-----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, DiWXDV3zFhfxiVrGgcHmp/9FTwNQQMuQ7e35X0jd9IdvTAEuWOeRskk7yhjSBfrV EUymP1Cr5PzZ/K3J/UYCIQ== 0000706015-99-000012.txt : 19990816 0000706015-99-000012.hdr.sgml : 19990816 ACCESSION NUMBER: 0000706015-99-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FILENET CORP CENTRAL INDEX KEY: 0000706015 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 953757924 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15997 FILM NUMBER: 99686442 BUSINESS ADDRESS: STREET 1: 3565 HARBOR BLVD CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7149663400 MAIL ADDRESS: STREET 1: 3565 HARBOR BLVD CITY: COSTA MESA STATE: CA ZIP: 926261420 10-Q 1 QUARTERLY REPORT FOR FILENET CORPORATION FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 0-15997 FILENET CORPORATION (Exact name of Registrant as specified in its charter) Delaware 95-3757924 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3565 Harbor Boulevard, Costa Mesa, CA 92626 - ------------------------------------------------------------------------ (Address of principal executive offices) (Zip code) (714) 966-3400 - ------------------------------------------------------------------------ (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| As of July 30, 1999, there were 32,252,283 shares of the Registrant's common stock outstanding. FILENET CORPORATION Index Page Number - -------- ------------------------------------------------------------ ---------- PART I. FINANCIAL INFORMATION Item 1. Consolidated Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998......... 3 Consolidated Statements of Operations (unaudited) for the three and six month periods ended June 30, 1999 and 1998.................................................. 4 Consolidated Statements of Comprehensive Operations (unaudited)for the three and six month periods ended June 30, 1999 and 1998......................................... 5 Consolidated Statements of Cash Flows (unaudited) for the three and six month periods ended June 30, 1999 and 1998....................................................... 6 Notes to Consolidated Financial Statements (unaudited)......... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................. 19 Item 4. Submission of Matters to a Vote of Security Holders............ 19 Item 5. Other Information.............................................. 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) June 30, December 31, 1999 1998 --------------- --------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 57,496 $ 55,820 Short-term marketable securities 14,415 15,484 Accounts receivable, net 67,512 61,636 Inventories 3,115 2,419 Prepaid expenses and other current assets 7,731 8,865 ------------ ------------ Total current assets 150,269 144,224 Property, net 42,302 44,177 Long-term marketable securities 22,370 10,885 Deferred income taxes 6,433 6,385 Other assets 1,401 1,151 ------------ ------------ Total assets $ 222,775 $ 206,822 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 15,048 $ 21,022 Accrued compensation and benefits 22,456 22,165 Unearned maintenance revenue 21,830 11,238 Federal income tax payable 5,454 3,618 Deferred income taxes 953 942 Other accrued liabilities 22,868 17,517 ------------ ------------ Total current liabilities 88,609 76,502 Stockholders' equity: Preferred stock - $.10 par value; 7,000,000 shares authorized; none issued and outstanding Common stock - $.01 par value; 100,000,000 shares authorized; 33,240,573 and 32,924,950 shares outstanding at June 30, 1999 and December 31, 1998, respectively 146,581 144,242 Retained earnings 9,246 3,304 Accumulated other comprehensive operations (7,094) (2,659) ------------ ------------- 148,733 144,887 Treasury stock, at cost; 1,098,000 shares at June 30, 1999 and December 31, 1998 respectively (14,567) (14,567) ------------ ------------- Total stockholders' equity 134,166 130,320 ------------ ------------- Total liabilities and stockholders' equity $ 222,775 $ 206,822 ============ ============= See accompanying notes to consolidated financial statements. 3 FILENET CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30, -------------------------------- -------------------------------- 1999 1998 1999 1998 -------------- --------------- --------------- -------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue: Software $ 48,651 $ 44,403 $ 90,635 $ 87,650 Service 33,893 29,467 67,320 52,938 Hardware 3,545 6,502 9,576 13,393 ----------- ------------ ------------ ------------ Total revenue 86,089 80,372 167,531 153,981 ----------- ------------ ------------ ------------ Costs and expenses: Cost of software revenue 4,663 4,265 8,624 7,951 Cost of service revenue 20,515 16,967 40,819 31,313 Cost of hardware revenue 1,867 3,238 5,033 6,598 Research and development 13,234 11,820 26,336 23,894 Selling, general and administrative 40,746 38,585 80,191 76,152 ----------- ------------ ------------ ------------ Total costs and expenses 81,025 74,875 161,003 145,908 ----------- ------------ ------------ ------------ Operating income 5,064 5,497 6,528 8,073 Other income, net 499 1,031 1,960 2,010 ----------- ------------ ------------ ------------ Income before income taxes 5,563 6,528 8,488 10,083 Provision for income taxes 1,669 1,893 2,546 2,924 ----------- ------------ ------------ ------------ Net income $ 3,894 $ 4,635 $ 5,942 $ 7,159 =========== ============ ============ ============ Earnings per share: Basic $ 0.12 $ 0.15 $ 0.19 $ 0.23 Diluted $ 0.12 $ 0.14 $ 0.18 $ 0.21 Weighted average shares outstanding: Basic 32,066 30,801 31,990 30,501 Diluted 32,563 34,097 32,558 33,530 See accompanying notes to consolidated financial statements.
4 FILENET CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (In thousands)
Three Months Ended June 30, Six Months ended June 30, -------------------------------- -------------------------------- 1999 1998 1999 1998 -------------- --------------- -------------- --------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net income $ 3,894 $ 4,635 $ 5,942 $ 7,159 -------------- --------------- -------------- --------------- Other comprehensive income(loss): Foreign currency translation adjustments-1 (1,702) 1,064 (4,355) (657) Unrealized gains (losses) on securities: Unrealized holding gains (losses)-2 (64) 7 (80) 12 -------------- --------------- -------------- --------------- Total other comprehensive income (loss) (1,766) 1,071 (4,435) (645) -------------- --------------- -------------- --------------- Comprehensive income $ 2,128 $ 5,706 $ 1,507 $ 6,514 ============== =============== ============== =============== - --------------------------------------------------------------------------------- 1 net of tax effect of $1,135 and $(709) for the three months ended June 30, 1999 and 1998, respectively and net of tax benefit of $2,903 and $438 for the six months ended June 30, 1999 and 1998, respectively 2 net of tax effect of $43 and $(5) for the three months ended June 30, 1999 and 1998, respectively and net of tax effect of $53 and $(8) for the six months ended June 30, 1999 and 1998, respectively See accompanying notes to consolidated financial statements.
5 FILENET CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six Months Ended June 30, ------------------------------------ 1999 1998 ---------------- ---------------- Cash flows from operating activities: Net income $ 5,942 $ 7,159 Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 8,688 7,109 Provision for doubtful accounts 202 377 Deferred income taxes 59 575 Changes in operating assets and liabilities: Accounts receivable (9,263) (9,325) Inventories (695) 386 Prepaid expenses and other current assets 783 764 Accounts payable (5,687) 1,201 Accrued compensation and benefits 734 2,551 Unearned maintenance revenue 10,682 6,665 Federal income tax payable 1,845 4,782 Other 7,737 (4,552) ------------- ------------- Net cash provided by operating activities 21,027 17,692 ------------- ------------- Cash flows from investing activities: Proceeds from sale of equipment 1,313 422 Capital expenditures (8,898) (13,586) Purchases of marketable securities (28,048) (21,065) Proceeds from sales and maturities of marketable securities 15,600 24,113 ------------- ------------- Net cash used by investing activities (20,033) (10,116) ------------- ------------- Cash flows from financing activities: Proceeds from issuance of common stock 2,340 9,740 Common stock repurchased - (4,435) ------------- ------------- Net cash provided by financing activities 2,340 5,305 ------------- ------------- Effect of exchange rate changes on cash and cash equivalents (1,658) (124) ------------- ------------- Net increase in cash and cash equivalents 1,676 12,757 Cash and cash equivalents, beginning of year 55,820 37,344 ------------- -------------- Cash and cash equivalents, end of period $ 57,496 $ 50,101 ============= ============== Supplemental cash flow information: Interest paid $ 9 $ 60 Income taxes paid $ 46 $ 516 See accompanying notes to consolidated financial statements.
6 FILENET CORPORATION Notes To Consolidated Financial Statements (Unaudited) 1. In the opinion of the management of FileNET Corporation ("the Company"), the accompanying unaudited consolidated financial statements reflect adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of the Company at June 30, 1999 and the results of its operations, its comprehensive operations and its cash flows for the three and six month periods ended June 30, 1999 and 1998. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission ("SEC"), although the Company believes that the disclosures in the consolidated financial statements are adequate to ensure the information presented is not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and the Company's Quarterly Report on form 10-Q for the quarter ended March 31, 1999. The results of operations for the interim periods are not necessarily indicative of the operating results for the year. 2. In May 1998, the Company effected a two-for-one split of its common stock. All references in the consolidated financial statements to number of shares and per share amounts of the Company's common stock have been restated to reflect the split. 3. Certain reclassifications have been made to the prior year's consolidated financial statements to conform with the current year's presentation. 4. The following table is a reconciliation of the earnings and share amounts used in the calculation of basic earnings per share and diluted earnings per share for the three and six month period ended June 30, 1999.
Per Share (In thousands, except per share Net Income Shares Amount amounts) --------------------------------------- Three months ended June 30, 1999 Basic earning per share $ 3,894 32,066 $ 0.12 Effect of dilutive stock options 497 ------------ ----------- Diluted earnings per share $ 3,894 32,563 $ 0.12 ============ =========== Six months ended June 30, 1999 Basic earning per share $ 5,942 31,990 $ 0.19 Effect of dilutive stock options 568 ------------ ----------- Diluted earnings per share $ 5,942 32,558 $ 0.18 ============ ===========
5. In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires enterprises to report comprehensive income and its components in general-purpose financial statements. SFAS No. 130 was effective for the Company beginning January 1, 1998. Accordingly, the Company has prepared Consolidated Statements of Comprehensive Operations for the three and six month period ended June 30, 1999 and 1998. Accumulated other comprehensive operations as of June 30, 1999 is comprised of the following:
Accumulated Foreign Currency Unrealized Other Translation Holding Comprehensive (In thousands) Adjustment Gains (Losses) Operations ----------------- ----------------- ----------------- Balance, December 31, 1998 $ (2,667) $ 8 $ (2,659) Current period changes (4,355) (80) (4,435) ----------------- ----------------- ----------------- Balance, June 30, 1999 $ (7,022) $ (72) $ (7,094) ================= ================= =================
7 6. The Company has prepared operating segment information in accordance with SFAS 131 to report components that are evaluated regularly by the Company's chief operating decision-makers in deciding how to allocate resources and in assessing performance. The operating segments are managed separately because each segment represents a strategic business unit that offers different products or services. The results of the segments reflect allocation of certain functional expense categories consistent with its internal reporting which is not the same as GAAP reporting. Operating segments data for the three and six month periods ended June 30, 1999 compared to the same periods for 1998 is as follows:
Three months ended June 30, Six months ended June 30, In thousands 1999 1998 1999 1998 --------------------------- ------------------------- Software Revenue $ 48,651 $ 44,403 $ 90,635 $ 87,650 Operating income (loss) 931 286 (2,759) 321 Customer Support Revenue $ 20,506 $ 16,999 $ 40,051 $ 32,861 Operating income 3,588 2,839 7,510 4,463 Professional Services and Education Revenue $ 11,665 $ 9,555 $ 23,406 $ 15,498 Operating income (loss) (2) 878 185 654 Hardware Revenue $ 3,545 $ 6,502 $ 9,576 $ 13,393 Operating income 397 959 1,277 1,931 Other Revenue $ 1,722 $ 2,913 $ 3,863 $ 4,579 Operating income 150 535 315 704 Total Revenue $ 86,089 $ 80,372 $ 167,531 $ 153,981 Operating income 5,064 5,497 6,528 8,073
7. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, is effective for fiscal years beginning after June 15, 2000 and will require the Company to record all derivatives on the balance sheet at fair value. For derivatives that are hedges, changes in the fair value of derivatives will be offset by the change in fair value of the hedged assets, liabilities, or firm commitments. The Company believes the impact of adopting this standard will not be material to its results of operations or equity. The Company will continue to evaluate the early adoption of this pronouncement. 8. In October 1994, Wang Laboratories, Inc. (Wang) filed a complaint in the United States District Court for the District of Massachusetts alleging that the Company is infringing five patents held by Wang (the FileNET Case). On June 23, 1995, Wang amended its complaint to include an additional related patent. On July 2, 1996, Wang filed a complaint in the same court alleging that Watermark Software Inc., formerly a wholly owned subsidiary that was merged into the Company, is infringing three of the same patents asserted in the initial complaint (the Watermark Case). On October 9, 1996, Wang withdrew its claim in the FileNET Case that one of the patents it initially asserted is infringed. In March 1997, Eastman Kodak Company (Kodak) purchased the Wang imaging business unit that has responsibility for this litigation. On July 30, 1997, the Court permitted Eastman and Kodak Limited of England to be substituted in the litigation in place of Wang. 8 The Company has moved for summary judgement on noninfringement as to each of the five patents in the suit, and for summary judgment of invalidity as to one of the patents. Eastman moved for summary judgment as to the Company's unenforceability defense on one of the patents. In July 1998, the Magistrate Judge assigned to the case heard oral arguments on the Company's motion for summary judgement that U.S. Patent 4,918,588 is not infringed and is invalid. The Magistrate Judge has not yet decided these motions. The Company believes that after he has ruled on these motions, he will hear oral arguments in the remaining motions in the sequence in which they were filed. A trial date has not been set. If it should be determined that the patents at issue in the litigation are valid and are infringed by any of the Company's products, including Watermark products, the Company will, depending on the product, redesign the infringing products or seek to obtain a license to market the products. There can be no assurance that the Company will be able to successfully redesign the infringing products or obtain a license on acceptable terms. Based on the Company's analysis of these Eastman patents and their respective file histories, the Company believes that it has meritorious defenses to Eastman's claims; however, the ultimate outcome or any resulting potential loss cannot be determined at this time. On October 27, 1998, plaintiff Thomas P. Nyquist filed a class action complaint against the Company and certain of its officers and directors in the United States District Court for the Central District of California (the Nyquist 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 court has appointed the lead plaintiff and lead plaintiffs' counsel and consolidated all actions. On July 22, 1999, defendant filed a motion to dismiss the complaint in its entirely. The Company believes that all of the allegations contained in the Nyquist Action are without merit and intends to defend the actions vigorously; however, the ultimate outcome or any resulting potential loss cannot be determined at this time. Subsequent to December 31, 1998, the former shareholders of Saros Corporation filed a demand for mandatory arbitration to release approximately 0.2 million shares of the Company's stock which were held in escrow pursuant to the Agreement and Plan of Merger dated January 17, 1996 among FileNET Corporation, FileNET Acquisition Corporation and Saros Corporation and for damages. In August 1999, the Company and the Shareholders' Agent agreed to mediate the matter. The date for mediation has not been set. Nonwithstanding the foregoing, each party has selected an arbitrator and agreed upon a third neutral arbitrator in connection with arbitration. A date for arbitration, if needed, willnot be set until the mediation process is completed. The Company believes that it has meritorious reasons for not releasing the shares and other defenses to the claims; however, the ultimate or any resulting potential loss cannot be presently determined. The Company, in the normal course of business, is subject to various other legal matters. While the results of litigation and claims cannot be predicted with certainty, the Company believes that the final outcome of these other matters will not have a materially adverse effect on the Company's consolidated results of operations or financial condition. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in Part I--Item 1 and "Factors That May Affect Future Results" in this item of this Quarterly Report, and with the audited consolidated financial statements and notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. Results of Operations Revenue
Three Months Ended June 30, Six Months Ended June 30, ------------------------------------ ----------------------------------- (Dollars in millions) 1999 1998 % Change 1999 1998 % Change ------------ ----------- ---------- ------------ ---------- ----------- Software revenue Domestic $ 32.9 $ 26.7 23% $ 59.7 $ 56.2 6% International (11%) (1%) 15.8 17.7 31.0 31.4 ------------ ----------- ------------ ---------- Total software revenue $ 48.7 $ 44.4 10% $ 90.7 $ 87.6 4% ------------ ----------- ------------ ---------- Percentage of total revenue 57% 55% 54% 57% Customer Support Domestic $ 16.2 $ 13.3 22% $ 31.3 $ 25.7 22% International 4.3 3.7 16% 8.7 7.2 21% ------------ ----------- ------------ ---------- Total customer support revenue $ 20.5 $ 17.0 21% $ 40.0 $ 32.9 22% ------------ ----------- ------------ ---------- Percentage of total revenue 24% 21% 24% 21% Professional Services and Education Domestic $ 8.5 $ 7.6 12% $ 17.0 $ 11.3 50% International 3.2 1.9 68% 6.4 4.2 52% ------------ ----------- ------------ ---------- Total professional services and education revenue $ 11.7 $ 9.5 23% $ 23.4 $ 15.5 51% ------------ ----------- ------------ ---------- Percentage of total revenue 13% 12% 14% 10% Hardware revenue Domestic $ 2.3 $ 4.6 (50%) $ 7.1 $ 9.6 (26%) International 1.2 1.9 (37%) 2.4 3.8 (37%) ------------ ----------- ------------ ---------- Total hardware revenue $ 3.5 $ 6.5 (46%) $ 9.5 $ 13.4 (29%) ------------ ----------- ------------ ---------- Percentage of total revenue 4% 8% 6% 9% Other revenue Domestic $ 1.3 $ 2.0 (35%) $ 3.1 $ 3.3 (6%) International 0.4 1.0 (60%) 0.8 1.3 (38%) ------------ ----------- ------------ ---------- Total other revenue $ 1.7 $ 3.0 (43%) $ 3.9 $ 4.6 (15%) ------------ ----------- ------------ ---------- Percentage of total revenue 2% 4% 2% 3% ------------ ----------- ------------ ---------- Total revenue Domestic $ 61.2 $ 54.2 13% $118.2 $ 106.1 11% International 24.9 26.2 (5%) 49.3 47.9 3% ------------ ----------- ------------ ---------- Total revenue $ 86.1 $ 80.4 7% $167.5 $ 154.0 9% ============ =========== ============ ==========
Software revenue from the licensing of the Company's software products increased 10% and 4% for the three and six month periods, respectively, ended June 30, 1999 over the comparable periods of 1998. The increases were primarily attributable to an increase in the volume of domestic product shipments to new Panagon customers. 10 Customer support revenue consists of revenue from maintenance contracts and "fee for service" revenues. Customer support revenue increased 21% and 22% for the three and six month period, respectively, ended June 30, 1999 over the comparable periods of 1998. The increases were attributable to increased maintenance revenue due to the growth of the Company's installed base. Professional services and education revenue consists of revenue from consulting and implementation services provided to end users of the Company's software products, technical consulting services provided to the Company's resellers and training services. Consulting services are primarily performed on a time and material basis. Professional services and education revenue increased 23% and 50% for the three and six month period, respectively, ended June 30, 1999 over the comparable periods of 1998 due to increased demand for the Company's expanded professional services and education offerings. Hardware revenue is generated primarily from the sale of 12-inch optical storage and retrieval libraries (OSAR). Hardware revenue decreased by 46% and 29% for the three and six month period, respectively, ended June 30, 1999 over the comparable periods of 1998. This decrease is the result of a decrease in new orders experienced both domestically and internationally due to customers' ordering competitive products. The Company expects hardware revenue to continue to decline in both absolute dollars and as a percentage of total revenue. Other revenue is generated from the sale of spare parts, supplies and "third- party" products. Other revenue decreased 43% and 15% for the three and six month period, respectively, ended June 30, 1999 compared to the same periods in 1998 due to decreased sales of spare parts. International revenues were approximately 29% and 33% of total revenues in the three month periods ended June 30, 1999 and 1998, respectively. For the six month period ended June 30, 1999 and 1998 international revenues constituted 29% and 31% of total revenues, respectively. The decreases are attributable to the softening of non-European markets. Management expects that the Company's international operations will continue to account for a significant portion of total revenues. International revenues are subject to certain risks including but not limited to political and economic instability; and currency fluctuations. See "Factors That May Affect Future Results" below. Cost of Revenue
Three Months Ended June 30, Six Months Ended June 30, -------------------------------------- ------------------------------------ (Dollars in millions) 1999 1998 % Change 1999 1998 % Change -------------------------------------- ------------------------------------ Cost of software revenue $ 4.7 $ 4.3 9% $ 8.6 $ 8.0 8% Percentage of software revenue 10% 10% 9% 9% Cost of customer support revenue $ 9.2 $ 8.0 15% $ 17.9 $ 16.1 11% Percentage of customer support revenue 45% 47% 45% 49% Cost of professional services and education revenue $ 9.9 $ 7.0 41% $ 19.7 $ 11.9 66% Percentage of professional services and education revenue 85% 74% 85% 77% Cost of hardware revenue $ 1.8 $ 3.2 (44%) $ 5.0 $ 6.6 (24%) Percentage of hardware revenue 51% 49% 53% 49% Cost of other revenue $ 1.4 $ 2.0 (30%) $ 3.2 $ 3.3 (3%) Percentage of other revenue 82% 67% 82% 72% Total cost of revenue $ 27.0 $ 24.5 10% $ 54.4 $ 45.9 19% Percentage of total revenue 31% 30% 32% 30%
The cost of software revenue includes royalties paid to third parties and the cost of software distribution. The cost of software revenue as a percentage of software revenue remained constant at 10% for the three months ended June 30, 1999 and 1998 and 9% for the six months ended June 30, 1999 and 1998. 11 The cost of customer support revenue includes customer support personnel, supplies, and the cost of third party hardware maintenance. The cost of customer support revenue as a percentage of customer support revenue for the three month period ended June 30, 1999 decreased to 45% from 47% in the same period of 1998. The cost of customer support revenue for the six month period ended June 30, 1999 decreased to 45% from 49% for the comparable period of 1998. The decrease is attributable to cost savings realized through the consolidation of the Company's European operations. The cost of professional services and education revenue consists primarily of professional services and training personnel and third party contractors. The cost of professional services and education revenue as a percentage of professional services and education revenue for the three month period ended June 30, 1999 increased to 85% from 74% for the same period of 1998. The cost of professional services and education revenue for the six month period ended June 30, 1999 increased to 85% from 77% for the comparable period of 1998. The increase is due to the addition of professional services management personnel to support the Company's announced strategy of increasing its focus on delivering new professional services products. The cost of hardware revenue includes the cost of manufacturing OSARs, and the cost of hardware integration personnel. The cost of hardware revenue as a percentage of hardware revenue for the three month period ended June 30, 1999 increased to 51% from 49% for the comparable period of 1998. The cost of hardware revenue as a percentage of hardware revenue for the six month period ended June 30, 1999 increased to 53% from 49% for the comparable period of 1998. The increase is due to lower revenue without a corresponding decrease in fixed manufacturing costs. The cost of other revenue includes the cost of supplies, spare parts and "third party" product. The cost of other revenue as a percentage of other revenue for the three months ended June 30, 1999 increased to 82% from 67% for the comparable period of 1998. The cost of other revenue as a percentage of other revenue for the six month period ended June 30, 1999 increased to 82% from 72% for the comparable period of 1998. The increase is due to the selling of higher cost product in 1999 compared to 1998. Operating Expenses
Three Months Ended June 30, Six Months Ended June 30, ------------------------------------- ------------------------------------ (Dollars in millions) 1999 1998 % Change 1999 1998 % Change ----------------------- ----------- ---------------------- ----------- Research and development $ 13.2 $ 11.8 12% $ 26.3 $ 23.9 10% Percentage of total revenue 15% 15% 16% 16% Selling, general and administrative $ 40.8 $ 38.6 6% $ 80.2 $ 76.1 5% Percentage of total revenue 47% 48% 48% 49%
Research and development expenses increased 12% and 10% for the three and six month periods ended June 30, 1999, respectively, compared to the comparable periods of 1998. The increases in absolute dollars were due to a general increase in salaries and recruiting costs necessitated by the intense competitive environment for software engineers and an increase in the use of contract developers. As a percentage of total revenue, research and development expenses were at 15% for the three month period ended June 30, 1999 and 1998, respectively and 16% for the six month period ended June 30, 1999 and 1998, respectively. 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 6% and 5% for the three and six month periods ended June 30 1999, compared to the comparable periods of 1998. The increase was primarily due to overall increases in salaries, increased sales development and training costs and consulting related to systems development projects. As a percentage of total revenue, selling, general and administrative expenses decreased to 48% for the six months period ended June 30, 1999 from 49% for the comparable period of 1998 primarily due to the higher revenue levels in 1999. 12 Provision for Income Taxes. The Company's combined federal, state and foreign annual effective tax rate for the for the three and six months ended June 30, 1999, respectively was 30% compared to 29% for the comparable periods in 1998. The increase in the rate is attributable to a decrease in taxable income generated in lower tax jurisdictions outside of North America. Foreign Currency Fluctuations and Inflation. The Company's performance can be affected by changes in foreign currency values relative to the U.S. dollar in relation to the Company's revenue and operating expenses. The impact to net income from foreign exchange transactions and hedging activities is immaterial for all periods reported. As of June 30, 1999, the Company had forward exchange contracts outstanding totaling approximately $1.2 million in 8 currencies. All of these contracts mature in three months. Other comprehensive loss reflects an increase of $1.7 for the three months ended June 30, 1999 and an increase of $4.4 for the six months ended June 30, 1999 in the unrealized loss due to foreign currency translation. This increase was primarily attributable to unrealized losses associated with the weakening of the Euro currency against the U.S. dollar during the 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 six months ended June 30, 1999 and 1998. Other Financial Instruments. The Company enters into forward foreign exchange contracts as a hedge against effects of fluctuating currency exchange rates on monetary assets and liabilities denominated in currencies other than the functional currency of the relevant entity. The Company is exposed to market risk on the forward exchange contracts as a result of changes in foreign exchange rates; however, the market risk should be offset by changes in the valuation of the underlying exposures. Gains and losses on these contracts, which equal the difference between the forward contract rate and the prevailing market spot rate at the time of valuation, are recognized in the consolidated statement of operations. The counterparties to these instruments are major financial institutions. The Company uses commercial rating agencies to evaluate the credit quality of the counterparties, and the Company does not anticipate a loss resulting from any credit risk of these institutions. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." As amended, SFAS 133, is effective for fiscal years beginning after June 15, 2000 and will require the Company to record all derivatives on the balance sheet at fair value. For derivatives that are hedges, changes in the fair value of derivatives will be offset by the change in fair value of the hedged assets, liabilities, or firm commitments. The Company believes the impact of adopting this standard will not be material to its results of operations or equity. The Company will continue to evaluate the early adoption of this pronouncement. Liquidity and Capital Resources At June 30 1999, combined cash, cash equivalents and short- and long-term marketable securities totaled $94.3 million, an increase of $12.1 million from the end of 1998. Cash provided by operating activities during the six months ended June 30, 1999 totaled $21.0 million and resulted primarily from net income; an increase in unearned maintenance revenue related to annual renewal billings; an increase in other accrued liabilities; and additions to net income for depreciation and amortization expense offset by decreases in accounts payable and increase in accounts receivable. Cash used by investing activities totaled $20.0 million and was a result of capital expenditures and purchases of marketable securities offset by sales and maturities of marketable securities. Cash provided by financing activities totaled $2.3 million and was a result of proceeds received from the exercise of employee stock options. Accounts receivable increased to $67.5 million at June 30, 1999 from $61.6 million at December 31, 1998. Days sales outstanding increased to 71 days as of June 30, 1999 from 66 days as of December 31, 1998. Current liabilities increased to $88.6 million at June 30, 1999 from $76.5 million at December 31, 1998. The increase in current liabilities is primarily a result of increases in unearned maintenance revenue, accrued royalties and accrued taxes, offset by decreases in accounts payable. The Company has a $20 million unsecured line of credit with a commercial bank that expires in June 2001 and is subject to the maintenance of certain financial covenants. As of June 30, 1999, there were no borrowings outstanding against the Company's credit line and the Company was in compliance with all the covenants of the line. 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. 13 Other Matters Year 2000. With the approach of the year 2000, the Company recognized that significant issues could arise in connection with the computer software products it licenses and the internal business systems which are essential to its operations. In 1997, the Company implemented a year 2000 Integrity Program (the Program) to ensure that the Company's computer software products and internal business systems will function properly in the year 2000 and thereafter. The Program, as it relates to the software products licensed to customers, includes year 2000 compliance testing and certification of all current software products. All new generations of the Company's software products will be released as year 2000 compliant. Not all software products of the Company are year 2000 compliant and the Company does not plan to make them so. Accordingly, upgraded year 2000 compliant versions of such software products are being made available to customers and resellers who will then bear the responsibility for installing the upgraded software product in order to make their systems year 2000 compliant. Some of the Company's customers are running software product versions that are not year 2000 compliant. The Company has been encouraging such customers to migrate to current software product versions. It is possible that the Company may experience increased expenses in addressing migration issues for such customers. The Company's customer support organization is in the process of completing its program, Customer Service Profile 2000, to review the status of each Company product currently installed at a customer location and to schedule upgrades according to the customer's requirements and support programs. It also provided the diagnostics used in such program to its resellers for their use at their customer locations. Customers who have support agreements with the Company have been directly informed as to whether or not the particular software products they have installed are year 2000 compliant. All customers are kept informed of the release of year 2000 compliant updates and upgrades via the Company's readiness disclosure statement on its Web site. The inability of any of the Company's software products to properly manage and manipulate data in the year 2000 could result in increased warranty costs, customer satisfaction issues, potential lawsuits and other costs and liabilities, as well as customers being unable to run software licensed from the Company and incurring significant costs from the resultant business interruption. The Company has implemented a contingency plan for certain legacy software products which provides an upgrade path to current year 2000 compliant versions of the Company's software products with similar functionality. The Company has spent an estimated $1.2 million on year 2000 product related projects through June 30, 1999. The expense for year 2000 product related projects is estimated to be approximately $.4 million for the remainder of 1999. The Company is forming a rapid response team as part of customer support that will respond to problems during the year 2000 date change period. The Company estimates these expenses at $.1 million. The Company has communicated with significant third party vendors of computer software with which the Company's systems interface or upon which the Company's software products depend. Such third party vendors have delivered year 2000 versions or guaranteed that its current computer software is year 2000 compliant. In the event that customers of the Company have year 2000 related problems with such third party software, the ompany has been assured that the third party will 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 third party software which is incorporated in the Company's software products or customer-developed applications which run on 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 IT systems for year 2000 compliance. The Company's significant business systems (financial, operational, marketing, customer support, etc.) have been reviewed and are either currently year 2000 compliant or will be upgraded and/or replaced so as to be year 2000 tested and compliant by October 31, 1999. All of the hardware and software deployed in the Company's technical infrastructure is either fully year 2000 tested and compliant or is scheduled to be replaced with year 2000 compliant components by October 31, 1999. The Company is also evaluating IT related environmental systems (heating, air conditioning, security, etc.) and intends to make all such systems year 2000 compliant by October 31, 1999. To the extent possible, the Company will develop and execute contingency plans designed to allow continued operation in the event of failure of the Company's or third parties' systems by October 31, 1999. Contingency plans are being developed in certain key areas, in particular finance, sales, IT and customer service to ensure that any potential business interruptions caused by the year 2000 issue are mitigated. Such contingency plans may include identification of alternative sources for processing data and managing customer support issues. Business teams will be monitoring the critical systems, and service centers to react immediately to facilitate repairs at the end of the year 1999. Data retention and recovery procedures will be in place for critical business data to provide back-ups with on-site and off-site data copies. For those business, 14 infrastructure and environmental systems that are to be upgraded in order to achieve year 2000 compliance, the majority were already scheduled for upgrade for other business reasons. The Company's cost to fund solely year 2000 compliance projects has been $0.4 million through June 30, 1999. The expense to complete these projects is estimated to be approximately $0.7 million for the remainder of 1999. Although the Company is not aware of any material operational issues or costs associated with preparing its software products and internal systems for the year 2000, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of the necessary systems and changes to address the year 2000 issue. The 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. 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 software and 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 software, develop and introduce, in a timely manner, new software products incorporating technological advances and respond to customer requirements, including without limitation enhancements to certain specified Company software products to achieve year 2000 compliance. There can be no assurance that the Company will be successful in developing and marketing new software products or enhancements to its existing software on a timely basis or that any new or enhanced software will adequately address the changing needs of the marketplace. If the Company is unable to develop and introduce new software or enhancements to existing software 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 software it has developed or acquired and to achieve the desired level of sales from such software 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 software introductions and software enhancements by the Company and its competitors; the mix of sales by products, software, services and distribution channels; levels of international sales; acquisitions by competitors; changes in foreign currency exchange rates, impact of the EURO currency; the ability of the Company to develop and market new software products and control costs; and general domestic and international economic and political conditions. Demand for the Company's software products could be adversely impacted to the extent customers and potential customers are 15 temporarily distracted by their year 2000 remediation efforts, as such products compete for information technology (IT) resources that have been diverted for such remedial efforts which may have higher priority than ordering or implementing the Company's software products. 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 integrated document management, imaging, workflow, computer output to laser disk and electronic document management software markets are highly competitive, and there are certain competitors of the Company with substantially greater sales, marketing, development and financial resources. The Company believes that the competitive factors affecting the market for its software products and services include vendor and product reputation; product quality, performance and price; the availability of software products on multiple platforms; product scalability; product integration with other enterprise applications; software functionality and features; software ease of use; and the quality of 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 software products comparable or superior to those offered by the Company, offer lower price products or adapt more quickly than the Company to new technologies or evolving customer requirements. Competition is expected to intensify. In order to be successful in the future, the Company must respond to technological change, customer requirements and competitors' current software products and innovations. There can be no assurance that the Company will be able to continue to compete effectively in its market or that future competition will not have a material adverse effect on its business, financial condition or results of operations. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of the markets served by the Company. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on the Company's business, financial condition or results of operations. Intellectual Property and other Proprietary Rights. The Company's success depends, in part, on its ability to protect its proprietary rights to the technologies used in its principal products. The Company relies on a combination of copyrights, trademarks, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights in its software products. There can be no assurance that the Company's existing or future copyrights, trademarks, trade secrets or other intellectual property rights will be of sufficient scope or strength to provide meaningful protection or a commercial advantage to the Company. The Company has no software patents. Also, in selling certain of its products, the Company relies on "shrink wrap" licenses that are not signed by licensees and, therefore, may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. There can be no assurance that such factors would not have a material adverse effect on the Company's business, financial condition or results of operations. In addition, the Company also relies on certain software that it licenses from third parties, including software that is integrated with internally developed software used in the Company's products to perform key functions. There can be no assurance that such third parties will remain in business, that they will continue to support their software products, that their products are, or will be, year 2000 compliant, or that their software products will otherwise continue to be available to the Company on commercially reasonable terms. The loss or inability to maintain any of theses software licenses could result in delays or reductions in software shipments until equivalent software can be developed, identified, licensed and integrated, which could adversely affect the Company's business, financial condition or results of operations. The Company may, from time to time, be notified that it is infringing certain patent or intellectual property rights of others. Combinations of technology acquired through past or future acquisitions and the Company's technology will create new software products and technology that may give rise to claims of infringement. While no actions other than those discussed below are currently pending against the Company for infringement of patent or other proprietary rights of third parties, there can be no assurance that third parties will not initiate infringement actions against the Company in the future. Infringement actions can result in substantial cost to, and diversion of, resources of the Company. If the Company were found to infringe upon the rights of others, no assurance can be given that the Company could redesign the infringing products 16 or could obtain licenses on acceptable terms or at all, that significant damages for past infringement would not be assessed or that further litigation relative to any such licenses or usage would not occur. The failure to successfully defend any claims or redesign its products or obtain necessary licenses or other rights, the ultimate disposition of any claims or the advent of litigation arising out of any claims of infringement, could have a material adverse effect on the Company's business, financial condition or results of operations. In October 1994, Wang Laboratories, Inc. (Wang) filed a complaint in the United States District Court for the District of Massachusetts alleging that the Company is infringing five patents held by Wang (the FileNET Case). On June 23, 1995, Wang amended its complaint to include an additional related patent. On July 2, 1996, Wang filed a complaint in the same court alleging that Watermark Software Inc., formerly a wholly owned subsidiary that was merged into the Company, is infringing three of the same patents asserted in the initial complaint (the Watermark Case). On October 9, 1996, Wang withdrew its claim in the FileNET Case that one of the patents it initially asserted is infringed. In March 1997, Eastman Kodak Company (Kodak) purchased the Wang imaging business unit that has responsibility for this litigation. On July 30, 1997, the Court permitted Eastman and Kodak Limited of England to be substituted in the litigation in place of Wang. The Company has moved for summary judgement on noninfringement as to each of the five patents in the suit, and for summary judgment of invalidity as to one of the patents. Eastman moved for summary judgment as to the Company's unenforceability defense on one of the patents. In July 1998, the Magistrate Judge assigned to the case, heard oral arguments on the Company's motion for summary judgement that U.S. Patent 4,918,588 is not infringed and is invalid. The Magistrate Judge has not yet decided these motions. The Company believes that after he has ruled on these motions, he will hear oral arguments in the remaining motions in the sequence in which they were filed. A trial date has not been set. If it should be determined that the patents at issue in the litigation are valid and are infringed by any of the Company's products, including Watermark products, the Company will, depending on the product, redesign the infringing products or seek to obtain a license to market the products. There can be no assurance that the Company will be able to redesign the infringing products or obtain a license on acceptable terms. Based on the Company's analysis of these Eastman patents and their respective file histories, the Company believes that it has meritorious defenses to Eastman's claims; however, the ultimate outcome or any resulting potential loss cannot be determined at this time. Dependence on Certain Relationships. The Company has entered into a number of key relationships with other companies such as Microsoft Corporation, IBM Global Services, SAP AG, Hewlett-Packard Company, and Sun Microsystems, Inc. There can be no assurance that these companies will not reduce or discontinue their relationships with, or support of, the Company and its products. Dependence on Key Management and Technical Personnel. The Company's success depends to a significant degree upon the continued contributions of its key management, marketing, technical and operational personnel. In general, the Company does not utilize employment agreements for its key employees. The loss of the services of one or more key employees could have a material adverse effect on the Company's operating results. The Company also believes its future success will depend in large part upon its ability to attract and retain additional highly skilled management, technical, marketing, product development, consultants and operational personnel. Competition for such personnel, particularly engineers and other technical personnel, is intense, and pay scales in the software industry have significantly increased. There can be no assurance that the Company will be successful in attracting and retaining such personnel. International Sales. Historically, the Company has derived approximately one-third of its total revenues from international sales. International business is subject to certain risks including varying technical standards; tariffs and trade barriers; political and economic instability; reduced protection for intellectual property rights in certain countries; difficulties in staffing and maintaining foreign operations; difficulties in managing foreign distributors; varying requirements for localized products; potentially adverse tax consequences; currency exchange fluctuations including those related to the EURO beginning in 1999; the burden of complying with a wide variety of complex foreign laws, regulations and treaties; and the possibility of difficulties in collecting accounts receivable. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition or results of operations. 17 Product Liability. Software and products as complex as those sold by the Company are susceptible to errors or failures, especially when first introduced or when new versions are released. The Company's software products are often intended for use in applications that are critical to a customer's business. As a result, the Company's customers may rely on the effective performance of the software to a greater extent than the market for software products generally. The Company conducts extensive software testing to ensure that its software is free of significant errors and defects. In addition, the Company has designed and tested the most current versions of its software products to be year 2000 compliant. However, some of the Company's customers are running earlier software products that are not year 2000 compliant. Although the Company has been encouraging such customers to migrate to current software versions, no assurance can be given that all of them will do so in a timely fashion, if at all. Moreover, the Company also relies on certain software that it licenses from third parties, including software that is integrated with internally developed software and is used in the Company's products to perform key functions. There can be no assurance that such third party software will be free of errors and defects or be year 2000 compliant in a timely fashion. Although the Company has not experienced any material product liability claims to date, there can be no assurance that errors or defects, whether associated with year 2000 functions or otherwise, will not result in product liability claims against the Company in the future. 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. The Company's license agreements with customers typically contain provisions designed to limit its exposure to potential product liability claims. However, it is possible that such limitation of liability provisions may not be effective under the laws of certain jurisdictions. 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 software 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, resellers and suppliers. In addition, in recent years the stock market in general, and the market for shares of high-technology stocks in particular, have experienced extreme price fluctuations that have often been unrelated to the operating performance of affected companies. Such fluctuations could adversely affect the trading price of the Company's common stock. 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings See Notes to Consolidated Financial Statements. Item 4. Submission of Matters to a Vote of Security Holders (a) The 1999 Annual Meeting of Stockholders of the Company was held at 9:00 a.m. on May 20, 1999, in Costa Mesa, California. (b) At the annual meeting, the following seven individuals were elected to the Company's Board of Directors, constituting all members of the Board of Directors: Nominee Affirmative Votes Votes Withheld ----------------------- ------------------------ ------------------------- L. George Klaus 27,678,276 583,248 ----------------------- ------------------------ ------------------------- William P. Lyons 27,644,776 616,748 ----------------------- ------------------------ ------------------------- Lee D. Roberts 27,628,603 632,921 ----------------------- ------------------------ ------------------------- John C. Savage 27,641,703 619,821 ----------------------- ------------------------ ------------------------- Roger S. Siboni 27,645,960 615,564 ----------------------- ------------------------ ------------------------- Theodore J. Smith 27,632,916 628,608 ----------------------- ------------------------ ------------------------- Carolyn M. Ticknor 27,641,403 620,121 ----------------------- ------------------------ ------------------------- (c) The Company's stockholders were asked to approve an amendment to the Company's 1995 Stock Option Plan (the "1995 Plan") to increase the number of shares of Common Stock issuable under the 1995 Plan by an additional 1,200,000 shares. This proposal was approved in accordance with the following vote of stockholders: Broker Votes For Votes Against Abstentions Non-Votes ------------------ ------------------- ------------------ ----------------- 23,986,483 3,997,198 277,843 0 ------------------ ------------------- ------------------ ----------------- (d) The Company's stockholders were asked to approve an amendment to the 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan") to increase the number of shares of Common Stock issuable under the 1998 Purchase Plan by an additional 300,000 shares. This proposal was approved in accordance with the following vote of stockholders: Broker Votes For Votes Against Abstentions Non-Votes ------------------ ------------------- ------------------ ----------------- 27,100,893 887,427 273,204 0 ------------------ ------------------- ------------------ ----------------- Item 5. Other Information On May 28, 1999, Carolyn M. Ticknor voluntarily tendered her resignation as Director of the Company which was accepted by the Board. Her resignation was not due to any disagreement with the Company relating to the Company's operations, policies or practices. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - The list of exhibits contained in the accompanying Index to Exhibits is herein incorporated by reference. (b) No reports on Form 8-K were filed during the second quarter of 1999. 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 August 13, 1999 By:______________/s/_____________________________ 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 Exhibi 3.1 to Form S-4 filed on January 26, 1996; Registration No. 333-00676). 3.1.1* Certificate of Amendment of Restated Certificate of Incorporation (filed as Exhibit 3.1.1 to Form S-4 filed on January 26, 1996, Registration No. 333-00676). 3.2* Bylaws (filed as Exhibit 3.2 of the Registrant's registration statement on Form S-1, Registration No. 33-15004 (the "Form S-1")). 4.1* Form of certificate evidencing Common Stock (filed as Exhibit 4.1 to the Form S-1, Registration No. 33-15004). 4.2* Rights Agreement, dated as of November 4, 1988 between FileNET Corporation and the First National Bank of Boston, which includes the form of Rights Certificate as Exhibit A and the Summary of Rights to Purchase Common Shares as Exhibit B (filed as Exhibit 4.2 to Form S-4 filed on January 26, 1996; Registration No. 333-00676). 4.3* Amendment One dated July 31, 1998 and Amendment Two dated November 9, 1998 to Rights Agreements between FileNET Corporation and BANKBOSTON N.A. formerly known as The First National Bank of Boston (filed as Exhibit 4.3 to Form 10-Q for the quarter ended September 30, 1998). 10.1 Amended and Restated Credit Agreement (Multicurrency) by and among the Registrant and Bank of America National Trust and Savings Association dated June 30, 1999, effective June 30,1999 (filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 1999). 10.2* Business Alliance Program Agreement between the Registrant and Oracle Corporation dated July 1, 1996, as amended by Amendment One thereto (filed as Exhibit 10.4 to Form 10-QA for the quarter ended June 30, 1996). 10.3* Runtime Sublicense Addendum between the Registrant and Oracle Corporation dated July 1, 1996; as amended by Amendment One thereto (filed as Exhibit 10.4 to Form 10-QA for the quarter ended June 30, 1996). 10.3.1* Runtime Sublicens Addendum between the Registrant and Oracle Corporation dated July 1, 1996; as amended by Amendments Two through Six thereto (filed as Exhibit 10.3.1 to Form 10-Q for the quarter ended September 30, 1998). 10.4* Full Use and Deployment Sublicense Addendum between the Registrant and Oracle Corporation dated July 1, 1996, as amended by Amendment One thereto (filed as Exhibit 10.4 to Form 10-QA for the quarter ended June 30, 1996). 10.5* Lease between the Registrant and C. J. Segerstrom & Sons for the headquarters f the Company, dated April 30, 1987 (filed as Exhibit 10.19 to the Form S-1). 10.6* Third Amendment to the Lease between the Registrant and C. J. Segerstrom & Sons dated April 30, 1987, for additional facilities at the headquarters of the Company, dated October 1, 1992 (filed as Exhibit 10.7 to Form 10-K filed on April 4, 1997). 10.7* Fifth Amendment to the Lease between the Registrant and C. J. Segerstrom & Sons dated April 30, 1987, for the extension of the term of the lease, dated March 28, 1997 (filed as Exhibit 10.8 to Form 10-Q for the quarter ended March 31, 1997). 10.8* 1989 Stock Option Plan for Non-Employee Directors of FileNET Corporation, as amended by the First Amendment, Second Amendment, Third Amendment thereto (filed as Exhibit 10.9 to Form S-4 filed on January 26, 1996; Registration No. 333-00676) 10.9* Amended and Restated 1995 Stock Option Plan of FileNET (filed as Exhibit 99.1 to Form S-8 filed on November 9, 1998; Registration No. 333-66997). - --------------------------------------------- * Incorporated herein by reference 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* Development and Initial Supply Agreement between the Registrant and Quintar Company dated August 20, 1992 (filed as Exhibit 10.21 to Form 10-K for the year ended January 3, 1993). 10.16* Amendment dated December 22, 1992 to the Development and Initial Supply Agreement between the Registrant and Quintar Company dated August 20, 1992 (filed as Exhibit 10.22 to Form 10-K for the year ended January 3, 1993). 10.17* Amendment 2 dated December 18, 1998 to the Product License Agreement between the Registrant and Novell, Inc. dated May 16, 1995 (filed as Exhibit 10.17 to Form 10-K/A for the year ended December 31, 1998). 10.18* Agreement and Plan of Merger between the Registrant and Watermark Software Inc. dated July 18, 1995 (filed as Exhibit 10.27 to Form 10-Q for the quarter ended July 2, 1995). 10.19* Agreement and Plan of Merger between the Registrant and Saros Corporation, as amended, dated January 17, 1996 (filed as Exhibits 2.1, 2.2, 2.3, and 2.4 to Form 8-K on March 13, 1996). 10.20* Stock Purchase Agreement by and Among FileNET Corporation, IFS Acquisition Corporation, Jawaid Khan and Juergen Goersch dated January 17, 1996 and Amendment 1 to Stock Purchase Agreement dated January 30, 1996 (filed as Exhibit 10.2 to Form 10-K for the year ended December 31, 1995). 10.21* Amended and Restated FileNET Corporation 1998 Employee Stock Purchase Plan (filed as Exhibit 99.15 to Form S-8, filed on November 9, 1998; Registration No. 333-66997). 10.22* FileNET Corporation International Employee Stock Purchase Plan. (filed as Exhibit 99.16 to Form S-8, filed on November 9, 1998; Registration No. 333-66997). 27 Financial Data Schedule. - ----------------------------------------------- * Incorporated herein by reference 22 EX-10.1 2 AMENDED AND RESTATED CREDIT AGREEMENT AMENDED AND RESTATED CREDIT AGREEMENT (MULTICURRENCY) Dated as of June 30, 1999 between FILENET CORPORATION and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ================================================================================ TABLE OF CONTENTS Section Page ARTICLE I Definitions and Financial Requirements.....................1 1.01 Definitions...........................................1 1.02 Financial Requirements................................7 ARTICLE II The Credit Facilities.....................................7 --------------------- 2.01 The Revolving Facility................................7 ---------------------- 2.02 Advances Under the Revolving Facility.................8 ------------------------------------- 2.03 Commercial Letters of Credit under the Revolving Facility..................................9 -------------------- 2.04 Standby Letters of Credit Under the Revolving Facility.................................10 -------------------- 2.05 Local Currency Advances..............................11 ----------------------- 2.06 Bank Guaranties......................................12 --------------- 2.07 Optional Prepayment..................................12 ------------------- 2.08 Mandatory Payment....................................13 ----------------- 2.09 Commitment Fee.......................................13 -------------- 2.10 Default Rate.........................................13 ------------ 2.11 Early Termination of Commitment......................13 ------------------------------- ARTICLE III Extensions of Credit, Payments and Interest Calculations..................................14 ----------------------- 3.01 Requests for Credit..................................14 ------------------- 3.02 Disbursements and Payments...........................14 -------------------------- 3.03 Branch Accounts......................................14 --------------- 3.04 Evidence of Indebtedness.............................14 ------------------------- 3.05 Interest Calculation.................................14 -------------------- 3.06 Late Payments; Compounding...........................15 -------------------------- 3.07 Business Day.........................................15 ------------- 3.08 Taxes and Other Charges..............................15 ----------------------- 3.09 Illegality...........................................16 ---------- 3.10 Increased Costs......................................16 --------------- 3.11 Funding Losses.......................................17 -------------- 3.12 Inability to Determine Rates.........................17 ---------------------------- 3.13 Certificate of the Bank..............................17 ----------------------- 3.14 Debits to Borrower's Account.........................17 ---------------------------- 3.15 Survival.............................................17 -------- ARTICLE IV Conditions to Availability of Credit.....................18 ------------------------------------ 4.01 Conditions to First Extension of Credit..............18 --------------------------------------- 4.02 Conditions to Each Extension of Credit...............18 -------------------------------------- ARTICLE V Representations and Warranties...........................19 ------------------------------ 5.01 Corporate Existence and Power........................19 ----------------------------- 5.02 Authorization........................................19 ------------- 5.03 Enforceability.......................................19 -------------- 5.04 Compliance with Laws.................................19 -------------------- 5.05 Permits, Franchises..................................20 ------------------- 5.06 Litigation...........................................20 ---------- 5.07 No Event of Default..................................20 ------------------- 5.08 Other Obligations....................................20 ----------------- 5.09 Tax Returns..........................................20 ----------- 5.10 Information Submitted................................20 --------------------- i 5.11 No Material Adverse Effect...........................20 -------------------------- 5.12 ERISA Compliance.....................................20 ---------------- 5.13 Environmental Matters................................21 --------------------- ARTICLE VI Affirmative Covenants....................................21 --------------------- 6.01 Notices of Certain Events............................22 ------------------------- 6.02 Financial and Other Information......................22 ------------------------------- 6.03 Books, Records, Audits and Inspections...............23 -------------------------------------- 6.04 Use of Facility......................................23 --------------- 6.05 Insurance............................................23 --------- 6.06 Compliance with Laws.................................23 -------------------- 6.07 Change in Name, Structure or Location................23 ------------------------------------- 6.08 Existence and Properties.............................23 ------------------------ 6.09 Additional Acts......................................23 --------------- ARTICLE VII Negative Covenants......................................24 - ----------- ------------------ 7.01 Other Indebtedness...................................24 ------------------ 7.02 Liens................................................24 ----- 7.03 Capital Assets.......................................25 -------------- 7.04 Dividends............................................25 --------- 7.05 Loans................................................25 ----- 7.06 Acquisitions, Liquidations and Mergers............................................25 -------------------------------------- 7.07 Sale of Assets.......................................26 -------------- 7.08 Business Activities..................................26 ------------------- 7.09 Regulations G, T, U, and X...........................26 -------------------------- 7.10 Intentionally Omitted................................26 --------------------- 7.11 Quick Ratio..........................................26 ----------- 7.12 Total Liabilities to Tangible Net Worth..............26 --------------------------------------- 7.13 Tangible Net Worth...................................27 ------------------ 7.14 Consecutive Quarterly Losses; Losses in One Quarter........................................27 --------------------------------------------------- ARTICLE VIII Events of Default......................................27 ----------------- 8.01 Events of Default....................................27 (a) Failure to Pay................................27 -------------- (b) Breach of Representation or Warranty....................................27 ---------- (c) Specific Defaults.............................28 ----------------- (d) Other Defaults................................28 -------------- (e) Trade Suits...................................28 ----------- (f) Judgments.....................................28 --------- (g) Failure to Pay Debts; Voluntary Bankruptcy..................................28 ------------- (h) Involuntary Bankruptcy........................28 ---------------------- (i) Default of Other Financial Obligations........28 -------------------------------------- (j) Default under other Credit Documents..........28 ------------------------------------ (k) Default of Other Bank Obligations.............28 --------------------------------- (l) Material Adverse Effect.......................28 ----------------------- (m) ERISA.........................................29 ----- (n) Change of Control.............................29 ----------------- 8.02 Remedies.............................................29 -------- ARTICLE IX Miscellaneous............................................30 9.01 Successors and Assigns...............................30 ---------------------- 9.02 Consents and Waivers.................................30 -------------------- 9.03 Governing Law........................................30 ------------- 9.04 Costs and Attorneys' Fees............................30 ------------------------- ii 9.05 Integration; Amendment...............................31 ---------------------- 9.06 Borrower's Documents.................................31 -------------------- 9.07 Participations.......................................31 -------------- 9.08 General Indemnification..............................31 ----------------------- 9.09 Arbitration; Reference Proceeding....................32 --------------------------------- 9.10 Notices..............................................32 ------- 9.11 Headings; Interpretation.............................33 ------------------------ 9.12 Severability.........................................33 ------------ 9.13 Counterparts.........................................33 ------------ 9.14 Waiver of Jury Trial.................................33 -------------------- EXHIBITS Exhibit A Form of Compliance Certificate iii AMENDED AND RESTATED CREDIT AGREEMENT (MULTICURRENCY) THIS AMENDED AND RESTATED CREDIT AGREEMENT (MULTICURRENCY) (this "Agreement") is entered into as of June 30, 1999, between FILENET CORPORATION (the "Borrower"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank"). A. The Borrower and the Bank have entered into a Second Amended and Restated Credit Agreement(Multicurrency)dated as of June 25, 1997, effective as of June 1, 1997, as amended (as so amended, the "Original Credit Agreement"), pursuant to which the Bank has agreed, on the terms and conditions contained therein, to extend credit to the Borrower and certain of its subsidiaries. B. The parties hereto desire to amend and restate in its entirety the Original Credit Agreement upon the terms and conditions set forth in this Agreement. In consideration of the mutual covenants and agreements contained herein, the Borrower and the Bank agree as follows: ARTICLE I Definitions and Financial Requirements 1.01 Definitions. The following terms (including plural and singular versions thereof) have the meanings indicated: "Acceptable Subsidiary": a Subsidiary of the Borrower acceptable to the Bank in its sole discretion that (a) is specified as a "Borrower" on a continuing guaranty executed by the Borrower in form and substance satisfactory to the Bank, (b) has executed such credit and related documentation with and in favor of the Bank as the Bank may request, and (c) (i) for extensions of credit in the form of Dollar Advances, Offshore Currency Advances, or letters of credit denominated in Dollars, is located in the United States and (ii) for purposes of extensions of credit in the form of Local Currency Advances, letters of credit denominated in a Local Currency or Bank Guaranties, is located outside of the United States. "Advance": an advance hereunder, which, subject to the terms and conditions hereof, may be in Dollars, an Offshore Currency, or a Local Currency. "Availability Period": the period commencing on the date of this Agreement and ending on the date that is the earlier to occur of (a) June 29, 2001, or (b) the date on which the Bank's commitment to extend credit hereunder terminates. 1 "Bank Guaranty": a guaranty issued hereunder by an Offshore Credit Provider for the Borrower's or an Acceptable Subsidiary's account. "Bank Guaranty Outstanding Amount": at any time, the amount or Equivalent Amount guaranteed pursuant to any Bank Guaranty but not disbursed thereunder at such time, plus all amounts paid under any Bank Guaranty by an Offshore Credit Provider which have not yet been reimbursed, plus any other obligation or liability of the Borrower or an Acceptable Subsidiary to any Offshore Credit Provider with respect to any Bank Guaranty. "Business Day": any day other than a Saturday, a Sunday, or other day on which commercial banks in San Francisco, California, are authorized or required by law to close, and (a) with respect to disbursements and payments pertaining to any Offshore Rate Advances denominated in Dollars, a day on which dealings are carried on in the applicable offshore Dollar interbank market, and (b) with respect to disbursements and payments pertaining to any Offshore Currency Advance: (i) if the applicable Business Day relates to an Offshore Currency Advance denominated in the euro or a National Currency Unit, a Target Business Day on which banks are generally open for business in London, Frankfurt, San Francisco and/or in any other principal financial center as the Bank shall from time to time determine for this purpose, and (ii) with respect to any disbursements and payments in and calculations pertaining to any Offshore Currency Advance denominated in any other Offshore Currency, a day on which commercial banks are open for foreign exchange business in London, England, and on which dealings in the relevant Offshore Currency are carried on in the applicable offshore foreign exchange interbank market in which disbursement of or payment in such Offshore Currency will be made or received hereunder. For purposes of this Agreement, "TARGET Business Day" means a day when TARGET (the Trans-European Automated Real-time Gross settlement Express Transfer system) is scheduled to be open for business. "Closing Date": the date on which all conditions to the initial extension of credit hereunder are satisfied. "Code": the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder as from time to time in effect. "Compliance Certificate": a certificate, substantially in the form of Exhibit A, executed and delivered on behalf of the Borrower by an appropriate officer of the Borrower. 2 "Credit Documents": collectively, this Agreement and each other agreement, documents and instrument now or hereafter delivered to the Bank (including any Offshore Credit Provider) in connection with the credits established herein and the transactions contemplated hereby. "Credit Limit": the amount $20,000,000 or the Equivalent Amount thereof. "Default": any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. "Dollars", "dollars" and "$": each, lawful money of the United States. "Dollar Advances": specified in subsection 2.01(c). "EMU": Economic and Monetary Union as contemplated in the Treaty of Rome of March 25, 1957, as amended by the Single European Act 1986 and the Maastricht Treaty (which was signed at Maastricht on February 1, 1992, and came into force on November 1, 1993), as amended from time to time. "EMU legislation": legislative measures of the European Council (including European Council regulations) for the introduction of, changeover to, or operation of the euro, being in part the implementation of the third stage of EMU. "Environmental Laws": any foreign, federal, state, local, or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any governmental authority, any and all requirements of law and any and all common law requirements, rules, and bases of liability regulating, relating to, or imposing liability or standards of conduct concerning pollution or protection of human health or the environment or Hazardous Substances or any activity involving Hazardous Substances, as now or may at any time hereafter may be in effect. "Equivalent Amount": whenever this Agreement requires or permits a determination on any date of the equivalent in dollars of an amount expressed in a currency other than dollars, the equivalent amount in dollars of any amount expressed in a currency other than dollars as determined by the Bank on such date on the basis of the Spot Rate for the purchase of dollars with such other currency on the relevant date. "ERISA": the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder as from time to time in effect. "ERISA Event": (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Borrower from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as such a withdrawal under Section 4062(e) of ERISA; (c) the filing of a notice of intent to terminate, the treatment of a plan amendment as a termination under Section 4041 or 4041A of ERISA or the commencement of proceedings by the PBGC to terminate a Pension Plan subject to Title IV of ERISA; (d) a failure by the Borrower to make required contributions to a Pension Plan or other Plan subject to Section 412 of the Code; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Borrower; or (g) an application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code with respect to any Pension Plan. "euro": the single currency of Participating Member States of the European Union. "Event of Default": any event listed in Article VIII of this Agreement. "FDIC": the Federal Deposit Insurance Corporation, or any entity succeeding to any of its principal functions. "Final Maturity Date": (a) in respect of any Advances, June 29, 2001; (b) in respect of any commercial letters of credit, December 28, 2001; (c) in respect of any standby letters of credit, June 28, 2002; and (d) in respect of any Bank Guaranties, June 28, 2002. "FRB": the Board of Governors of the Federal Reserve System, or any entity succeeding to any of its principal functions. "Hazardous Substance": any hazardous or toxic substance, material, pollutant, waste or similar designation, defined, listed, classified, or regulated as such in or under any Environmental Laws, including asbestos, petroleum, or petroleum products (including gasoline, crude oil, or any fraction thereof), polychlorinated biphenyls, and urea-formaldehyde insulation. "Investment Guidelines": the Borrower's Investment Guidelines submitted to the Bank and approved by the Bank prior to the Closing Date, and any changes thereto after the Closing Date to the extent approved by the Bank in writing. "IRS": the Internal Revenue Service or any entity succeeding to any of its principal functions under the Code. "L/C Outstanding Amount": at any time, the undrawn amount (or Equivalent Amount thereof) at such time of any letter of credit issued hereunder, plus the amount (or Equivalent Amount thereof) of all drafts or drawings paid or accepted by the Bank or an Offshore Credit Provider which have not yet been reimbursed to the Bank or such Offshore Credit Provider, plus any other obligation or liability of the Borrower or any Acceptable Subsidiary to the Bank or an Offshore Credit Provider with respect to any letter of credit issued under this Agreement. "Local Currency": specified in subsection 2.01(c). "Local Currency Advance": specified in subsection 2.01(c). 4 "Material Adverse Effect": (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, condition (financial or otherwise) or prospects of the Borrower or the Borrower and its Subsidiaries taken as a whole; (b) a material impairment of the ability of the Borrower or any Acceptable Subsidiary to perform under any Credit Document; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability of any Credit Document. "National Currency Unit": the former national currency of a Participating Member State. "Offshore Credit Provider": a foreign office, foreign branch or foreign affiliate of the Bank, acceptable to the Bank. "Offshore Currency": specified in subsection 2.01(c). "Offshore Currency Advance": specified in subsection 2.01(c). "Offshore Rate": for each Offshore Rate Interest Period, the rate of interest (rounded upward to the next 1/16th of 1%) determined pursuant to the following formula: Offshore Rate = Offered Rate ------------------------------------- 1.00 - Eurodollar Reserve Percentage Where: "Offered Rate" means the rate of interest at which deposits in the applicable currency in the approximate amount of the Offshore Rate Advance to be made and having a maturity comparable to such Offshore Rate Interest Period would be offered by the Bank's Grand Cayman Branch, Grand Cayman, British West Indies (or such other office as may be designated for such purpose by the Bank), to major banks in the offshore interbank market upon request of such banks at approximately 8:00 a.m. San Francisco time two Business Days prior to the first day of such Offshore Rate Interest Period; provided, however, that with respect to any Offshore Currency Advance to be denominated in the euro or a National Currency Unit of a Participating Member State, it shall mean the rate displayed on Telerate (also known as Dow Jones Markets) page 3740 or 3750 (or any replacement page thereof or other applicable display page designated by Telerate) as appropriate for deposits in such currency in the approximate amount of the Offshore Currency Advance to be made and having a comparable maturity to such Offshore Rate Interest Period at approximately 11:00 a.m. (London time) two TARGET Business Days prior to the first day of such Offshore Rate Interest Period. "Eurodollar Reserve Percentage" means, for any Offshore Rate Interest Period, the maximum reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on the first day of such Offshore Rate Interest Period (whether or not applicable to the Bank) under regulations issued from time to time by 5 the FRB for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities") having a term comparable to such Offshore Rate Interest Period. "Offshore Rate Advance": an Advance for which interest is based on the Offshore Rate. "Offshore Rate Interest Period": for each Offshore Rate Advance the period commencing on the date the Offshore Rate Advance begins to bear interest at a rate based on the Offshore Rate and ending one, two, three, or six months thereafter, as requested by the Borrower; provided, however, that the last day of each Offshore Rate Interest Period shall be determined in accordance with the practices of the applicable offshore interbank markets as from time to time in effect, and provided further that no such interest period shall extend beyond the Final Maturity Date. "Participating Member State": each country so described in any EMU Legislation. "PBGC": the Pension Benefit Guaranty Corporation or any entity succeeding to any of its principal functions under ERISA. "Pension Plan": a pension plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA which the Borrower sponsors, maintains, or to which it makes, is making, or is obligated to make contributions, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five plan years. "Plan": an employee benefit plan (as defined in Section 3(3) of ERISA) which the Borrower sponsors or maintains or to which the Borrower makes, is making, or is obligated to make contributions and includes any Pension Plan. "Reference Rate": for any day, the rate of interest in effect for such day as publicly announced from time to time by the Bank as its "reference rate" or "prime rate." It is a rate set by the Bank based upon various factors including the Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in the reference rate or prime rate announced by the Bank shall take effect at the opening of business on the day specified in the public announcement of such change. "Reference Rate Advance": an Advance that bears interest based on the Reference Rate. "Reportable Event": any of the events set forth in Section 4043(c) of ERISA or the regulations thereunder, other than any such event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the PBGC. "Revolving Facility": the line of credit described in Section 2.01. 7 "Spot Rate": for a currency, the rate quoted by the Bank as the spot rate for the purchase by the Bank of such currency with another currency through its Foreign Exchange Trading Center #5193, San Francisco, California, or such other of the Bank's offices as it may designate from time to time, at approximately 8:00 a.m. (San Francisco time) on the date two Business Days prior to the date as of which the foreign exchange computation is made. "Subsidiary": of the Borrower, any corporation, association, partnership, joint venture, or other business entity of which more than 50% of the voting stock or other equity interests (in the case of entities other than corporations), is owned or controlled directly or indirectly by the Borrower or one or more Subsidiaries of the Borrower or a combination thereof. "Target Business Day": specified in the definition of "Business Day." "Unfunded Pension Liability": the excess of a Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. 1.02 Financial Requirements. Unless otherwise specified in this Agreement, all accounting terms used in this Agreement shall be interpreted, all financial computations required under this Agreement shall be made, and all financial information required under this Agreement shall be prepared, in accordance with generally accepted accounting principles in effect from time to time in the United States, consistently applied. ARTICLE II The Credit Facilities 2.01 The Revolving Facility. (a) From time to time during the Availability Period, subject to the terms and provisions hereof, the Bank, on a revolving basis, will (i) make Advances to the Borrower or an Acceptable Subsidiary, (ii) create and issue commercial and standby letters of credit for the Borrower's or an Acceptable Subsidiary's account, and (iii) cause to be issued Bank Guaranties for the Borrower's or an Acceptable Subsidiary's account. (b) This amendment and restatement of the Original Credit Agreement shall not be deemed a repayment, satisfaction, cancellation or novation of any credit outstanding thereunder or any other obligations of the Borrower or its Subsidiaries under the Original Credit Agreement or any of documents or instruments given in connection therewith, which shall instead continue and constitute obligations hereunder and under the other Credit Documents. All such documents or instruments given in connection therewith shall be deemed to be Credit Documents hereunder, and all guaranties issued by the Borrower with respect to credit extended or which may be extended by the Bank to its Subsidiaries shall remain in full force and effect and shall be deemed to be issued hereunder. (c) Advances hereunder may be made in (i) dollars ("Dollar Advances") to the Borrower or an Acceptable Subsidiary, (ii) in a lawful currency other than dollars which is freely transferable and convertible into dollars and is traded in the offshore interbank currency markets at the time of the Advance, including the euro, but not including any National Currency Unit (an "Offshore Currency") ("Offshore Currency Advances") to the Borrower or an Acceptable Subsidiary, or (iii) in a lawful currency other than dollars which is available at a branch or affiliate of the Bank located in a country other than the United States and is the legal tender of that country where the branch or affiliate is located (a "Local Currency") ("Local Currency Advances") to an Acceptable Subsidiary. (d) The aggregate of (i) all Dollar Advances, (ii) the Equivalent Amount of all Offshore Currency Advances and Local Currency Advances, (iii) the L/C Outstanding Amount of all letters of credit, and (iv) the Bank Guaranty Outstanding Amount of all Bank Guaranties may not exceed at one time the Credit Limit. 2.02 Advances Under the Revolving Facility. (a) Subject to the other provisions of this Section, Dollar Advances under the Revolving Facility shall bear interest at a rate per annum equal to the Reference Rate. The Borrower shall pay or cause the applicable Acceptable Subsidiary to pay interest monthly, on the last day of each month until the Final Maturity Date, on which date all accrued and unpaid interest shall be due and payable. The Borrower shall repay or cause the applicable Acceptable Subsidiary to repay the principal amount of each Reference Rate Advance on the date such advance is converted into an Offshore Rate Advance under subsection (b) below, and on the Final Maturity Date. (b) In lieu of the interest rate described above, the Borrower or the applicable Acceptable Subsidiary may elect during the Availability Period to have all or portions of Advances under the Revolving Facility be in dollars or an Offshore Currency and bear interest at the Offshore Rate plus 1.00% per annum during an Offshore Rate Interest Period, subject to the following requirements: (i) Each Offshore Rate Advance shall be, if in Dollars, for an amount not less than $500,000, or, if in an Offshore Currency, in a minimum amount acceptable to the Bank. (ii) The Borrower shall pay or cause the applicable Acceptable Subsidiary to pay interest on each Offshore Rate Advance on the last day of the Offshore Rate Interest Period for such Advance; provided, however, that if any Interest Period for a Offshore Rate Advance exceeds one month, interest shall also be payable on the date which falls one month after the beginning of such Interest Period and on each date which falls one month after any such interest payment date. The Borrower shall repay or cause the applicable Acceptable Subsidiary to repay the principal balance of each Offshore Rate Advance on the last day of the Offshore Rate Interest Period for such Advance, and (if sooner occurring) on the Final Maturity Date. (iii) Any payment of an Offshore Rate Advance prior to the last day of the Offshore Rate Interest Period for such Advance, whether voluntary, by reason of acceleration or otherwise, including any mandatory payments required under this 8 Agreement and applied by the Bank to an Offshore Rate Advance, shall be accompanied by the amount of accrued interest on the amount repaid and by the amount (if any) required by Section 3.11. (c) Intentionally Omitted. (d) For purposes of determining the Borrower's and any applicable Acceptable Subsidiary's compliance with subsection 2.01(d), the Equivalent Amount of Offshore Currency Advances shall be determined, and redetermined by the Bank as of the applicable borrowing date in respect of such Advance (including the date such Advance was converted into an Offshore Currency Advance under subsection 2.02(b)), and on the last Business Day of each month. 2.03 Commercial Letters of Credit under the Revolving Facility. (a) Each commercial letter of credit shall, except as provided in subsection 2.03(b), be denominated in dollars and issued pursuant to the terms and conditions hereof and of a Bank standard form Application and Security Agreement for Commercial Letter of Credit (or such other form as the Bank may require) executed by the Borrower or an Acceptable Subsidiary. (b) The Bank or any Offshore Credit Provider may, from time to time during the Availability Period, in its sole discretion, issue commercial letters of credit denominated in Local Currencies to Acceptable Subsidiaries. Neither the Bank nor any Offshore Credit Provider shall have any obligation to issue any such commercial letters of credit denominated in Local Currencies unless the Bank and the relevant Acceptable Subsidiary agree, at the time of such Acceptable Subsidiary's request for such a letter of credit, on the repayment terms and other material provisions for such letter of credit and the Borrower or such Acceptable Subsidiary shall execute such applications, agreements and additional documentation as the Bank or the Offshore Credit Provider may require relating to such letter of credit. (c) Each commercial letter of credit shall: (i) expire on or before 180 days after the date such letter of credit is issued, but in no event later than the Final Maturity Date; (ii) require drafts payable in dollars (or, in the case of letters of credit issued under subsection 2.03(b), in the applicable currency) at sight or up to 180 days after sight; and (iii) be otherwise in form and substance and in favor of beneficiaries and for purposes satisfactory to the Bank. (d) The Borrower shall pay or cause the applicable Acceptable Subsidiary to pay to the Bank or the applicable Offshore Credit Provider issuance fees, negotiation fees, and other fees at the times and in the amounts the Bank or the Offshore Credit Provider advises the Borrower from time to time as being applicable to the Borrower's or the Acceptable Subsidiary's commercial letters of credit. (e) Each draft paid by the Bank or an Offshore Credit Provider under a commercial letter of credit issued hereunder shall be reimbursed by the Borrower or the applicable Acceptable Subsidiary to the Bank or such Offshore Credit Provider on the date such draft is paid by the Bank or the Offshore Credit Provider. Any sum owed to the Bank or an Offshore Credit Provider with respect to a commercial letter of credit issued for the Borrower's or any Acceptable Subsidiary's account which is not paid when due shall, at the option of the Bank in each instance, be deemed to be an Advance to the Borrower outstanding under the Revolving Facility and shall thereafter bear interest at the Reference Rate. (f) At the expiration of the Availability Period, the Bank may require the Borrower to provide or cause the applicable Acceptable Subsidiary to provide cash collateral in the amount of the L/C Outstanding Amount of any commercial letters of credit outstanding under this Agreement, and, in addition to any other rights or remedies which the Bank may have under this Agreement or otherwise, upon the occurrence of an Event of Default, the Bank may require the Borrower to provide or cause the applicable Acceptable Subsidiary to provide cash collateral in the amount of the L/C Outstanding Amount of any commercial letters of credit outstanding under this Agreement. 2.04 Standby Letters of Credit Under the Revolving Facility. (a) Each standby letter of credit shall, except as provided in subsection 2.04(b), be denominated in dollars and issued pursuant to the terms and conditions hereof and of a Bank standard form Application and Agreement for Standby Letter of Credit (or such other form as the Bank may require) executed by the Borrower or an Acceptable Subsidiary. (b) The Bank or any Offshore Credit Provider may, from time to time during the Availability Period, in its sole discretion, issue standby letters of credit denominated in Local Currencies to Acceptable Subsidiaries. Neither the Bank nor any Offshore Credit Provider shall have any obligation to issue any such standby letters of credit denominated in Local Currencies unless the Bank and the relevant Acceptable Subsidiary agree, at the time of such Acceptable Subsidiary's request for such a letter of credit, on the repayment terms and other material provisions for such letter of credit and the Borrower or such Acceptable Subsidiary shall execute such applications, agreements and additional documentation as the Bank or the Offshore Credit Provider may require relating to such letter of credit. (c) Each standby letter of credit shall: (i) expire on or before one year after the date such letter of credit is issued, but in no event later than the Final Maturity Date; and (ii) be otherwise in form and substance and in favor of beneficiaries and for purposes satisfactory to the Bank. (d) The Borrower shall pay or cause the applicable Acceptable Subsidiary to pay to the Bank a non-refundable fee equal to 1.00% per annum of the outstanding undrawn amount of each standby letter of credit issued hereunder for its account or for the account of an Acceptable Subsidiary (with a minimum fee of $250), payable annually in advance, and calculated on the basis of the face amount outstanding on the day the fee is calculated, or, in the case of standby letters of credit issued to an Acceptable Subsidiary and denominated in a Local Currency, such fees as are applicable to such letter of credit pursuant to subsection 2.04(b). However, if an Event of Default exists, at the option of the Bank, the amount of the fee shall be increased to 3% per annum, commencing on the day the Bank provides notice of the increase to the Borrower, or such fees as are applicable to a standby letter of credit denominated in a Local Currency pursuant to subsection 2.04(b). The Borrower shall also pay or cause the applicable Acceptable Subsidiary to pay such other fees and commissions at the times and in the amounts the Bank advises the Borrower from time to time as being applicable to the Borrower's or Acceptable Subsidiaries' standby letters of credit. (e) Each draft paid by the Bank or an Offshore Credit Provider under a standby letter of credit issued hereunder shall be reimbursed by the Borrower or the Acceptable Subsidiary to the Bank or such Offshore Credit Provider on the date such draft is paid by the Bank or the Offshore Credit Provider. Any sum owed to the Bank or an Offshore Credit Provider with respect to a standby letter of credit issued for the Borrower's or an Acceptable Subsidiary's account which is not paid when due shall, at the option of the Bank in each instance, be deemed to be an Advance to the Borrower outstanding under the Revolving Facility and shall thereafter bear interest at the Reference Rate. (f) At the expiration of the Availability Period, the Bank may require the Borrower to provide or cause the applicable Acceptable Subsidiary to provide cash collateral in the amount of the L/C Outstanding Amount of any standby letters of credit outstanding under this Agreement, and, in addition to any other rights or remedies which the Bank may have under this Agreement or otherwise, upon the occurrence of an Event of Default, the Bank may require the Borrower to provide or cause the applicable Acceptable Subsidiary to provide cash collateral in the amount of the L/C Outstanding Amount of any standby letters of credit outstanding under this Agreement. (g) The aggregate of the L/C Outstanding Amount in respect of standby letters of credit and the Bank Guaranty Outstanding Amount may not exceed at any time $10,000,000. 2.05 Local Currency Advances. (a) From time to time during the Availability Period, the Bank or any Offshore Credit Provider may, in its sole discretion, make Local Currency Advances to Acceptable Subsidiaries. (b) Neither the Bank nor any Offshore Credit Provider shall have any obligation to make any Local Currency Advance unless the following conditions are satisfied: (i) the Bank and the relevant Acceptable Subsidiary agree, at the time of such Acceptable Subsidiary's request for a Local Currency Advance, on the currency, the amount, the principal payment date(s), the interest rate and payment date(s), the prepayment and overdue payment terms, and the reserve, tax and other material provisions for such Advance; and (ii) The Borrower and such Acceptable Subsidiary shall execute such additional documentation as the Bank or such Offshore Credit Provider may require relating to each Local Currency Advance. 2.06 Bank Guaranties. (a) From time to time during the Availability Period, the Bank may, in its sole discretion, issue Bank Guaranties to the Borrower and to Acceptable Subsidiaries. Each Bank Guaranty shall be issued by an Offshore Credit Provider and pursuant to the laws of the jurisdiction in which such Offshore Credit Provider is located and subject to any other applicable law. Each Bank Guaranty shall be issued pursuant to the terms and conditions hereof and of a Bank standard form indemnity agreement and any other Bank standard forms for guaranties executed by the Borrower or the relevant Acceptable Subsidiary. (b) Each Bank Guaranty shall: (i) expire on or before the date which is one year after the date it is issued, but in any event no later than the Final Maturity Date; and (ii) be otherwise in form and substance and in favor of beneficiaries and for purposes satisfactory to the Bank. (c) The Borrower or the relevant Acceptable Subsidiary shall pay the Offshore Credit Provider issuance fees and other fees at the times and in the amounts the Bank advises the Borrower or the Acceptable Subsidiary from time to time as being applicable to Bank Guaranties issued for the Borrower's or the Acceptable Subsidiary's account. (d) Each payment by the Offshore Credit Provider under a Bank Guaranty shall be reimbursed by the Borrower or the Acceptable Subsidiary to the Offshore Credit Provider on the date of such payment. Any sum owed to the Offshore Credit Provider with respect to a Bank Guaranty issued under this Section which is not paid when due shall, at the option of the Offshore Credit Provider in each instance, be deemed to be an Advance to the Borrower by the Bank outstanding under the Revolving Facility and shall thereafter bear interest at the Reference Rate. (e) At the expiration of the Availability Period, the Bank may require the Borrower to provide or cause the applicable Acceptable Subsidiary to provide cash collateral in the amount of the Bank Guaranty Outstanding Amount, and, in addition to any other rights or remedies which the Bank may have under this Agreement or otherwise, upon the occurrence of an Event of Default, the Bank may require the Borrower to provide or cause the applicable Acceptable Subsidiary to provide cash collateral in the amount of the Bank Guaranty Outstanding Amount. (f) The aggregate of the Bank Guaranty Outstanding Amount and the L/C Outstanding Amount in respect of standby letters of credit may not exceed at any time $10,000,000. 2.07 Optional Prepayment. Subject to Section 3.11, the Borrower or the applicable Acceptable Subsidiary may, at any time or from time to time, upon not less than three Business Days' irrevocable notice to the Bank, prepay Advances in whole or in part. If such notice is given by the Borrower or the applicable Acceptable Subsidiary, the prepayment amount specified therein shall be due and payable on the date specified therein, together with accrued interest to the date of repayment on the amount so prepaid. 2.08 Mandatory Payment. If at any time and for any reason the total amount of credit outstanding under this Agreement exceeds the limitations set forth herein, the Borrower shall or shall cause the applicable Acceptable Subsidiary to, subject to Section 3.11, pay to the Bank, upon demand, the amount of the excess; provided, that if the foregoing applies due to a change in applicable rates of exchange between Dollars and Offshore Currencies or Local Currencies, the Borrower shall be obligated to pay such amount only if the excess is greater than $500,000 or the Equivalent Amount thereof. Payments under this Section may be applied to the obligations of the Borrower or the Acceptable Subsidiaries to the Bank in the order and manner as the Bank in its discretion may determine. Payments to be applied to outstanding letters of credit and drafts accepted under letters of credit and Bank Guaranties may, at the Bank's option, be used to prepay, or held as cash collateral to secure, the Borrower's or any Acceptable Subsidiary's obligations to the Bank or any Offshore Credit Provider with respect thereto. 2.09 Commitment Fee. The Borrower shall pay to the Bank a commitment fee at the rate of 0.20% per annum on the average daily unused portion of the credit provided under this Agreement. For purposes of computing the unused portion, the L/C Outstanding Amount and the Bank Guaranty Outstanding Amount shall be deemed to be usage. The commitment fee shall be computed on a calendar quarter basis, except for the first period which shall commence on May 1, 1997 and end on June 30, 1997, and the last period which shall end on the last day of the Availability Period. The commitment fee shall be payable in arrears on June 30, 1997, on the last day of each successive quarter thereafter, and on the last day of the Availability Period. 2.10 Default Rate. Upon the occurrence and during the continuation of any Event of Default, and without constituting a waiver of any such Event of Default, (a) Advances under the Revolving Facility shall at the option of the Bank bear interest at a rate per annum which is 2.00% per annum higher than the rate of interest otherwise provided under this Agreement, and (b) Offshore Currency Advances shall at the option of the Bank be redenominated and converted into the Equivalent Amount of Reference Rate Advances in Dollars. 2.11 Early Termination of Commitment. The Borrower may at any time terminate the Bank's (including any Offshore Credit Provider's) commitment to extend credit hereunder by giving no less than five Business Days' prior notice to the Bank and paying in full the entire amount of credit outstanding hereunder (including the L/C Outstanding Amount and Bank Guaranty Outstanding Amount), together with any sums due under Section 3.11. Payments to be applied to outstanding letters of credit and drafts accepted under letters of credit and Bank Guaranties may, at the Bank's option, be used to prepay, or held as cash collateral to secure, the Borrower's and Acceptable Subsidiaries' obligations to the Bank with respect thereto. All accrued commitment fees to, but not including the effective date of any termination of the commitment, shall be paid on the effective date of such termination. 2.12 Denomination and Payments in the Euro; Additional Changes. Each obligation under this Agreement of a party hereto which would have been denominated in a National Currency Unit but for the introduction of the euro, shall instead be denominated in, or redenominated into, as applicable, the euro; provided that, if and to the extent that any EMU Legislation allows amounts denominated in the euro to be paid by crediting an account of the creditor within a country in either the euro or the National Currency Unit of that country, such amounts may be paid hereunder in either the euro or such National Currency Unit. The provisions of this Agreement relating to the euro and National Currency Units shall be subject to such further changes as the Bank may from time to time in its reasonable discretion notify to the Borrower to be necessary or appropriate to reflect the changeover to the euro in Participating Member States. ARTICLE III Extensions of Credit, Payments and Interest Calculations 3.01 Requests for Credit. Each request for an extension of credit shall be made in writing on a form acceptable to the Bank or in any other manner acceptable to the Bank. 3.02 Disbursements and Payments. Each disbursement by the Bank and each payment by the Borrower or an Acceptable Subsidiary under this Agreement shall be made in the funds and at such branch of the Bank as the Bank may from time to time select. All payments by the Borrower or an Acceptable Subsidiary under this Agreement of amounts denominated in the euro or a National Currency Unit shall be made in immediately available, freely transferable, cleared funds to the account of the Bank in the principal financial center in such Participating Member State, as from time to time designated by the Bank for such purpose. The Bank shall not be liable to the Borrower or any Acceptable Subsidiary in any way whatsoever for any delay, or the consequences of any delay, in the crediting to any account of any amount denominated in the euro or a National Currency Unit. 3.03 Branch Accounts. Each extension of credit under this Agreement shall be made for the account of such branch, office, or affiliate of the Bank as the Bank may from time to time select. 3.04 Evidence of Indebtedness. Principal, interest, and all other sums due to the Bank (or any Offshore Credit Provider) under this Agreement shall be evidenced by entries in records maintained by the Bank (or such Offshore Credit Provider), and, if required by the Bank, by a promissory note or notes. Each payment on and any other credits with respect to principal, interest, and all other sums due under this Agreement shall be evidenced by entries to records maintained by the Bank or such Offshore Credit Provider. The loan accounts or records maintained by the Bank or any Offshore Credit Provider shall be conclusive absent manifest error of the amount of the credit extended hereunder and the interest and payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrower or any Acceptable Subsidiary hereunder to pay any amount owing. 3.05 Interest Calculation. Interest based on the Reference Rate shall be computed on the basis of a 365/366-day year, actual days elapsed. All other interest and fees payable under this Agreement shall be computed on the basis of a 360 day year and actual days elapsed, which results in more interest or a larger fee than if a 365-366 day year were used; provided, that, the basis of accrual of interest or fees with respect to the euro shall be consistent with the convention and practice for the euro in the London interbank market or other applicable interbank market, as the case may be. 3.06 Late Payments; Compounding. Any sum payable by the Borrower hereunder (including unpaid interest) if not paid when due shall bear interest (payable on demand) from its due date until payment in full at a rate per annum equal to the Reference Rate plus 2.00% per annum. At the option of the Bank, in each instance, any sum payable hereunder which is not paid when due (including unpaid interest) may be added to principal of the Revolving Facility and shall thereafter bear interest at the rate applicable to principal. 3.07 Business Day. Any sum payable by the Borrower or an Acceptable Subsidiary hereunder which becomes due on a day which is not a Business Day shall be due on the next Business Day after such due date, unless, in the case of an Offshore Rate Loan, the result of such extension would be to carry such Offshore Rate Interest Period into another calendar month, in which event such Offshore Rate Interest Period shall end on the immediately preceding Business Day. Any payments received by the Bank or an Offshore Credit Provider on a day which is not a Business Day shall be deemed to be received on the next Business Day after such date of receipt. 3.08 Taxes and Other Charges. (a) (i) If any taxes (other than taxes on net income (A) imposed by the country or any subdivision of the country in which the Bank's principal office or actual lending office is located and (B) measured by the United States taxable income the Bank would have received if all payments under or in respect of this Agreement and any instrument or agreement required hereunder were exempt from taxes levied by the Borrower's country) are at any time imposed on any payments under or in respect of this Agreement or any instrument or agreement required hereunder including, but not limited to, payments made pursuant to this Section, the Borrower shall pay all such taxes and shall also pay to the Bank, at the time interest is paid, all additional amounts which the Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such taxes had not been imposed. (ii) The additional amounts necessary to preserve the after-tax yield the Bank would have received if such taxes had not been imposed shall be calculated pursuant to the formula: (w)(t)(i) y = - - - - - - - 1-w-t where the terms are defined as follows: y = additional payment to be made to the Bank w = withholding tax rate levied by foreign government t = the Bank's combined Federal and state tax rate i = amount of interest to be paid on Credit (computed by using the base rate plus quoted spread) 1 = one (b) The Borrower will provide the Bank with original tax receipts, notarized copies of tax receipts, or such other documentation as will prove payment of tax in a court of law applying the United States Federal Rules of Evidence, for all taxes paid by the Borrower pursuant to subsection (a) above. The Borrower will deliver receipts to the Bank within 30 days after the due date for the related tax. 3.09 Illegality. (a) If the Bank determines that (i) the introduction of any law, rule, regulation, treaty, or determination of an arbitrator or court or other governmental authority or any change in or in the interpretation or administration thereof has made it unlawful, or that any central bank or other governmental authority has asserted that it is unlawful, for the Bank (directly or through any Offshore Credit Provider) to make or extend any Advance or other credit under this Agreement, or (ii) any order, judgment, or decree of any governmental authority or arbitrator purports by its terms to enjoin or restrain the Bank (or any Offshore Credit Provider) from making or extending any Advance or other credit hereunder, then, on notice thereof by the Bank to the Borrower, the obligation of the Bank to make or extend such Advance or other credit (directly or through any Offshore Credit Provider) shall be suspended until the Bank shall have notified the Borrower that the circumstances giving rise to such determination no longer exist. (b) If the Bank determines that it is unlawful for it or any applicable Offshore Credit Provider to maintain any Offshore Rate Advance or Local Currency Advance hereunder, the Borrower shall prepay or shall cause the applicable Acceptable Subsidiary to prepay in full all Offshore Rate Advances or Local Currency Advances, as the case may be then outstanding, together with interest accrued thereon, either on the last day of the applicable Offshore Rate Interest Period or the interest period applicable to the Local Currency Advance if the Bank or such Offshore Credit Provider may lawfully continue to maintain such Advances to such day and such loans have an interest period, or immediately, if the Bank may not lawfully continue to maintain such Advances or such loans have no interest period, together with any amounts required to be paid in connection therewith pursuant to Section 3.11. 3.10 Increased Costs. The Borrower shall pay to the Bank, on demand, the Bank's costs or losses arising from any statute or regulation, or any request or requirement of a regulatory agency which is applicable to all national banks or a class of all national banks (but not including any such statute, regulation, request or requirement which has the effect of changing the reserve requirements to the extent already included in the calculation of the Offshore Rate). The costs and losses will be allocated to this facility in a manner determined by the Bank, using any reasonable method. The costs include the following: (a) any reserve or deposit requirements; and (b) any capital requirements relating to the Bank's assets and commitments for credit; and (c) the introduction of, changeover to or operation of the euro in a Participating Member State. 3.11 Funding Losses. The Borrower shall reimburse the Bank and hold the Bank harmless from any loss or expense which the Bank may sustain or incur as a consequence of the failure of the Borrower (or any Acceptable Subsidiary) to make any payment or prepayment of principal of any Advance hereunder made at a rate of interest related to the Offshore Rate (including payments made after any acceleration thereof), or to borrow at such a rate, or the prepayment of an Advance which bears interest at such a rate on a day which is not the last day of the interest period with respect thereto (including payments made after any acceleration thereof or because the total amount of credit exceeds the limitations set forth herein), or the redenomination and conversion, upon the occurrence of any Event of Default, of an Advance which bears interest at such a rate; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Advances made at a rate related to the Offshore Rate hereunder or from fees payable to terminate any deposits from which such funds were obtained or deemed obtained. 3.12 Inability to Determine Rates. The Bank has no obligation to accept an election for an Offshore Rate Advance if (a) deposits in the applicable currency in the principal amount, and for the period equal to the interest period, for such Advance are not available in the applicable funding market; or (b) the Offshore Rate does not accurately reflect the cost of such Advance; or (c) with respect to Offshore Currency Advances denominated in the euro, the euro has ceased to be utilized as the basic accounting unit of the European Community. Nothing contained herein shall, however, obligate the Bank to obtain the funds for any Advance in any particular manner. 3.13 Certificate of the Bank. If the Bank claims any reimbursement or compensation pursuant to Section 3.10 or Section 3.11, then the Bank shall deliver to the Borrower a certificate setting forth in reasonable detail the amount payable to the Bank thereunder and such certificate shall be conclusive and binding on the Borrower in the absence of manifest error. 3.14 Debits to Borrower's Account. The Borrower hereby authorizes the Bank to debit the Borrower's deposit account number 1233012785 at the Global Payments Operations, Concord, CA office of the Bank in the amount of principal, interest, fees, or any other amount due under this Agreement or under any instrument or agreement required under this Agreement. The Bank may, at its option, debit the account on the date such amounts become due, or, if such due date is not a Business Day, on the next Business Day after such due date. If there are insufficient funds in the account to cover the amount debited to the accounts in accordance with this Section, such debit may be reversed in whole or in part, at the option of the Bank in its sole discretion, and the amount not debited shall be deemed to remain unpaid. 3.15 Survival. The agreements and obligations of the Borrower under Sections 3.08 through 3.11 shall survive the expiration or termination of the commitment to extend credit hereunder and the payment of all other obligations of the Borrower or any Acceptable Subsidiary hereunder or under the other Credit Documents. ARTICLE IV Conditions to Availability of Credit The Bank's obligation to extend credit under this Agreement is subject to the Bank's receipt of the following, each in form and substance satisfactory to the Bank: 4.01 Conditions to First Extension of Credit. Before the first extension of credit: (a) This Agreement, executed by the Borrower; (b) Satisfactory evidence of due authorization of the execution, delivery, and performance by the Borrower and any Acceptable Subsidiary of this Agreement and any other Credit Documents, including certified resolutions, incumbency certificate; (c) A certificate of an appropriate officer of the Borrower as to the matters set forth in Section 4.02(a) and (b); (d) A copy of the Borrower's current Investment Guidelines, which must be satisfactory to the Bank; (e) Payment of a non-refundable amendment and restatement fee in the amount of $_______, which amount the Borrower covenants to pay to the Bank on demand, and payment of any other fee or expense required hereunder prior to the first extension of credit; (f) Such other approvals, opinions, documents or instruments as the Bank may request. 4.02 Conditions to Each Extension of Credit. Before each extension or renewal of credit (including pursuant to any election under Section 2.02(b)), including the first: (a) The representations and warranties of the Borrower contained in this Agreement shall be true on and as of the date of each extension of credit; (b) Immediately prior to and immediately after giving effect to such extension of credit, no Default or Event of Default shall exist; (c) Executed originals of all Credit Documents required under Article II shall have been delivered to the Bank. Each request for an extension of credit hereunder shall constitute a representation and warranty by the Borrower, as of the date of each such request and as of the date of each extension of credit, that the conditions in this Section are satisfied. ARTICLE V Representations and Warranties The Borrower represents and warrants that: 5.01 Corporate Existence and Power. The Borrower and each Subsidiary: (a) is a corporation duly organized and existing under the laws of the jurisdiction of its organization; (b) has the power and authority and all governmental licenses, authorizations, consents, and approvals to own its assets, carry on its business, and to execute, deliver, and perform its obligations under, the Credit Documents to which it is a party ; and (c) is duly qualified and properly licensed and in good standing under the laws of each jurisdiction where its ownership, lease, or operation of property or the conduct of its business requires such license or qualification. 5.02 Authorization. The execution, delivery, and performance by the Borrower and each Acceptable Subsidiary of this Agreement and any other Credit Document to which any of them is a party, have been duly authorized by all necessary corporate action, and do not and will not: (a) contravene the terms of any organizational or charter documents; (b) conflict with or result in any breach or contravention of, or the creation of any lien, security interest, or charge under, any agreement, contract, indenture, document, or instrument to which the Borrower or any Subsidiary is a party or by which any property is bound, or any order, injunction, writ, or decree of any governmental authority to which the Borrower or any Subsidiary or any of their respective property is subject; or (c) violate any law, rule, regulation, or determination of an arbitrator or of a court or other governmental authority, in each case applicable to or binding upon the Borrower or any Subsidiary or any of their respective property. 5.03 Enforceability. This Agreement is a legal, valid, and binding agreement of the Borrower, enforceable against the Borrower in accordance with its terms, and the other Credit Documents and any other instrument or agreement required under this Agreement, when executed and delivered, will be legal, valid, binding, and enforceable in accordance with its terms against the Borrower or the Acceptable Subsidiary, as applicable. 5.04 Compliance with Laws. Each of the Borrower and its Subsidiaries is in compliance with all foreign, federal, state and local laws, rules, regulations and determinations of arbitrators, courts and other governmental authorities materially affecting the business, operations or property of the Borrower and such Subsidiaries (including Environmental Laws). 5.05 Permits, Franchises. The Borrower or its Subsidiaries possess all permits, memberships, franchises, contracts, and licenses required and all trademark rights, trade name rights, patent rights, and fictitious name rights necessary to enable the Borrower and its Subsidiaries to conduct the businesses in which they are now engaged. 5.06 Litigation. There is no litigation, tax claim, proceeding, governmental or administrative action, investigation, arbitration proceeding or dispute pending, or, to the knowledge of the Borrower, threatened, against or affecting the Borrower or any of its Subsidiaries or any of their properties, the adverse determination of which would result in a Material Adverse Effect. 5.07 No Event of Default. There exists no Default or Event of Default. 5.08 Other Obligations. As of the Closing Date, the Borrower or its Subsidiaries is not in default under any other agreement involving the borrowing of money, the extension of credit, or the lease of real or personal property, to which the Borrower or such Subsidiary is a party as borrower, guarantor, installment purchaser, or lessee, except as disclosed in writing to the Bank prior to the Closing Date. 5.09 Tax Returns. The Borrower has no knowledge of any material pending assessments or adjustments with respect to its or its Subsidiaries' income tax liabilities for any year, except as disclosed in writing to the Bank prior to the Closing Date. 5.10 Information Submitted. All financial and other information that has been submitted by the Borrower or a Subsidiary to the Bank, including the Borrower's financial statement delivered to the Bank most recently prior to the Closing Date: (a) in the case of financial statements, is prepared in accordance with generally accepted accounting principles consistently applied; and (b) is true and correct in all material respects and is complete insofar as may be necessary to give the Bank true and accurate knowledge of the subject matter thereof. 5.11 No Material Adverse Effect. Since December 31, 1996, there has been no Material Adverse Effect. 5.12 ERISA Compliance. Except as specifically disclosed to the Bank in writing prior to the Closing Date: (a) each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law; (b) there are no pending, or to the best knowledge of Borrower, threatened claims, actions or lawsuits, or action by any governmental authority, with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect; (c) there has been no prohibited transaction or other violation of the fiduciary responsibility rule with respect to any Plan which could reasonably result in a Material Adverse Effect; (d) no ERISA Event has occurred or is reasonably expected to occur with respect to any Pension Plan; (e) no Pension Plan has any Unfunded Pension Liability; (f) the Borrower has not incurred, nor does it reasonably expect to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (g) no trade or business (whether or not incorporated under common control with the Borrower within the meaning of Section 414(b), (c), (m) or (o) of the Code) maintains or contributes to any Pension Plan or other Plan subject to Section 412 of the Code; and (h) neither the Borrower or entity under common control with the Borrower in the preceding sentence has ever contributed to any multiemployer plan within the meaning of Section 4001(a)(3) of ERISA. 5.13 Environmental Matters. (a) (i) The properties of the Borrower and its Subsidiaries do not contain and have not previously contained (at, under, or about any such property) any Hazardous Substances or other contamination (A) in amounts or concentrations that constitute or constituted a violation of, or could give rise to liability under, any Environmental Laws, (B) which could interfere with the continued use, occupation or operation of such property, (C) which could impair the fair market value thereof or (D) in levels or concentrations requiring cleanup or other management under applicable standards or guidelines of foreign, federal, state or local environmental agencies; and (ii) there has been no transportation or disposal of Hazardous Substances from, nor any release or threatened release of Hazardous Substances at or from, any property of the Borrower or any of its Subsidiaries in violation of or in any manner which could give rise to liability under any Environmental Laws. (b) Neither the Borrower nor any of its Subsidiaries has received or is aware of any material claim or notice of material violation, alleged material violation, non-compliance, liability or potential liability regarding environmental matters, Hazardous Substances or compliance with Environmental Laws with regard to the properties or operations of the Borrower or any of its Subsidiaries, nor does the Borrower have knowledge or reason to believe that any such action is being contemplated, considered, or threatened. 5.14 Year 2000. On the basis of a comprehensive review and assessment of the Borrower's and its Subsidiaries' systems and equipment and inquiry made of the Borrower's and its Subsidiaries' material suppliers and vendors, the Borrower reasonably believes that the "Year 2000 problem" (that is, the inability of computers, as well as embedded microchips in non-computing devices, to perform properly date-sensitive functions with respect to certain dates prior to and after December 31, 1999), including costs of remediation, will not result in a Material Adverse Effect. The Borrower and its Subsidiaries will have developed contingency plans by October 31, 1999 to ensure uninterrupted business operation of systems and equipment which are essential to Borrower's business operations in the event of failure of their own or a third party's systems or equipment due to the Year 2000 problem, including those of vendors and suppliers. ARTICLE VI Affirmative Covenants So long as credit is available under this Agreement and until full and final payment of all of the Borrower's and any Acceptable Subsidiaries' obligations under this Agreement and any other Credit Document: 6.01 Notices of Certain Events. The Borrower shall promptly give written notice to the Bank of: (a) all litigation, proceedings or actions affecting the Borrower or its Subsidiaries where the amount claimed is $1,000,000 or more; (b) any substantial dispute which may exist between the Borrower or its Subsidiaries and any governmental regulatory body or law enforcement authority; (c) any Default or Event of Default; (d) any of the representations and warranties in Article V ceases to be true and correct; and (e) any other matter which has resulted or could reasonably be expected to result in a Material Adverse Effect. 6.02 Financial and Other Information. The Borrower shall deliver to the Bank in form and detail satisfactory to the Bank, and in such number of copies as the Bank may request: (a) Within 100 days after the end of each fiscal year, (i) the Borrower's consolidated financial statements for such year audited by a certified public accountant together with an unqualified opinion of such certified public accountant and including, at a minimum, the Borrower's balance sheet and statements of income, retained earnings, and cashflow; and (ii) a complete copy of Borrower's Form 10-K Annual Report submitted to the Securities and Exchange Commission for such year; (b) Within 50 days after the end of each fiscal quarter, (i) the Borrower's consolidated financial statements for such period prepared by the Borrower and including, at a minimum, the Borrower's balance sheet and statements of income, retained earnings, and cash flow, and (ii) a complete copy of Borrower's Form 10-Q Quarterly Report submitted to the Securities and Exchange Commission for such quarter; (c) Concurrently with the delivery of the financial statements referred to in subsections 6.02(a) and (b) above, a Compliance Certificate; (d) Within 10 days after the date of filing with the Securities and Exchange Commission, copies of the Borrower's Form 8-K Current Reports; (e) Promptly after any changes thereto, any changes to the Investment Guidelines; and (f) Promptly upon request, such other materials and information relating to the Borrower or its Subsidiaries as the Bank may request. 6.03 Books, Records, Audits and Inspections. The Borrower shall, and shall cause its Subsidiaries to, maintain adequate books, accounts and records, and prepare all financial statements required hereunder in accordance with generally accepted accounting principles consistently applied, and in compliance with the regulations of any governmental regulatory body having jurisdiction over the Borrower or its Subsidiaries, or the Borrower's or its Subsidiaries' businesses, and permit employees or agents of the Bank at any reasonable time to inspect the Borrower's and its Subsidiaries' properties, and to examine or audit the Borrower's and its Subsidiaries' books, accounts, and records and make copies and memoranda thereof. 6.04 Use of Facility. The Borrower shall use and shall cause the Acceptable Subsidiaries to use the credit facility provided herein solely for working capital and other general corporate purposes not in contravention of any requirement of law. 6.05 Insurance. The Borrower shall, and shall cause its Subsidiaries to, maintain and keep in force insurance of the types and in amounts customarily carried in lines of businesses similar to those of the Borrower and its Subsidiaries, as applicable, including fire, extended coverage, public liability (including coverage for contractual liability), property damage (including use and occupancy), business interruption, and workers' compensation, all carried by insurers and in amounts satisfactory to the Bank, with loss payable endorsements on such types of insurance as the Bank may request, and deliver to the Bank from time to time, at the Bank's request, a copy of each insurance policy, or if permitted by the Bank, a certificate of insurance setting forth all insurance then in effect. 6.06 Compliance with Laws. The Borrower shall at all times comply with, and cause its Subsidiaries to comply with, all laws, statutes (including any fictitious name statute), rules, regulations, orders, and directions of any governmental authority having jurisdiction over the Borrower or any of its Subsidiaries or the business of the Borrower or any of its Subsidiaries (including all Environmental Laws). 6.07 Change in Name, Structure or Location. The Borrower shall notify the Bank in writing prior to any change in (a) the Borrower's name or the name of any Acceptable Subsidiary, (b) the Borrower's or any Acceptable Subsidiary's business or legal structure, or (c) the Borrower's or any Acceptable Subsidiary's place of business or chief executive office if the Borrower has more than one place of business. 6.08 Existence and Properties. The Borrower and each of its Subsidiaries shall maintain and preserve its existence and all rights, privileges, and franchises now enjoyed, conduct its business in an orderly, efficient, and customary manner, keep all the its properties in good working order and condition, and from time to time make all needed repairs, renewals, or replacements thereto and thereof so that the efficiency of such property shall be fully maintained and preserved. 6.09 Additional Acts. The Borrower shall perform, on request of the Bank, such acts as may be necessary or advisable to perfect any lien or security interest contemplated hereby or otherwise to carry out the intent of this Agreement. ARTICLE VII Negative Covenants So long as credit is available under this Agreement and until full and final payment of all of the Borrower's and any Acceptable Subsidiary's obligations under this Agreement and any other Credit Document: 7.01 Other Indebtedness. The Borrower and its Subsidiaries shall not create, incur, assume, or permit to exist any indebtedness or liabilities for or resulting from borrowed money, loans, or advances, or for the deferred purchase price of property under capital leases, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, or become liable as a surety, guarantor, accommodation endorser, or otherwise for or upon the obligation of any other person, firm, corporation or other entity; provided, however, that this Section shall not prohibit: (a) the acquisition of goods, supplies, or merchandise on normal trade credit; (b) the execution of bonds or undertakings in the ordinary course of its business as presently conducted; (c) the endorsement of negotiable instruments received in the ordinary course of its business as presently conducted; (d) indebtedness for borrowed money to banks other than the Bank incurred by Subsidiaries which does not exceed $5,000,000 in the aggregate (including commitments and outstandings) outstanding at any time; (e) indebtedness secured by purchase money liens permitted under Section 7.02(f), provided that the aggregate of such indebtedness incurred in any fiscal year does not exceed $10,000,000; (f) guarantees by the Borrower or its Subsidiaries in favor of the Bank; or (g) guarantees by the Borrower of indebtedness incurred by Subsidiaries which is permitted under subsection (d) of this Section 7.01. 7.02 Liens. The Borrower shall not, and shall not suffer or permit any of its Subsidiaries to, create, assume, or suffer to exist any security interest, deed of trust, mortgage, lien (including the lien of an attachment, judgment, or execution), or encumbrance, securing a charge or obligation, on or of any of its or their property, real or personal, whether now owned or hereafter acquired, except: (a) security interests and deeds of trust in favor of the Bank; (b) liens, security interests, and encumbrances in existence as of the date of this Agreement and disclosed to the Bank in writing prior to the Closing Date; (c) liens for current taxes, assessments, or other governmental charges which are not delinquent or remain payable without any penalty; (d) liens in connection with workers' compensation, unemployment insurance, or other social security obligations; (e) mechanics', worker's, materialmen's, landlords', carriers', or other like liens arising in the ordinary and normal course of business with respect to obligations which are not due; and (f) purchase money security interests in personal property hereafter acquired when the security interest does not extend beyond the property purchased, the liability secured does not exceed 100% of the cost thereof, and the aggregate amount of liabilities secured by such property do not exceed, at any one time, $10,000,000. 7.03 Capital Assets. The Borrower on a consolidated basis shall not expend or incur obligations for the acquisition of fixed or capital assets on a cumulative basis of more than (i) $25,000,000 for the fiscal year ending December 31, 1997, (ii) $30,000,000 for each of the fiscal years ending December 31, 1998 and December 31, 1999, and (iii) $37,500,000 for each of the fiscal years ending December 31, 2000 and December 31, 2001. 7.04 Dividends. Neither the Borrower nor any of its Subsidiaries that is not wholly-owned by the Borrower shall declare or pay any dividends or distributions on any of its shares now or hereafter existing, or purchase, redeem or otherwise acquire for value any of its shares, or create any sinking fund in relation thereto, except for (i) dividends payable solely in its capital stock and (ii) repurchases of its shares in an aggregate cumulative amount not to exceed $10,000,000 after March 31, 1997. 7.05 Loans. Neither the Borrower nor any of its Subsidiaries shall make any loans, advances, or other extensions of credit to any of the Borrower's or such Subsidiary's executives, officers, or directors or shareholders (or any relatives of any of the foregoing), or make loans, advances or other extensions of credit to or invest in any other person, firm, corporation, or other entity, other than (a) investments in cash equivalents; (b) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business; (c) extensions of credit by the Borrower to any of its wholly-owned Subsidiaries or by any of its wholly-owned Subsidiaries to another of its wholly-owned Subsidiaries; (d) investments incurred in order to consummate acquisitions or other transactions otherwise permitted under Section 7.06, provided that such acquisitions or other transactions are undertaken in accordance with all applicable requirements of law; and (e) other loans, advances, extensions of credit and investments in an aggregate amount outstanding at any one time not to exceed $5,000,000. 7.06 Acquisitions, Liquidations and Mergers. The Borrower shall not, and shall not suffer or permit any Subsidiary to, liquidate or dissolve or enter into any consolidation, merger, partnership, joint venture, or other combination, or to purchase control of, or the assets or business of, any other person, firm, corporation or other entity; provided that this Section shall not prohibit any such transaction where (i) the consolidated or merged entity or partnership or joint venture or acquired assets or business involves business activities and operations substantially the same as or related to the present business activities and operations of the Borrower, and (ii) in the case of a consolidation, merger or combination, the Borrower or such Subsidiary shall be the surviving entity, and provided further that any Subsidiary may merge with the Borrower, provided that the Borrower shall be the continuing or surviving corporation, or with any one or more Subsidiaries, provided that if any transaction shall be between a Subsidiary and a wholly-owned Subsidiary, the wholly-owned Subsidiary shall be the continuing or surviving corporation. 7.07 Sale of Assets. Neither the Borrower nor any of its Subsidiaries shall (a) sell, lease, or otherwise dispose of its business or assets as a whole or such as in the opinion of the Bank constitutes a substantial portion of its business or assets; (b) sell or otherwise dispose of any of its accounts receivable except in connection with the collection of same in the ordinary course of business; (c) sell or otherwise dispose of any of its assets except for full, fair and reasonable consideration; or (d) enter into any sale and leaseback agreement covering any of its fixed or capital assets if the amount of financing being extended pursuant to such agreement exceeds $5,000,000. 7.08 Business Activities. The Borrower and its Subsidiaries shall not engage in any business activities or operations substantially different from or unrelated to present business activities and operations. 7.09 Regulations G, T, U, and X. The Borrower shall not, and shall not permit any of its Subsidiaries to, use any portion of the proceeds of any Advances or extensions of credit hereunder, directly or indirectly, (i) to purchase or carry margin stock (within the meanings of Regulations G, T, U, and X of the FRB), (ii) to repay or otherwise refinance indebtedness of the Borrower or others incurred to purchase or carry any such margin stock, (iii) to extend credit for the purpose of purchasing or carrying any such margin stock, or (iv) to acquire any security in any transaction that is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended. 7.10 Intentionally Omitted. 7.11 Quick Ratio. The Borrower shall not permit at any time on a consolidated basis its Quick Ratio to be less than 1.50: 1.00. For purposes of this Agreement, (a) "Quick Ratio" shall mean the ratio of (i) the sum of (A) consolidated cash, (B) accounts receivable net of any reserves or offsets, (C) short-term cash investments, (D) investment grade marketable securities not classified as long-term investments, and (E) long-term investments not to exceed $15,000,000 and in compliance with the Investment Guidelines, to (ii) Current Liabilities; and (b) "Current Liabilities" shall include all funded and unfunded indebtedness under this Agreement and the other Credit Documents (including undrawn amounts (or the Equivalent Amount thereof) of all letters of credit and Bank Guaranties and drawn and unreimbursed obligations with respect thereto). 7.12 Total Liabilities to Tangible Net Worth. The Borrower shall not permit at any time on a consolidated basis the ratio of the Borrower's Total Liabilities to Tangible Net Worth to exceed 0.75: 1.00. For purposes of this Agreement, (a) "Total Liabilities" shall include all funded and unfunded indebtedness under this Agreement and the other Credit Documents (including undrawn amounts (or the Equivalent Amount thereof) of all letters of credit and Bank Guaranties and drawn and unreimbursed obligations with respect thereto); and (b) "Tangible Net Worth" means the gross book value of the assets of the Borrower and its Subsidiaries (exclusive of goodwill, patents, trademarks, trade names, organization expense, treasury stock (to the extent included in gross assets), unamortized debt discount and expense, deferred charges, capitalized software and other like intangibles and excluding (i) loans from the Borrower or its Subsidiaries to any of its employees, officers, or owners, and (ii) any value placed on any leasehold, provided, however, that leasehold improvements may be included in the value of the Borrower's consolidated assets) less (A) reserves applicable thereto and (B) all liabilities including accrued and deferred income taxes. 7.13 Tangible Net Worth. The Borrower shall not permit at any time on a consolidated basis its Tangible Net Worth to be less than $105,000,000 plus the sum of (i) 75% of net income after income taxes (without subtracting losses) earned in each quarterly accounting period commencing after March 31, 1997, plus (ii) the net proceeds from any equity securities issued after March 31, 1997, plus (iii) any increase in stockholders' equity resulting from the conversion of debt securities to equity securities after March 31, 1997, less (iv) the lesser of (a) $10,000,000 or (b) the amount of repurchases by the Borrower of its equity securities after March 31, 1997. 7.14 Consecutive Quarterly Losses; Losses in One Quarter. The Borrower on a consolidated basis shall not incur, (a) any quarterly net (after tax) or operating loss in excess of $7,500,000 for the quarter ending June 30, 1997, (b) any quarterly net (after tax) or operating loss in excess of $2,000,000 for the quarter ending September 30, 1997, and (c) for the quarter ending December 31, 1997 and each quarter thereafter (i) any quarterly net (after tax) or operating loss in any two consecutive fiscal quarters and (ii) any quarterly net (after tax) or operating loss in excess of 5% of its consolidated Tangible Net Worth. For purposes of clarification of clause (c), if there is a net (after tax) or operating loss in the quarter ending September 30, 1997, the quarter ending December 31, 1997 must be profitable. ARTICLE VIII Events of Default 8.01 Events of Default. The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement: (a) Failure to Pay. The Borrower or any Acceptable Subsidiary fails to pay, when due, any installment of principal, or any interest, fee or any other sum due under this Agreement or any other Credit Document in accordance with the terms hereof or thereof. (b) Breach of Representation or Warranty. Any representation or warranty herein or in any other Credit Document proves to have been false or misleading in any material respect when made or deemed made. (c) Specific Defaults. The Borrower fails to perform or observe any term, covenant or agreement contained in Section 6.01, 6.02, or 6.03 or Article VII. (d) Other Defaults. The Borrower or any Acceptable Subsidiary fails to perform or observe any other term or covenant contained in this Agreement or any Credit Document. (e) Trade Suits. One or more suits are filed against the Borrower by a trade creditor or trade creditors of the Borrower in the aggregate amount of $5,000,000 or more. (f) Judgments. One or more judgments or arbitration awards are entered against the Borrower or any of its Subsidiaries or the Borrower or any of its Subsidiaries enters into any settlement agreement with respect to any litigation or arbitration, in the aggregate amount of $3,000,000 or more on a claim or claims not fully covered by insurance. (g) Failure to Pay Debts; Voluntary Bankruptcy. The Borrower or any Subsidiary (i) fails to pay the Borrower's or such Subsidiary's debts generally as they come due, or (ii) files any petition, proceeding, case, or action for relief under any bankruptcy, reorganization, insolvency, or moratorium law, or any other law or laws for the relief of, or relating to, debtors. (h) Involuntary Bankruptcy. An involuntary petition is filed under any bankruptcy or similar statute against the Borrower or any Subsidiary, or a receiver, trustee, liquidator, assignee, custodian, sequestrator, or other similar official is appointed to take possession of the properties of the Borrower or any Subsidiary; provided, however, that such Event of Default shall be deemed cured if such petition or appointment is set aside or withdrawn or ceases to be in effect within 60 days from the date of said filing or appointment. (i) Default of Other Financial Obligations. Any default occurs under any other agreement involving the borrowing of money or the extension of credit to which the Borrower or any Subsidiary may be a party as borrower, guarantor, or installment purchaser, if such default consists of the failure to pay any obligation when due or if such default gives to the holder of the obligation concerned the right to accelerate the obligation. (j) Default under other Credit Documents. Any Credit Document (other than this Agreement), guaranty, subordination agreement, or other agreement or instrument required hereunder or executed in connection herewith is breached or becomes ineffective or any default occurs under any such agreement or instrument or Borrower disavows its obligations under any such guaranty. (k) Default of Other Bank Obligations. Any default occurs under any other obligation of the Borrower or any Subsidiary to the Bank or to any subsidiary or affiliate of the Bank. (l) Material Adverse Effect. There occurs a Material Adverse Effect. (m) ERISA. (i) An ERISA Event shall occur with respect to a Pension Plan which has resulted or could reasonably be expected to result in liability of the Borrower under Title IV of ERISA to the Pension Plan or PBGC in an aggregate amount in excess of $500,000; (ii) the commencement or increase of contributions to, or the adoption of or the amendment of a Pension Plan by the Borrower which has resulted or could reasonably be expected to result in an increase in Unfunded Pension Liability among all Pension Plans in an aggregate amount in excess of $500,000; or (iii) any of the representations and warranties contained in Section 5.12 shall cease to be true and correct which, individually or in combination, has resulted or could reasonably be expected to result in a Material Adverse Effect. (n) Change of Control. (i) any person, firm, corporation or other entity (a "person") or two or more persons acting in concert shall acquire beneficial ownership, directly or indirectly, of securities of the Borrower (or other securities convertible into such securities) representing 30% or more of the combined voting power of all securities of the Borrower entitled to vote in the election of directors; or (ii) during any period of up to 12 consecutive months, commencing after the Closing Date, individuals who at the beginning of such 12-month period were directors of the Borrower shall cease for any reason to constitute a majority of the Board of Directors of the Borrower unless the persons replacing such individuals were nominated by the Board of Directors of the Borrower; or (iii) any person or two or more persons acting in concert acquiring by contract or otherwise, or entering into a contract or arrangement which upon consummation will result in its or their acquisition of, or control over, securities of the Borrower (or other securities convertible into such securities) representing 30% or more of the combined voting power of all securities of the Borrower entitled to vote in the election of directors. 8.02 Remedies. If any Event of Default occurs, (a) any indebtedness of the Borrower or of any Acceptable Subsidiary under any of the Credit Documents, any term thereof to the contrary notwithstanding, shall at the Bank's option (but automatically upon the occurrence of an Event of Default described in subsection 8.01(g)(ii) or subsection 8.01(h)) and without notice become immediately due and payable without presentment, demand, protest, or notice of dishonor, or any other notice, all of which are hereby expressly waived by the Borrower to the full extent permitted by law, and the Bank may declare an amount equal to the maximum aggregate amount that is or at any time thereafter may become available for drawing under any then-outstanding letters of credit (whether or not any beneficiary shall have presented, or be entitled at such time to present, the drafts or other documents required to draw under such letters of credit) and the Bank Guaranty Outstanding Amount, to be immediately due and payable; (b) the obligation, if any, of the Bank (including through any Offshore Credit Provider) to make further loans or extensions of credit hereunder shall immediately cease and terminate, and (c) the Bank and each Offshore Credit Provider shall have all rights, powers, and remedies available under each of the Credit Documents, or accorded by law, including the right to resort to any or all security for any credit accommodation described herein, and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers, and remedies of the Bank and each Offshore Credit Provider may be exercised at any time by the Bank or such Offshore Credit Provider and from time to time after the occurrence of an Event of Default. All rights, powers, and remedies of the Bank and any Offshore Credit Provider in connection with each of the Credit Documents are cumulative and not exclusive and shall be in addition to any other rights, powers, or remedies provided by law or equity. ARTICLE IX Miscellaneous 9.01 Successors and Assigns. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that the Borrower shall not assign this Agreement or any other Credit Document or any of the rights, duties or obligations of the Borrower hereunder without the prior written consent of the Bank. 9.02 Consents and Waivers. No failure to exercise and no delay in exercising, on the part of the Bank or any Offshore Credit Provider, any right, remedy, power, or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power, or privilege. No consent or waiver under this Agreement shall be effective unless in writing. No waiver of any breach or default shall be deemed a waiver of any breach or default thereafter occurring. 9.03 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California. 9.04 Costs and Attorneys' Fees. The Borrower shall, whether or not the transactions contemplated hereby shall be consummated, pay or reimburse the Bank on demand for all reasonable out-of-pocket costs and expenses incurred by the Bank in connection with the development, preparation, delivery, administration, and execution of, and any amendment, supplement, waiver or modification to, this Agreement and any other Credit Document and the consummation of the transactions contemplated hereby and thereby, including reasonable attorney fees and disbursements and the allocated cost of internal counsel and disbursements, incurred by the Bank with respect thereto; and in connection with the enforcement, attempted enforcement or preservation of any rights or remedies hereunder or under any Credit Document, including any "workout" or restructuring under this Agreement, including attorney fees and disbursements and the allocated cost of internal counsel and disbursements. As used herein, "out-of-pocket costs" shall include the allocated cost of internal counsel to the Bank, and other non-routine Bank resources (such as internal environmental consultants or asset auditors). The agreements and obligations of the Borrower under this Section shall survive the expiration or termination of the commitment to extend credit hereunder and the payment of all other obligations of the Borrower or any Acceptable Subsidiary hereunder or under the other Credit Documents. 9.05 Integration; Amendment. This Agreement, together with the other Credit Documents, embodies the entire agreement and understanding between the Borrower and the Bank. This Agreement may be amended or modified only in writing, signed by the Borrower and the Bank. 9.06 Borrower's Documents. The Bank shall be under no obligation to return any schedules, invoices, statements, budgets, forecasts, reports or other papers delivered by the Borrower and shall destroy or otherwise dispose of same at such time as the Bank, in its discretion, deems appropriate. 9.07 Participations. The Bank may at any time sell, assign, grant participations in, or otherwise transfer to any other person, firm, corporation or other entity (a "Participant") all or part of the obligations of the Borrower and any Acceptable Subsidiary under this Agreement and any other Credit Document. The Borrower authorizes the Bank and each Participant, upon the occurrence of an Event of Default, to proceed directly by right of setoff, banker's lien, or otherwise, against any assets of the Borrower and any Acceptable Subsidiary which may be in the hands of the Bank or such Participant, respectively. The Borrower authorizes the Bank to disclose to any prospective Participant and any Participant any and all information in the Bank's possession concerning the Borrower and its Subsidiaries, this Agreement or any other Credit Document. 9.08 General Indemnification. The Borrower shall pay and indemnify the Bank, the Offshore Credit Providers, the Bank's parent company, and each of their respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") and hold harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses, or disbursements (including reasonable attorneys' fees and disbursements and the allocated costs of internal counsel) of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance, and administration of this Agreement and any other Credit Documents, or the transactions contemplated hereby and thereby, and with respect to any investigation, litigation, or proceeding related to this Agreement, any violation of any Environmental Law by the Borrower or its Subsidiaries, any use, generation, manufacture, production, storage, release, threatened release, discharge, disposal or presence (whether actual or alleged) of a Hazardous Substance on, under or about the property or operations of or property leased to the Borrower or any of its Subsidiaries, any transportation from or other off-site management of any Hazardous Substance generated or used by the Borrower or any of its Subsidiaries, or the loans and other extensions of credit hereunder or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that the Borrower shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of such Indemnified Person. The agreements and obligations of the Borrower in this Section shall survive the expiration and termination of the commitment to extend credit hereunder and the payment of all other obligations of the Borrower or any Acceptable Subsidiary hereunder or under the other Credit Documents. 9.09 Arbitration; Reference Proceeding. (a) Any controversy or claim between or among the parties, including but not limited to those arising out of or relating to this Agreement or any other Credit Document or other agreements or instruments relating hereto or delivered in connection herewith and any claim based on or arising from an alleged tort, shall at the request of any party be determined by arbitration. The arbitration shall be conducted in accordance with the United States Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this Agreement, and under the Commercial Rules of the American Arbitration Association ("AAA"). The arbitrator(s) shall give effect to statutes of limitation in determining any claim. Any controversy concerning whether an issue is arbitrable shall be determined by the arbitrator(s). Judgment upon the arbitration award may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. (b) Notwithstanding the provisions of subsection (a) of this Section, no controversy or claim shall be submitted to arbitration without the consent of all parties if, at the time of the proposed submission, such controversy or claim arises from or relates to an obligation to the Bank which is secured by real property collateral located in California. If all parties do not consent to submission of such a controversy or claim to arbitration, the controversy or claim shall be determined as provided in subsection (c) of this Section. (c) A controversy or claim which is not submitted to arbitration as provided and limited in subsections (a) and (b) of this Section shall, at the request of any party, be determined by a reference in accordance with California Code of Civil Procedure Sections 638 et seq. If such an election is made, the parties shall designate to the court a referee or referees selected under the auspices of the AAA in the same manner as arbitrators are selected in AAA-sponsored proceedings. The presiding referee of the panel, or the referee if there is a single referee, shall be an active attorney or retired judge. Judgment upon the award rendered by such referee or referees shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (d) No provision of this paragraph shall limit the right of any party to this Agreement to exercise self-help remedies such as setoff, to foreclose against or sell any real or personal property collateral or security, or to obtain provisional or ancillary remedies from a court of competent jurisdiction before, after, or during the pendency of any arbitration or other proceeding. The exercise of a remedy does not waive the right of either party to resort to arbitration or reference. At the Bank's option, foreclosure under a deed of trust or mortgage may be accomplished either by exercise of power of sale under the deed of trust or mortgage or by judicial foreclosure. 9.10 Notices. (a) All notices, requests and other communications provided for hereunder shall be in writing and mailed or delivered to a party at its address specified on the signature pages hereof, or to such other address as shall be designated by such party in a written notice to the other parties. (b) All such notices and communications shall, when transmitted by overnight delivery, be effective when delivered for overnight delivery, or if personally delivered, upon such personal delivery, except that notices pursuant to Article II shall not be effective until actually received by the Bank. (c) The Borrower acknowledges and agrees that any agreement of the Bank pursuant to Article II to receive notices by telephone or facsimile is solely for the convenience and at the request of the Borrower. Telephone requests may be made by any individual identified in writing to the Bank on a form acceptable to the Bank as being authorized to make such requests. The Bank shall be entitled to rely upon any written or telephone request from persons it reasonably believes to be authorized by the Borrower to make such requests without making independent inquiry. The Borrower assumes the full risk of, and the Bank shall not be responsible for, any delays or errors in transmission, and the obligation of the Borrower to repay the loans and other extensions of credit hereunder shall not be affected in any way or to any extent by any failure by the Bank to receive written confirmation of any telephonic or facsimile notice or the receipt by the Bank of a confirmation which is at variance with the terms understood by the Bank to be contained in the telephonic or facsimile notice. 9.11 Headings; Interpretation. Article, section, and paragraph headings are for reference only and shall not affect the interpretation or meaning of any provisions of this Agreement. The meaning of defined terms shall be equally applicable to the singular and plural forms of the defined terms. The words "hereof", "herein", "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement; and article, subsection, section, schedule and exhibit references are to this Agreement unless otherwise specified. The term "including" is not limiting and means "including without limitation." In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including." 9.12 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 9.13 Counterparts. This Agreement may be executed in as many counterparts as may be deemed necessary or convenient, and by the different parties hereto on separate counterparts each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same agreement. 9.14 Waiver of Jury Trial. IF A CONTROVERSY OR CLAIM IS NOT SUBMITTED TO ARBITRATION AS PROVIDED AND LIMITED IN SUBSECTIONS (a) AND (b) OF SECTION 9.09 OR IS NOT DETERMINED BY A REFERENCE AS PROVIDED IN SUBSECTION (c) OF SUBSECTION 9.09, THEN THE BORROWER AND THE BANK WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE BORROWER AND THE BANK EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER CREDIT DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. FILENET CORPORATION By: _________________________________________ Typed Name: Mark S. St. Clare Title: Senior Vice President, Finance and CFO By: _________________________________________ Typed Name: Brian A. Colbeck Title: Controller, CAO, Assistant Secretary Address where notices to Borrower are to be sent: 3565 Harbor Blvd. Costa Mesa, CA 92626 Attn: Telecopier No.: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: _________________________________________ Typed Name: Timothy M. O'Connor Title: Vice President Address where notices to Bank are to be sent: Nations Bank Plaza 901 Main Street Dallas, Texas 75202-3714 Attn: Timothy M. O'Connor Vice President Telecopier No.: EXHIBIT A FILENET CORPORATION COMPLIANCE CERTIFICATE Date: _____________, 199__ Reference is made to that certain Amended and Restated Credit Agreement (Multicurrency) (the "Credit Agreement") dated as of June 30, 1999, between FileNet Corporation (the "Borrower") and Bank of America National Trust and Savings Association, a national banking association (the "Bank"). Unless otherwise defined herein, capitalized terms used herein have the respective meanings assigned to them in the Credit Agreement. The undersigned responsible officer of the Borrower hereby certifies as of the date hereof that he/she is the ________________ of the Borrower, and that, as such, he/she is authorized to execute and deliver this Compliance Certificate (the "Certificate") to the Bank on the behalf of the Borrower and its consolidated Subsidiaries, and that: [Use the following paragraph if this Certificate is delivered in connection with the financial statements required by subsection 6.02(a) of the Credit Agreement.] 1. Attached as Schedule 1 hereto are (a) a true and correct copy of the audited consolidated balance sheet of the Borrower as of the end of the fiscal year ended _________, 199__, (b) the related consolidated statements of income, retained earnings and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, and accompanied in each case by the unqualified opinion of ______________ [insert name of independent certified public accounting firm], and (c) a complete copy of the Borrower's Form 10K annual report submitted to the Securities and Exchange Commission for such year. or [Use the following paragraph if this Certificate is delivered in connection with the financial statements required by subsection 6.02(b) of the Credit Agreement.] 1. Attached as Schedule 1 hereto is (a) a true and correct copy of the unaudited consolidated balance sheet of the Borrower as of the end of such quarter ended ____________, 199__, (b) the related consolidated statements of income, retained earnings and cash flows of the Borrower for the period commencing on the first day and ending on the last day of such quarter, and (c) a complete copy of the Borrower's Form 10-Q Quarterly Report submitted to the Securities and Exchange Commission for such quarter. 2. The undersigned has reviewed and is familiar with the terms of the Credit Agreement and has made, or has caused to be made under his/her supervision, a detailed review of the transactions and conditions (financial or otherwise) of the Borrower during the accounting period covered by the attached financial statements. 3. The attached financial statements are complete and correct in all material respects, and have been prepared in accordance with generally accepted accounting principles on a basis consistent with prior periods. 4. To the best of the undersigned's knowledge, the Borrower and any Acceptable Subsidiaries, during such period, have each observed, performed or satisfied all of their respective covenants and other agreements, and satisfied every condition in the Credit Agreement and other Credit Documents to be observed, performed or satisfied by the Borrower or such Acceptable Subsidiaries, and the undersigned has no knowledge of any Default or Event of Default. 5. The following financial covenant analyses and information set forth on Schedule 2 attached hereto are true and accurate on and as of the date of this Certificate. IN WITNESS WHEREOF, the undersigned has executed this Certificate as of ________, 199__. FILENET CORPORATION By: ________________________________________ Title: _____________________________________
Date: ______________, 199__ For the fiscal quarter/year ended ______________, 199__ SCHEDULE 2 to Compliance Certificate* Actual Required/Permitted 1. Section 7.01(d) Other Bank Borrowings by Subsidiaries Indebtedness of Subsidiaries for borrowed money from other banks ___________________ Not to exceed $5,000,000 2. Section 7.01(e) Purchase Money Obligations and Section 7.02 Purchase Money Liens Purchase money obligations and related liens ___________________ Not to exceed $10,000,000 3. Section 7.03 Capital Assets Obligations for the acquisition of fixed or ___________________ Not to exceed (i) $25,000,000 from 1/1/97 capital assets through 12/31/97, (ii) $30,000,000 from 1/1/98 through 12/31/98, (iii) $30,000,000 from 1/1/99 through 12/31/99, (iv) $37,500,000 from 1/1/00 through 12/31/00, and (v) $37,500,000 from 1/1/01 through 12/31/01. 4. Section 7.04(ii) Stock Repurchases Stock repurchases ___________________ Not to exceed $10,000,000 after March 31, 1997 5. Section 7.05(e) Other loans and investments ___________________ Not to exceed $5,000,000 6. Section 7.07(d) Sale and Leaseback Financing under sale and leaseback agreements of ___________________ Not to exceed $5,000,000 fixed or capital assets 7. Section 7.11 Quick Ratio A. (i) cash ___________________ (ii) net accounts receivable ___________________ ___________________________________ * All amounts determined on a consolidated basis. S-1 Actual Required/Permitted (iii) short-term cash investments ___________________ (iv) investment grade marketable securities not classified as long-term investments ___________________ (v) long-term investments in compliance with the Investment Guidelines(not to exceed $15,000,000) __________________ (i)+(ii)+(iii)+(iv)+(v) = __________________ B. Current liabilities (including all funded and unfunded obligations under the Credit Agreement and other Credit Documents, including undrawn amounts (or the Equivalent Amount thereof) of all letters of credit and Bank Guaranties and drawn and unreimbursed obligations with respect thereto A/B = ___________________ Not less than 1.50 to 1.00 8. Section 7.12 Total Liabilities to Total Net Worth the ratio of A. Total liabilities (including all funded and unfunded obligations under the Credit Agreement and other Credit Documents, including undrawn amounts (or the Equivalent Amount thereof) of all letters of credit and Bank Guaranties and drawn and unreimbursed obligations with respect thereto ___________________ B. Tangible Net Worth the difference of: (i) gross book value of assets ___________________ less (ii) goodwill, patents, trademarks, trade names, organization expense, capitalized software, treasury S-2 stock (to the extent included in assets), unamortized debt discount and expense, deferred charges, and other like intangibles, monies due from affiliates, officers, directors, or shareholders of the Borrower or any of its Subsidiaries, and value placed on any leasehold (other than leasehold improvements) ____________________ less (iii) applicable reserves ____________________ less (iv) all liabilities (including accrued and deferred income taxes) ____________________ (i)-(ii)-(iii)-(iv) = ____________________ A/B = ____________________ Not greater than 0.75 to 1.00 9. Section 7.13 Tangible Net Worth Tangible Net Worth (from 8 above) ____________________ Not less than the sum of: A. $105,000,000 plus B. 75% of net income after taxes (without subtracting losses) for each fiscal quarter commencing after 3/31/97 ________ plus C. 100% of net proceeds from the issuance of any equity securities issued after 3/31/97 ________ plus D. 100% of any increase in shareholders' equity from conversion of debt to equity after 3/31/97 ________ less S-3 Actual Required/Permitted E. Stock repurchases from and after 3/31/97 (not to exceed $10,000,000) ________ A + B + C + D - E = ________ 10. Section 7.14 Consecutive Quarterly Losses; Losses in One Quarter A. (i) Net (after tax) income (loss) for fiscal quarter reported on ____________________ Not in excess of 5% of Tangible Net Worth (from 8 above). (ii) Operating income (loss) for fiscal quarter reported on ____________________ Not in excess of 5% of Tangible Net Worth (from 8 above). B. (i) Net (after tax) income (loss) immediately preceding fiscal quarter ____________________ (ii) Net (after tax) income (loss) for fiscal quarter reported on ____________________ If (i) is a loss, (ii) shall not be a loss. C. (i) Operating income (loss) for the immediately preceding fiscal quarter ____________________ (ii) Operating income (loss) for fiscal quarter reported on ____________________ If (i) is a loss, (ii) shall not be a loss.
S-4 EX-27 3 FINANCIAL DATA SCHEDULE
5 1000 6-MOS Dec-31-1998 Jun-30-1999 57,496 14,415 67,512 0 3,115 150,269 124,324 (82,022) 222,775 88,609 0 0 0 132,014 2,152 222,775 100,211 167,531 13,657 54,476 106,527 0 0 8,488 2,546 5,942 0 0 0 5,942 .19 .18
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