimates and include assumptions regarding third party modification plans. However, in particular due to the potential impact of third party modification plans, there can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. The foregoing statements are based upon management's best estimates at the present time, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. There can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the nature and amount of programming required to upgrade or replace each of the affected programs, and the success of the Company's external customers, resellers and vendors and suppliers in addressing the year 2000 issue. The EURO Conversion On January 1, 1999, eleven of the fifteen member countries of the European Union are scheduled to establish fixed conversion rates between their existing sovereign currencies and the EURO. These countries have agreed to adopt the EURO as their common legal currency on that date. The EURO will then trade on currency exchanges and be available for non-cash transactions. These countries will issue sovereign debt exclusively in EURO and will re-denominate outstanding sovereign debt. Effective on this date, these countries will no longer control their own monetary policies by directing independent interest rate for the legacy currencies. Instead, the authority to direct monetary policy, including money supply and official interest rates for the EURO, will be exercised by the new European Central Bank. Following introduction of the EURO, the legacy currencies are scheduled to remain legal tender in these countries as a denomination of the EURO between January 1, 1999 and January 1, 2002 (the "transition period"). During the transition period, public and private parties may pay for goods and services using either the EURO or the country's legacy currency on a "no compulsion, no prohibition" basis. However, conversion rates no longer will be computed directly from one legacy currency to another. Instead, a "triangulation" process will be applied whereby an amount denominated in one legacy currency first will be converted into an amount denominated in EURO, and the resultant EURO-denominated amount is converted into the second legacy currency. The Company is in the process of evaluating the impact the conversion to the EURO will have on its financial condition and results of operations. Based on this evaluation to date, the Company currently does not believe there will be a material impact on its financial condition or results of operations as a result of the EURO conversion, except that the Company cannot currently assess the impact that a common EURO-based price list will have on how it markets its products in Europe nor the impact, if any, on revenues generated in Europe. Environmental Matters The Company is not aware of any issues related to environmental matters that have, or are expected to, materially affect its business. Factors That May Affect Future Results The Company's business, financial condition, operating results and prospects can be impacted by a number of factors, including but not limited to those set forth below and elsewhere in this report, any one of which could cause the Company's actual results to differ materially from recent results or from the Company's anticipated future results. Rapid Technological Change; Product Development The market for the Company's products is characterized by rapid technological developments, evolving industry standards, changes in customer requirements and frequent new product introductions and enhancements. The Company's continued success will be dependent upon its ability to continue to enhance its existing products, develop and introduce, in a timely manner, new products incorporating technological advances and respond to customer requirements, including without limitation enhancements to certain specified Company software products to achieve year 2000 compliance. The Company could experience difficulties or delays in developing and introducing new products or integrating some or all of the technologies and products from acquisitions, with the technologies and products from the Company. Delays in or non-completion of the development of newly integrated products, or lack of market acceptance of such products, could have an adverse impact on the Company's future results of operations and result in a failure to realize the anticipated benefits of the acquisitions. To the extent one or more of the Company's competitors introduce products that more fully address customer requirements, the Company's business could be adversely affected. There can be no assurance that the Company will be successful in developing and marketing enhancements to its existing products or new products on a timely basis or that any new or enhanced products will adequately address the changing needs of the marketplace. If the Company is unable to develop and introduce new products or enhancements to existing products in a timely manner in response to changing market conditions or customer requirements including without limitation enhancements to certain existing software products to achieve year 2000 compliance, the Company's business and operating results could be adversely affected. From time to time, the Company or its competitors may announce new products, capabilities or technologies that have the potential to replace or shorten the life cycles of the Company's existing products. There can be no assurance that announcements of currently planned or other new products will not cause customers to delay their purchasing decisions in anticipation of such products, which could have a material adverse effect on the Company's business and operating results. Uncertainty Of Future Operating Results; Fluctuations In Quarterly Operating Results Prior growth rates in the Company's revenue and operating results should not necessarily be considered indicative of future growth or operating results. Future operating results will depend upon many factors, including the demand for the Company's products, the effectiveness of the Company's efforts to continue to integrate various products it has developed or acquired through acquisition of others and to achieve the desired levels of sales from such product integration, the level of product and price competition, the length of the Company's sales cycle, improvements in the productivity of the Company's sales force, seasonality of individual customer buying patterns, the size and timing of individual transactions, the delay or deferral of customer implementations, the budget cycles of the Company's customers, the timing of new product introductions and product enhancements by the Company and its competitors, the mix of sales by products, services and distribution channels, levels of international sales, acquisitions by competitors, changes in foreign currency exchange rates including EURO exchange rates beginning in 1999, the ability of the Company to develop and market new products and control costs, and general domestic and international economic and political conditions. As a result of these factors, revenues and operating results for any quarter are subject to variation and are not predictable with any significant degree of accuracy. Therefore, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Moreover, such factors could cause the Company's operating results in a given quarter to be below the expectations of public market analysts and investors. In either case, the price of the Company's common stock could be materially adversely affected. Competition The document imaging, workflow, computer output to laser disk and document management software markets are highly competitive, and there are certain competitors of the Company with substantially greater sales, marketing, development and financial resources. The Company believes that the competitive factors affecting the market for its products and services include vendor and product reputation; product quality, performance and price; the availability of products on multiple platforms; product scalability; product integration with other enterprise applications; product functionality and features; product ease-of-use; and the quality of customer support services and training. The relative importance of each of these factors depends upon the specific customer involved. While the Company believes it competes favorably in each of these areas, there can be no assurance that it will continue to do so. Moreover, the Company's present or future competitors may be able to develop products comparable or superior to those offered by the Company, offer lower priced products or adapt more quickly than the Company to new technologies or evolving customer requirements. Competition is expected to intensify. In order to be successful in the future, the Company must respond to technological change, customer requirements and competitors' current products and innovations. There can be no assurance that it will be able to continue to compete effectively in its market or that future competition will not have a material adverse effect on its business, operating results and financial condition. Intellectual Property and Other Proprietary Rights The Company's success depends in part on its ability to protect its proprietary rights to the technologies used in its principal products. The Company relies on a combination of copyrights, trademarks, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. There can be no assurance that the Company's existing or future copyrights, trademarks, trade secrets or other intellectual property rights will be of sufficient scope or strength to provide meaningful protection or commercial advantage to the Company. FileNET has no software patents. Also, in selling certain of its products, the Company relies on "shrink wrap" licenses that are not signed by licensees and, therefore, may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. There can be no assurance that such factors would not have a material adverse effect on the Company's business or operating results. The Company may from time to time be notified that it is infringing certain patent or intellectual property rights of others. Combinations of technology acquired through past or future acquisitions and the Company's technology will create new products and technology that may give rise to claims of infringement. While no actions other than the ones discussed below are currently pending against the Company for infringement of patent or other proprietary rights of third parties, there can be no assurance that third parties will not initiate infringement actions against the Company in the future. Infringement actions can result in substantial cost to and diversion of resources of the Company. If the Company were found to infringe upon the rights of others, no assurance can be given that licenses would be obtainable on acceptable terms or at all, that significant damages for past infringement would not be assessed or that further litigation relative to any such licenses or usage would not occur. The failure to successfully defend any claims or obtain necessary licenses or other rights, the ultimate disposition of any claims or the advent of litigation arising out of any claims of infringement, could have a material adverse effect on the Company's business, financial condition or results of operations. In October 1994, Wang filed a complaint in the United States District Court for the District of Massachusetts alleging that the Company is infringing five patents held by Wang. On June 23, 1995, Wang amended its complaint to include an additional related patent. On July 2, 1996, Wang filed a complaint in the same court alleging that Watermark, formerly a wholly-owned subsidiary that was merged into the Company, is infringing three of the same patents asserted in the initial complaint. On October 9, 1996, Wang withdrew its claim that one of the patents it initially asserted is infringed by the Company's products which were commercialized before the initial complaint was filed. Wang reserved the right to assert that patent against the Company's products commercialized after that date in a separate lawsuit. Based on the Company's analysis of these Wang patents and their respective file histories, the Company believes that it has meritorious defenses to Wang's claims; however, the ultimate outcome or any resulting potential loss cannot be determined at this time. In March 1997, Eastman Kodak Company ("Kodak") purchased the Wang imaging business unit that has responsibility for this litigation. The patents in the suit have been transferred to a Kodak subsidiary, Kodak Limited of England, which in turn has exclusively licensed them to another Kodak subsidiary, Eastman Software, Inc. in the United States. On July 30, 1997, the Court permitted Eastman Software, Inc. and Kodak Limited of England to be substituted in the litigation in place of Wang. The Company cannot predict what impact, if any, this will have on the litigation. If it should be determined that the patents at issue in the litigation are valid and are infringed by any of the Company's products, including Watermark products, the Company will, depending on the product, redesign the infringing products or seek to obtain a license to market the products. There can be no assurance that the Company will be able to obtain such a license on acceptable terms. Dependence On Certain Relationships The Company has entered into a number of co-marketing relationships with other companies such as Microsoft Corporation, Compaq Computer Corporation, SAP AG, Hewlett-Packard Company and Sun Microsystems, Inc. There can be no assurance that these companies will not reduce or discontinue their relationships with or support of the Company and its products. Dependence On Key Management and Technical Personnel The Company's success depends to a significant degree upon the continued contributions of its key management, marketing, technical and operational personnel. In general, the Company does not utilize employment agreements for its key employees. The loss of the services of one or more key employees could have a material adverse effect on the Company's operating results. The Company also believes its future success will depend in large part upon its ability to attract and retain additional highly skilled management, technical, marketing, product development and operational personnel. Competition for such personnel, particularly engineers and other technical personnel, is intense, and pay scales in the Company's industry are increasing. There can be no assurance that the Company will be successful in attracting and retaining such personnel. International Sales Historically, the Company has derived approximately one-third of its total revenues from international sales. International business is subject to certain risks including varying technical standards, tariffs and trade barriers, political and economic instability, reduced protection for intellectual property rights in certain countries, difficulties in staffing and maintaining foreign operations, difficulties in managing foreign distributors, varying requirements for localized product, potentially adverse tax consequences, currency exchange fluctuations including those related to the EURO beginning in 1999, the burden of complying with a wide variety of complex operations, foreign laws, regulations and treaties and the possibility of difficulties in collecting accounts receivable. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business or operating results. Product Liability The Company's license agreements with customers typically contain provisions designed to limit their exposure to potential product liability claims. However, it is possible that such limitation of liability provisions may not be effective under the laws of certain jurisdictions. Although the Company has not experienced any product liability claims to date, the sale and support of products may entail the risk of such claims, and there can be no assurance that the Company will not be subject to such claims in the future. A successful product liability claim brought against the Company could have a material adverse effect upon the Company's business, operating results and financial condition. Stock Price Volatility The Company believes that a variety of factors could cause the trading price of its common stock to fluctuate, perhaps substantially, including quarter-to-quarter variations in operating results; announcements of developments related to its business; fluctuations in its order levels; general conditions in the technology sector or the worldwide economy; announcements of technological innovations, new products or product enhancements by the Company or its competitors; key management changes; changes in joint marketing and development programs; developments relating to patents or other intellectual property rights or disputes; and developments in the Company's relationships with its customers, distributors and suppliers. In addition, in recent years the stock market in general, and the market for shares of high technology stocks in particular, has experienced extreme price fluctuations which have often been unrelated to the operating performance of affected companies. Such fluctuations could adversely affect the trading price of the Company's common stock. PART II. OTHER INFORMATION Item 1. Legal Proceedings See Notes to Consolidated Financial Statements. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - The list of exhibits contained in the accompanying Index to Exhibits is herein incorporated by reference. (b) No reports on Form 8-K were filed during the third quarter of 1998. 19 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FILENET CORPORATION November 16, 1998 By:___________________________________________ Date Mark S. St. Clare, Chief Financial Officer and Sr. Vice President, Finance (Principal Financial Officer) 20 INDEX TO EXHIBITS Exhibit No. Description ....................... ........................................................ 3.1* Restated Certificate of Incorporation, as amended (filed as Exhibit 3.1 to Form S-4 filed on January 26, 1996; Registration No. 333-00676). 3.1.1* Certificate of Amendment of Restated Certificate of Incorporation (filed as Exhibit 3.1.1 to Form S-4 filed on January 26, 1996, Registration No. 333-00676). 3.2* Bylaws (filed as Exhibit 3.2 of the Registrant's registration statement on Form S-1, Registration No. 33-15004 (the "Form S-1")). 4.1* Form of certificate evidencing Common Stock (filed as Exhibit 4.1 to the Form S-1, Registration No. 33-15004). 4.2* Rights Agreement, dated as of November 4, 1988 between FileNET Corporation and the First National Bank of Boston, which includes the form of Rights Certificate as Exhibit A and the Summary of Rights to Purchase Common Shares as Exhibit B (filed as Exhibit 4.2 to Form S-4 filed on January 26, 1996; Registration No. 333-00676). 4.3 Amendment One dated July 31, 1998 and Amendment Two dated November 9, 1998 to Rights Agreement, between FileNET Corporation and BANKBOSTON N.A., formerly known as the First National Bank of Boston. 10.1* Second Amended and Restated Credit Agreement (Multicurrency) by and among the Registrant and Bank of America National Trust and Savings Association dated June 25, 1997, effective June 1, 1997 (filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 1997). 10.2* Business Alliance Program Agreemen between the Registrant and Oracle Corporation date July 1, 1996, as amended by Amendment One thereto (filed as Exhibit 10.4 to Form 10-QA for the quarter ended June 30, 1996). 10.3* Runtime Sublicense Addendum between the Registrant and Oracle Corporation dated July 1, 1996, as amended by Amendment One thereto (filed as Exhibit 10.4 to Form 10-QA for the quarter ended June 30, 1996). 10.3.1 Runtime Sublicense Addendum between the Registrant and Oracle Corporation dated July 1, 1996, as amended by Amendment Two through Six herein. 10.4* Full Use and Deployment Sublicense Addendum between the Registrant and Oracle Corporation dated July 1, 1996, as amended by Amendment One thereto (filed as Exhibit 10.4 to Form 10-QA for the quarter ended June 30, 1996). 10.5* Lease between the Registrant and C. J. Segerstrom & Sons for the headquarters of the Company, dated April 30, 1987 (filed as Exhibit 10.19 to the Form S-1). 10.6* Third Amendment to the Lease between the Registrant and C.J. Segerstrom & Sons dated April 30, 1987, for additional facilities at the headquarters of the Company, dated October 1, 1992 (filed as Exhibit 10.7 to Form 10-K filed on April 4, 1997). 10.7* Fifth Amendment to the Lease between the Registrant and C.J. Segerstrom & Sons dated April 30, 1987, for the extension of the term of the lease dated March 28, 1997 (filed as Exhibit 10.8 to Form 10-Q for the quarter ended March 31, 1997). 10.8* 1989 Stock Option Plan for Non-Employee Directors of FileNE Corporation, as amended by the First Amendment, Second Amendment, Third Amendment thereto (filed as Exhibit 10.9 to Form S-4 filed on January 26, 1996; Registration No. 333-00676). 10.9* Amended and Restated 1995 Stock Option Plan of FileNET (filed as Exhibit 99.1 to Form S-8 filed on November 9, 1998; Registration No. 333-66997). - - -------------------------------------------- * Incorporated herein by reference 21 Exhibit No. Description ....................... ........................................................ 10.10* Second Amended and Restated Stock Option Plan of FileNET Corporation, together with the forms of Incentive Stock Option Agreement and Non-Qualified Stock Option Agreements (filed as Exhibits 4(a), 4(b) and 4(c), respectively, to the Registrant's Registration Statement on Form S-8, Registration No. 33-48499), and an Amendment thereto (filed as Exhibit 4(d) to the Registrant's Registration Statement on Form S-8, Registration No. 33-69920), and the Second Amendment thereto (filed as Appendix A to the Registrant's Proxy Statement for the Registrant's 1994 Annual Meeting of Stockholders, filed on April 29, 1994). 10.11* Non-Statutory Stock Option Agreement (with Notice of Grant of Stock Option and Special Addendum) between Registrant and Mr. Lee Roberts (filed as Exhibit 99.17 to Form S-8 on August 20, 1997). 10.12* Non-Statutory Stock Option Agreement (with Notice of Grant of Stock Option and Special Addendum) between Registrant and Mr. Ron Ercanbrack (filed as Exhibit 99.19 to Form S-8 on August 20, 1997). 10.13* Agreement for the Purchase of IBM products dated December 20, 1991 (filed on May 5, 1992 with the Form 8 amending the Company's Form 10-K for the fiscal year ended December 31, 1991). 10.14* Amendment #A1011-941003-01 dated September 30, 1994, to the Agreement for the Purchase of IBM products dated December 20, 1991 (filed as Exhibit 10.12 to form 10-K for the fiscal year ended December 31,1996). 10.15* Developmen and Initial Supply Agreement between the Registrant and Quintar Company dated August 20, 1992 (filed as Exhibit 10.21 to Form 10-K for the year ended January 3, 1993). 10.16* Amendment dated December 22, 1992 to the Development and Initial Supply Agreement between the Registrant and Quintar Company dated August 20, 1992 (filed as Exhibit 10.22 to Form 10-K for the year ended January 3, 1993). 10.17* Product License Agreement between the Registrant and Novell, Inc. dated May 16, 1995 (filed as Exhibit 10.26 to Form 10-Q for the quarter ended July 2, 1995). 10.18* Agreement and Plan of Merger between the Registrant and Watermark Software Inc. dated July 18, 1995 (filed as Exhibit 10.27 to Form 10-Q for the quarter ended July 2, 1995). 10.19* Agreement and Plan of Merger between the Registrant and Saros Corporation, as amended, dated January 17, 1996 (filed as Exhibits 2.1, 2.2, 2.3, and 2.4 to Form 8-K on March 13, 1996). 10.20* Stock Purchase Agreement by and Among FileNET Corporation, IFS Acquisition Corporation, Jawaid Khan and Juergen Goersch dated January 17, 1996 and Amendment 1 to Stock Purchase Agreement dated January 30, 1996 (filed as Exhibit 10.2 to Form 10-K for the year ended December 31, 1995). 10.21* Amended and Restated FileNET Corporation 1998 Employee Stock Purchase Plan (filed as Exhibit 99.15 to Form S-8, filed on November 9, 1998; Registration No. 333-66997). 10.22* FileNET Corporation International Employee Stock Purchase Plan.(filed as Exhibit 99.16 to Form S-8, filed on November 9, 1998; Registration No. 333-66997). 27 Financial Data Schedule. - - --------------------------------------------- * Incorporated herein by reference 22 EX-4.3 2 AMENDMENTS 1 & 2 TO RIGHTS AGREEMENT (BANK OF BOS) AMENDMENT NO. 1 TO THE RIGHTS AGREEMENT Pursuant to Section 26 of the Rights Agreement (the "Rights Agreement") dated as of November 4, 1988, between FileNet Corporation, a Delaware corporation (the "Company"), and BankBoston, N.A., a national banking association formerly known as The First National Bank of Boston (the "Rights Agent"), the Company and the Rights Agent hereby amend the Rights Agreement as of July 31, 1998, as provided below. 1. Name Change of Rights Agent. All references in the Rights Agreement, and each of the Exhibits thereto, to the "The First National Bank of Boston" shall be deleted and replaced with "BankBoston, N.A." and all references to the "Rights Agent" shall mean BankBoston, N.A. 2. Certain Definitions. Section 1 of the Rights Agreement shall be amended as follows: (a) The definition of the term "Business Day" set forth in Section 1(d) of the Rights Agreement shall be amended in its entirety to read in full as follows: "Business Day" shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in the Commonwealth of Massachusetts are authorized or obligated by law or executive order to close. (b) The definition of the term "close of business" set forth in Section 1(e) of the Rights Agreement shall be amended in its entirety to read in full as follows: "close of business" on any given date shall mean 5:00 p.m., Eastern time, on such date; provided, however, that if such date is not a Business Day, it shall mean 5:00 p.m., Eastern time, on the next succeeding Business Day. 3. Appointment of Rights Agent. Section 2 of the Rights Agreement shall be amended as follows: (a) The second sentence in Section 2 of the Rights Agreement shall be amended in its entirety to read in full as follows: "The Company may from time to time appoint such Co-Rights Agents as it may deem necessary or desirable, upon ten (10) days' prior written notice to the Rights Agent." (b) The following sentence shall be added after the second sentence in Section 2 of the Rights Agreement: "The Rights Agent shall have no duty to supervise, and shall in no event be liable for, the acts or omissions of any such Co-Rights Agent." 4. Exercise of Rights; Purchase Price; Expiration Date of Rights. Sections 7(a) and 7(b) of the Rights Agreement are hereby amended in their entirety to read in full as follows: "Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights. (a) Subject to the final sentence of Section 23(a) hereof, the registered holder of any Right Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein) in whole or in part at any time after the Distribution Date upon surrender of the Right Certificate, with the form of election to purchase and certification on the reverse side thereof duly executed, to the Rights Agent at the office o f the Rights Agent designated for such purpose, together with payment of the Purchase Price for each Common Share as to which the Rights are exercised, at or prior to the earliest of (i) the close of business on November 17, 2008 (the "Final Expiration Date"), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (the "Redemption Date"), or (iii) the closing of any merger or other acquisition transaction involving the Company pursuant to an agreement of the type described in Section 1(c)(ii)(A)(2) hereof. (b) The Purchase Price for each Common Share pursuant to the exercise of a Right shall initially be $175, shall be subject to adjustment from time to time as provided in Sections 11, 13 and 26 hereof and shall be payable in lawful money of the United States of America in accordance with paragraph (c) below." 5. Concerning the Rights Agent. Section 18 of the Rights Agreement shall be amended by replacing the phrase "without negligence" with the phrase "without gross negligence." 6. Duties of Rights Agent. Section 20(c) of the Rights Agreement shall be amended by replacing the term "negligence" with the phrase "gross negligence." 7. Notices. The address to which notices or demands shall be given or made by the Company or the holder of a Right Certificate to or on the Rights Agent set forth in Section 25 of the Agreement shall be amended in its entirety to read in full as follows: BankBoston, N.A. c/o Boston Equiserve Limited Partnership 150 Royall Street Canton, MA 02021 Attention: Client Administration 8. Form of Right Certificate. Exhibit A to the Rights Agreement, the Form of Right Certificate ("Exhibit A"), shall be amended as follows: (a) The legend on the first page of Exhibit A shall be amended in its entirety to read as follows: "NOT EXERCISABLE AFTER NOVEMBER 17, 2008 OR EARLIER IF NOTICE OF REDEMPTION IS GIVEN OR IF THE COMPANY IS MERGER OR ACQUIRED PURSUANT TO AN AGREEMENT OF THE TYPE DESCRIBED IN SECTION 1(c)(ii)(A)(2) OF THE RIGHTS AGREEMENT. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES (SPECIFIED IN SECTION 11(a)(ii) OF THE RIGHTS AGREEMENT), RIGHTS BENEFICIALLY OWNED BY ACQUIRING PERSONS OR ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS CERTIFICATE WERE ISSUED TO A PERSON WHO WAS AN ACQUIRING PERSON OR AN ASSOCIATE OR AFFILIATE OF AN ACQUIRING PERSON OR A NOMINEE THEREOF. THIS RIGHT CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY HAVE BECOME NULL AND VOID AS SPECIFIED IN SECTION 11(a)(ii) OF THE RIGHTS AGREEMENT].1" (b) The first paragraph of Exhibit A shall be amended in its entirety to read in full as follows: "This certifies that _____________________, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement dated as of November 4, 1988 (the "Rights Agreement") between FileNet Corporation, a Delaware corporation (the "Company"), and the First National Bank of Boston, a national banking association, as Rights Agent (the "Rights Agent"), to purchase from the Company at any time after the Distribution Date and prior to 5:00 p.m. (local time) on November 17, 2008, at the offices of the Rights Agent, or its successors as rights Agent, designated for such purpose, one fully paid, nonassessable common share (the "Common Shares") of the Company, at a purchase price of $175 per share (the "Purchase Price"), upon presentation and surrender of this Right Certificate with the Form of Election to Purchase and certification duly executed. The number of Rights evidenced by this Right Certificate (and the number of shares which may be purchased upon exercise thereof) set forth above, and the Purchase Price set forth above, are the number and Purchase Price as of November 17, 1988, based on the Common Shares constituted at such date. Capitalized terms used in this Right Certificate without definition shall have the meanings ascribed to them in the Rights Agreement." 9. Summary of Rights to Purchase Common Shares. Exhibit B to the Rights Agreement, the Summary of Rights to Purchase Shares ("Exhibit B"), shall be amended as follows: (a) The last two sentences of the first paragraph of Exhibit B shall be amended in their entirety to read in full as follows: "Each Right entitles the registered holder to purchase from the Company one Common Share at a price of $175 per share (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and The First National Bank of Boston, as Rights Agent (the "Rights Agent"), as amended." (b) The first full paragraph on page B-2 of Exhibit B shall be amended in its entirety to read in full as follows: "The Rights are not exercisable until the Distribution Date. The Rights will expire on November 17, 2008 (the "Final Expiration Date"), unless earlier redeemed by the Company as described below." 10. Successors and Assigns. This Amendment No. 1 to the Rights Agreement shall remain in full force and effect and shall be binding upon each of the undersigned and any successors or assigns thereof. Except as modified herein, the Rights Agreement shall remain in full force and effect without change. FILENET CORPORATION By: ______________________________ Name: ______________________________ Title: ______________________________ Acknowledged and Agreed: BANKBOSTON, N.A., as Rights Agent By: _______________________________ Name: _______________________________ Title: _______________________________ AMENDMENT NO. 2 TO THE RIGHTS AGREEMENT Pursuant to Section 26 of the Rights Agreement (the "Rights Agreement") dated as of November 4, 1988, between FileNet Corporation, a Delaware corporation (the "Company"), and BankBoston, N.A., a national banking association formerly known as The First National Bank of Boston (the "Rights Agent"), as amended, the Company and the Rights Agent hereby amend the Rights Agreement as of November 9, 1998, as provided below. 1. Certain Definitions. Section 1 of the Rights Agreement shall be amended as follows: (a) The definition of Acquiring Person set forth in Section 1(a) shall be amended in its entirety to read in full as follows: "Acquiring Person" shall mean any Person (as such term is hereinafter defined) who or which, together with all Affiliates and Associates (as such terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of 15% or more of the Common Shares of the Company then outstanding but shall not include the Company, any Subsidiary of the Company or any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding shares of capital stock of the Company for or pursuant to the terms of any such plan, in its capacity as an agent or trustee for any such plan. (b) The definition of Continuing Director set forth in Section 1(g) shall be deleted in its entirety and replaced with the phrase "Intentionally Omitted." 2. Issue of Rights Certificates. The first two sentences in Section 3(a) of the Rights Agreement shall be amended in their entirety to read in full as follows: (a) "Subject to the second sentence of this Section 3(a), until the earlier of (i) the tenth day after the Shares Acquisition Date or (ii) the tenth day after the date of the commencement of, or first public announcement of the intent of any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding shares of capital stock of the Company for or pursuant to the terms of any such plan, in its capacity as an agent or trustee for any such plan) to commence, a tender or exchange offer the consummation of which would result in any Person becoming the Beneficial Owner of Common Shares aggregating more than 15% of the then outstanding Common Shares of the Company (including any such date which is after the date of this Rights Agreement; the earlier of (i) and (ii) being herein referred to as the "Distribution Date") (x) the Rights (unless earlier terminated, redeemed or expired) will be evidenced (subject to the provisions of paragraph (b) of this Section 3) by the certificates for Common Shares registered in the names of the holders thereof (which certificates for Common Shares shall also be deemed to be Rights Certificates (as such term is hereinafter defined)) and not by separate certificates, and (y) the Rights ( and the right to receive certificates therefor) will be transferable only in connection with the transfer of the underlying Common Shares. The preceding sentence, notwithstanding, prior to the Distribution Date specified therein (or such later Distribution Date as the Board of Directors of the Company may select pursuant to this sentence), the Board of Directors of the Company may postpone the Distribution Date beyond the earlier of the dates set forth in the preceding sentence." 3. Form of Rights Certificates. Section 4(b)(iii)(B) of the Rights Agreement shall be amended by replacing the phrase "a majority of the Continuing" with the phrase "the Board of." 4. Redemption. Section 23 of the Rights Agreement shall be amended as follows: (a) The proviso in the first sentence of subsection (a), which reads "provided, however, if the Board of Directors of the Company authorizes redemption of the Rights after the time a person becomes an Acquiring Person, then there must be Continuing Directors then in office and such authorization shall require the concurrence of a majority of such Continuing Directors," shall be deleted in its entirety. (b) The proviso in the second sentence of subsection (a), which reads "provided, however, there must be Continuing Directors then in office and any such extension shall require the concurrence of a majority of such Continuing Directors," shall be deleted in its entirety. 5. Supplements and Amendments. Subsection (ii) in the first sentence of Section 26 of the Rights Agreement shall be amended by deleting the phrase "(which shortening or lengthening, following the Shares Acquisition Date, shall be effective only if there are Continuing Directors and shall require the concurrence of a majority of such Continuing Directors)" in its entirety. 6. Form of Right Certificate. Exhibit A to the Rights Agreement, the Form of Right Certificate ("Exhibit A"), shall be amended as follows: (a) The last paragraph on Page A-3 (which continues onto page A-4) of Exhibit A shall be amended in its entirety to read in full as follows: "Subject to the provisions of the Rights Agreement, the Rights evidenced by this Right Certificate may be redeemed by the Company at its option at a redemption price of $.01 per Right at any time prior to (10) days after the Shares Acquisition Date. The period during which redemption of the Rights is permitted may be extended by the Board of Directors of the Company. " (b) The last paragraph on Page A-4 (which continues onto page A-5) of Exhibit A shall be amended in its entirety to read in full as follows: "The Company and the Rights Agent may from time to time supplement or amend the Rights Agreement without the approval of any holders of Right Certificates, to cure any ambiguity, to correct or supplement any provision contained therein which may be defective or inconsistent with any other provisions therein, to shorten or lengthen any time period thereunder, or, so long as the interests of the holders of Right Certificates (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person) are not adversely affected thereby, to make any other provisions in regard to matters or questions arising thereunder which the Company and the Rights Agent may deem necessary or desirable, including but not limited to extending the Final Expiration Date." 7. Summary of Rights to Purchase Common Shares. Exhibit B to the Rights Agreement, the Summary of Rights to Purchase Common Shares ("Exhibit B") shall be amended as follows: (a) The first two sentences of the second paragraph of Exhibit B shall be amended in their entirety to read in full as follows: "Until the earlier to occur of (i) ten (10) days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the Common Shares or (ii) ten (10) days following the commencement or announcement of an intention to make a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the Common Shares (the earlier of (i) and (ii) being called the "Distribution Date"), the Rights will be evidenced, with respect to any of the Common Share certificates outstanding as of the Record Date, by such Common Share certificate with a copy of this Summary of Rights attached thereto. The Rights Agreement provides that the Board of Directors may postpone the Distribution Date and that, until the Distribution Date, the Rights will be transferred with and only with the Common Shares." (b) The first sentence of the third full paragraph on page B-2 of Exhibit B shall be amended in its entirety to read in full as follows: "In the event that a person were to acquire 15% or more of the Common Shares or if the Company were the surviving corporation in a merger and its Common Shares were not changed or exchanged, each holder of a Right, other than the Rights that are or were acquired or beneficially owned by the 15% stockholder (which Rights will thereafter be void), will thereafter have the right to receive upon exercise that number of Common Shares having a market value of two times the exercise price of the Right." (c) The first full paragraph on page B-3 of Exhibit B shall be amended in its entirety to read in full as follows: "The Rights may be redeemed, in whole, but not in part, at a price of $.01 per Right (the "Redemption Price") by the Board of Directors at any time until ten (10) days following the public announcement that a person has become an Acquiring Person. The Board of Directors may extend the period during which the Rights are redeemable beyond the ten (10) days following the public announcement that a person has become an Acquiring Person. Immediately upon the action of the Board of Directors of the Company electing to redeem the Rights, the Company shall make an announcement thereof, and upon such election, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price." (d) The second full paragraph on page B-3 of Exhibit B shall be deleted in its entirety. (e) The last paragraph on page B-3 of Exhibit B shall be amended in its entirety to read in full as follows: "The Company and the Rights Agent may amend or supplement the Rights Agreement without the approval of any holders of Right Certificates to cure any ambiguity, to correct or supplement any provision contained therein which may be defective or inconsistent with any other provisions therein, to shorten or lengthen any time period under the Rights Agreement or, so long as the interests of the holders of Right Certificates (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person) are not adversely affected thereby, to make any other provisions in regard to matters or questions arising thereunder which the Company and the Rights Agent may deem necessary or desirable, including but not limited to extending the Final Expiration Date." 8. Successors and Assigns. This Amendment No. 2 to the Rights Agreement shall remain in full force and effect and shall be binding upon each of the undersigned and any successors or assigns thereof. Except as modified herein, the Rights Agreement shall remain in full force and effect without change. FILENET CORPORATION By: _____________________________ Name: __________________________ Title: __________________________ Acknowledged and Agreed: BANKBOSTON, N.A., as Rights Agent By: ______________________________ Name: ______________________________ Title:______________________________ EX-10.3.1 3 ADMENDMENTS 2-6 TO RUNTIME SUBLICENSE ADDENDUM AMENDMENT TWO to the RUNTIME SUBLICENSE ADDENDUM to the BUSINESS ALLIANCE PROGRAM AGREEMENT between FILENET CORPORATION and ORACLE CORPORATION This document ("Amendment Two") shall serve to amend the Runtime Sublicense Addendum between Filenet Corporation (the "Alliance Member") and Oracle Corporation ("Oracle") dated July 1, 1996 (the "Addendum"). The Addendum and this Amendment Two are governed by the terms of the Business Alliance between the Alliance Member and Oracle dated July 1, 1996 (the "Agreement"). The Addendum is amended as follows: 1. Notwithstanding any provision to the contrary in the Addendum and the Agreement, the Alliance Member shall have the right for five (5) years from the Effective Date of this Amendment One to the Sublicense to State Farm (the "Sublicensee") only, for installation in the Territory as defined in the Addendum, Runtime versions of the Programs listed below (the "Program Set") to be used by Concurrent Devices of such Sublicensee in conjunction with the Alliance Member's Application Program in the Alliance Member's Image Management System Application Package ("Image Management System"). Image Management System is described in the Application Package Attachment attached hereto. For each Sublicense of the Program Set granted pursuant to this Amendment, the Alliance Member shall pay to Oracle a Sublicense Fee of $xx per Concurrent Device subject to the minimum User Levels as specified in the Oracle Price List. Program Set Oracle7 Server 2. For up to five (5) years from the Effective Date of this Amendment One, if, as a result of adjustments to the then current Oracle price List or from future negotiations between the parties, the license price of the Program Set as specified in the then current Oracle Price List falls below the $xx per Concurrent Device, the price the Alliance Member shall pay to Oracle for such Sublicenses of the Program Set shall be at such lower license price, and the Alliance Member shall not receive any refund or credits of any kind. Other than the modifications set forth above, the terms and conditions of the Addendum remain unchanged and in full force and effect. The Effective Date of this Amendment Two is December 31, 1996. FILENET CORPORATION ORACLE CORPORATION By: /s/ By: /s/ ---------------------------- -------------------------- Name: William Kreidler Name: Monica M. Murnane ---------------------------- -------------------------- Title: V. P. Operations Title: Manager - West Region ---------------------------- Alliance Sales Support -------------------------- AMENDMENT THREE to the RUNTIME SUBLICENSE ADDENDUM to the BUSINESS ALLIANCE PROGRAM AGREEMENT between FILENET CORPORATION and ORACLE CORPORATION This document ("Amendment Three") shall serve to amend the Runtime Sublicense Addendum between Filenet Corporation (the "Alliance Member") and Oracle Corporation ("Oracle") dated July 1, 1996 (the "Addendum"). The Addendum and this Amendment Three are governed by the terms of the Business Alliance between the Alliance Member and Oracle dated July 1, 1996 (the "Agreement"). The Addendum is amended as follows: 1. "The parties agree that the Alliance Member has the right to Sublicense to State Farm (the "Sublicensee") Full Use and Runtime versions of Oracle7 Server subject to the terms and conditions of the Agreement. Pursuant to this Amendment Three, Alliance Member may grant to the Sublicense the right to use and install Full Use and Runtime licenses of Oracle7 Server on the same hardware, provide that: (i) Alliance Member pays to Oracle all applicable Full Use and Runtime Sublicense fees as required by the Agreement; (ii) Sublicensee shall only use Full Use licenses of Oracle7 Server to build or modify reports or applications, alone or in conjunction with the third-party program by BMC entitled "Patrol", and (iii) Sublicensee's Users may not use Runtime licenses of Oracle7 Server to run modified versions of the Alliance Member's Application Package." 2. In Section 2.1, delete the first sentence and replace it with the following: "For each copy of the Programs Sublicensed by the Alliance Member or its Distributor in the Application Package, the Alliance Member agrees to pay Oracle a Sublicense fee equal to xx% of the applicable license fee for each Oracle Server-Enterprise Edition Program, xx% of the applicable license fee for each Oracle Server Program, and xx% of the applicable license fee for any other Program, as specified in the applicable Price List and Alliance Member Price List supplement to such Price List in effect at the time the applicable Programs are Sublicensed. Other than the modifications set forth above, the terms and conditions of the Addendum remain unchanged and in full force and effect. The Effective Date of this Amendment Three is ________________, 1997. FILENET CORPORATION ORACLE CORPORATION By: /s/ By: /s/ ---------------------------- -------------------------- Name: W. Kreidler Name: Jason P. Jang ---------------------------- -------------------------- Title: Sr. Vice President Title: Contract Specialist ---------------------------- -------------------------- AMENDMENT FOUR to the RUNTIME SUBLICENSE ADDENDUM to the BUSINESS ALLIANCE PROGRAM AGREEMENT between FILENET CORPORATION and ORACLE CORPORATION This document ("Amendment Four") shall serve to amend the Runtime Sublicense Addendum between Filenet Corporation (the "Alliance Member") and Oracle Corporation ("Oracle") dated July 1, 1996 (the "Addendum"). The Addendum and this Amendment Four are governed by the terms of the Business Alliance between the Alliance Member and Oracle dated July 1, 1996 (the "Agreement"). The Addendum is amended as follows: 1. The Alliance Member shall have the right, for ninety (90) days from the Effective Date of this Amendment Four, to Sublease Oracle7 Server in conjunction with the Alliance Member's Application Package "Image Management System (IMS)" to Sublicenses who currently have a valid license for "Image Management System (IMS)" running on a Sybase database. The Sublicense fee for each User of Oracle 7 Server sublicensed under this Amendment Four shall be $xx. Other than the modifications set forth above, the terms and conditions of the Addendum remain unchanged and in full force and effect. The Effective Date of this Amendment Four is ________________, 1997. FILENET CORPORATION ORACLE CORPORATION By: /s/ By: /s/ ----------------------------- ------------------------- Name: W. Kreidler Name: Jason P. Jang ----------------------------- ------------------------- Title: Sr. Vice President Title: Contract Specialist ----------------------------- ------------------------- AMENDMENT FIVE to the RUNTIME SUBLICENSE ADDENDUM to the BUSINESS ALLIANCE PROGRAM AGREEMENT between FILENET CORPORATION and ORACLE CORPORATION This document ("Amendment Five") shall serve to amend the Runtime Sublicense Addendum between Filenet Corporation (the "Alliance Member") and Oracle Corporation ("Oracle") dated July 1, 1996 (the "Addendum"). The Addendum and this Amendment Five are governed by the terms of the Business Alliance between the Alliance Member and Oracle dated July 1, 1996 (the "Agreement"). The Addendum is amended as follows: 1. The Alliance Member shall have the right, until 1 year from the Effective Date of this Amendment Five or the end of the Term of the Addendum, whichever is earlier, to Sublicense the Runtime Program Oracle7 Server ("Oracle7 Server") in conjunction with the Alliance Member's Application Package "IMS" to Sublicenses who currently have a valid license for "IMS" running on the following operating systems and/or databases in order to replace such operating systems and/or databases with Oracle7 server: IIBM AS400 IBM MVS DB2 Optica Gupta/Proprietary WANG WIIS/PACE WANG Open Image Viewstar Gupta Viewstar Sybase Plexus Informix The Sublicense fee for each User of Oracle7 Server Sublicense under this Amendment Five shall be $xx for Sublicenses installed within the United States and $xx for Sublicenses installed outside of the United States in the Territory (as defined in Amendment One to the Addendum dated July 1, 1996). Other than the modifications set forth above, the terms and conditions of the Addendum remain unchanged and in full force and effect. The Effective Date of this Amendment Five is ________________, 1997. FILENET CORPORATION ORACLE CORPORATION By: /s/ By: /s/ --------------------------------- ---------------------- Name: William Kreidler Name: Jason P. Jang --------------------------------- ---------------------- Title: Sr. Vice President, Title: Contract Specialist --------------------------------- ---------------------- Customer Support and Operations AMENDMENT SIX to the RUNTIME SUBLICENSE ADEDENDUM to the BUSINESS ALLIANCE PROGRAM AGREEMENT between FILENET CORPORATION and ORACLE CORPORATION This document ("Amendment Six") shall serve to amend the Runtime Sublicense Addendum dated July 1, 1996 ("the Addendum") to the Business Alliance Program Agreement between Filenet Corporation (the "Alliance Member") and Oracle Corporation ("Oracle") dated July 1, 1996 (the "Agreement"). The parties shall agree to amend the Addendum as follows: 1. During the Term of the Addendum, the Alliance Member shall have the right to market and grant Sublicense of the Runtime versions of the Programs set forth below for use on Designated Systems in the Territory in conjunction with the Alliance Member's Document Services ("DS") Application Program and/or the Alliance Member's Integrated Document Management Services ("IDMS") Application Program pursuant to the terms of the Addendum and this Amendment. The DS Application Package Attachments attached hereto as Exhibit A. The Application Package Attachments attached herein as Exhibit A shall be deemed added to the Agreement and the Application Programs identified in such Addendum shall be included in the term "Application Program" as defined in the Agreement. Programs Oracle 7/8 Server (NT) Oracle 7/8 Server, Enterprise Edition (Unix) 2. After the first paragraph of Section 2.2 insert the following new paragraph: "All Sublicense fees for Sublicenses installed outside the United States shall be based on the standard list license fees for the Programs as set forth on the Oracle' Global Price List." 3. Notwithstanding, any other provision of the Addendum, including, without limitation, Section 2.3, the parties agree that the Alliance Member shall have the right to Sublicense the Runtime version of the Oracle Server Program with the DS Application Program and/or the IDMS Application Program based on the maximum number of authorized Simultaneous Logged-On Users for the applicable Application Package for installed on the applicable Designated System. For the purposes of Sublicensing under this Amendment, all references to Users in the Agreement of the Addendum shall be deemed to refer to Simultaneous Logged-On Users. "Simultaneous Logged-On Users" shall mean: the maximum number of input devices accessing Filenet's IDMS Application Package or DS Application Package at any given point in time. If multiplexing software or hardware (e.g. a TP monitor, webserver product) is used, this number must be measured at the multiplexing front-end. Notwithstanding anything to the contrary, the user minimums for the Oracle Programs, stated in the table in section 1 of this Amendment licensed by the Alliance Member as part of the Application Package shall be changed from 8 Concurrent users to 5 Simultaneous Logged on Users. 4. Delete the body of Section 4 in its entirety and insert the following: 4. TERRITORY The Alliance Member shall have the right to market and grant Sublicenses of Programs in the Application Package in all countries worldwide (the "Territory"), subject to the terms of this Section. Oracle may from time to time deny the Alliance Member the right to Sublicense in certain countries in the Territory in order to protect Oracle's interests if, in the reasonable opinion of Oracle's counsel, such countries (i) do not provide for Oracle's proprietary rights through copyright, trade secret, patent, or other laws; or (ii) have laws or regulations or the government has committed acts which in the opinion of Oracle's counsel, are injurious to Oracle's interest in the Programs. The Alliance member acknowledges that the Programs are subject to export controls imposed on Oracle and the Alliance Member by the U.S. Export Administration Act, United States Departments of Commerce, Treasury, and State regulations and directives, and other United States law ("Export laws"). The Alliance Member certifies that neither the Programs nor any direct product thereof are (i) exported, directly or indirectly, in violation of Export laws; or (ii) are intended to be used for any purposes prohibited by the Export laws, including, without limitation, nuclear, chemical, or biological weapons proliferation. Furthermore, the Alliance Member shall not transfer the Programs outside of the territory for which the Alliance Member has sublicense rights under this Agreement. The Alliance Member warrants that neither it nor its Distributors will grant Sublicenses in or ship any Programs to a country until it (or the Distributor) has completed all necessary government formalities in such country and upon reasonable request by Oracle, the Alliance Member (or its Distributor) provides evidence of completion of such formalities to Oracle. The Alliance Member will indemnify Oracle for any losses, costs, liability, and damages incurred by Oracle as a result of a failure by the Alliance Member or its Distributors to comply with the necessary government requirements in any country. The obligation under this Section shall survive the expiration or termination of this Addendum. Upon Oracle's reasonable request, the Alliance Member shall make records available to Oracle to allow to confirm the Alliance Member's compliance with this Section. 5. Notwithstanding any other provision in the Addendum, for each copy of the Oracle Server Runtime Programs Sublicensed by the Alliance Member or its Distributor in the DS Application Package or the IDMS Application Package for use in the Territory, the Alliance Member agrees to pay Oracle a Sublicense fee per each authorized Simultaneous Logged-On Users for the applicable Application Package as specified below based on the applicable operating system for the Designated System: Application Package Operating System Sublicense Fee IDMS Application Package Unix $xx NT $xx Application Package Operating System Sublicense Fee DS Application Package Unix $xx NT $xx 6. In addition, Alliance Member will provide quarterly reports to Oracle Alliances, detailing Oracle's marketshare versus non-Oracle databases for Alliance Member's Application Packages. 7. Upgrades from Filenet's IMS to IDMS Application Package for Sublicenses will be provided at no charge provided, (a) The same number of users are upgraded between Filenet's IMS and IDMS Application Package, (b) All royalties have been reported and are paid in full for the IMS users being upgraded and (c) The end users are currently being supported by Filenet for all Runtime Sublicenses. Other than the modifications set forth above, the terms and conditions of the Addendum and the Agreement remain unchanged and in full force and effect. The Effective Date of this Amendment Six is October 16, 1998. FILENET CORPORATION ORACLE CORPORATION By: /s/ By: /s/ ------------------------------- -------------------------- Name: W. Kreidler Name: Nick Marquis ------------------------------- -------------------------- Title: Sr. Vice President, Title: Manager, ------------------------------- -------------------------- Worldwide Services & Operations Alliances Sales Support EX-27 4 FINANCIAL DATA SCHEDULE
5 1000 9-MOS Dec-31-1998 Sep-30-1998 56,589 13,250 62,149 0 3,030 149,999 131,265 (93,813) 200,954 70,282 0 0 0 129,000 1,212 200,954 142,432 225,133 22,442 74,467 151,838 0 0 1,940 560 1,380 0 0 0 1,380 .04 .04
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