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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, 2002
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: 00-15997
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) 327-3400
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
As of August 12, 2002, there were 35,627,846 shares of the Registrant's common
stock outstanding.
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FILENET CORPORATION
Index
Page
Number
PART I. FINANCIAL INFORMATION..................................... 3
Item 1. Condensed Consolidated Financial Statements............... 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 13
Item 3. Quantitative and Qualitative Disclosures about........... 24
Market Risk
PART II. OTHER INFORMATION........................................ 25
Item 1. Legal Proceedings........................................ 25
Item 4. Submssion of Matters to a Vote of Securities Holders..... 25
Item 6. Exhibits and Reports on Form 8-K......................... 26
SIGNATURE ......................................................... 27
INDEX TO EXHIBITS ......................................................... 28
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
FILENET CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share amounts)
June 30, December 31,
2002 2001
ASSETS
Current assets:
Cash and cash equivalents $ 84,290 $ 107,502
Short-term investments 67,395 64,660
Accounts receivable, net 53,420 36,909
Inventories, net 2,535 2,993
Prepaid expenses and other current assets 12,701 9,521
Deferred income taxes 2,779 2,779
Total current assets 223,120 224,364
Property, net 40,748 44,206
Long-term investments 17,008 -
Goodwill 16,581 9,953
Intangible assets, net 3,317 182
Deferred income taxes 21,436 21,445
Other assets 5,624 1,489
Total assets $ 327,834 $ 301,639
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,102 $ 8,282
Customer deposits 3,920 4,848
Accrued compensation and benefits 20,814 17,804
Unearned maintenance revenue 43,044 30,996
Income taxes payable 4,930 3,999
Other accrued liabilities 11,515 13,685
Total current liabilities 95,325 79,614
Unearned maintenance revenue and other
liabilities 4,978 6,200
Commitments and contingencies
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; 36,711,966 shares issued and
35,613,966 shares outstanding at June 30, 2002; and
36,389,682 shares issued and 35,291,682 shares
outstanding at December 31, 2001 203,129 199,526
Retained earnings 48,004 44,906
Accumulated other comprehensive loss (9,035) (14,040)
242,098 230,392
Treasury stock, at cost; 1,098,000 shares (14,567) (14,567)
Net stockholders' equity 227,531 215,825
Total liabilities and stockholders' equity $ 327,834 $ 301,639
See accompanying notes to condensed consolidated financial statements.
3
FILENET CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
Revenue:
Software $ 34,350 $ 28,788 $ 65,590 $ 61,531
Customer Support 37,281 32,690 73,844 61,829
Professional services and education 14,491 18,707 30,327 35,934
Hardware 2,105 2,663 4,707 8,048
Total revenue 88,227 82,848 174,468 167,342
Costs:
Software 2,510 1,343 4,591 3,383
Customer Support 9,807 11,466 19,895 23,452
Professional services and education 13,187 16,340 26,642 33,331
Hardware 1,585 1,943 3,510 5,474
Total cost of revenue 27,089 31,092 54,638 65,640
Gross Profit 61,138 51,756 119,830 101,702
Operating expenses:
Research and development 19,088 19,524 36,393 35,612
Selling, general and administrative 41,366 43,618 81,843 86,777
In-process research and development 400 - 400 -
Total operating expenses 60,854 63,142 118,636 122,389
Operating income (loss) 284 (11,386) 1,194 (20,687)
Other income (loss), net 1,921 (1,836) 2,829 (166)
Income (loss) before income taxes 2,205 (13,222) 4,023 (20,853)
Provision (benefit) for income taxes 471 (2,527) 925 (4,587)
Net income (loss) $ 1,734 $ (10,695) $ 3,098 $ (16,266)
Earnings (loss) per share:
Basic $ 0.05 $ (0.30) $ 0.09 $ (0.46)
Diluted $ 0.05 $ (0.30) $ 0.08 $ (0.46)
Weighted average shares outstanding:
Basic 35,543 35,281 35,452 35,139
Diluted 36,741 35,281 36,983 35,139
See accompanying notes to condensed consolidated financial statements.
4
FILENET CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (UNAUDITED)
(In thousands)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
Net income (loss) $ 1,734 $ (10,695) $ 3,098 $ (16,266)
Other comprehensive income (loss):
Foreign currency translation
adjustments 1 5,401 (1,439) 4,991 (4,628)
Unrealized gains on securities:
Unrealized holding gains 2 89 75 14 91
Total other comprehensive income (loss) 5,490 (1,364) 5,005 (4,537)
Comprehensive income (loss) 7,224 (12,059) 8,103 (20,803)
1 net of tax effect of $3,601 and $(959) for the three months ended June 30, 2002 and 2001, respectively
and net of tax effect of $3,327 and $(3,085) for the six months ended June 30, 2002 and 2001,
respectively
2 net of tax effect of $59 and $50 for the three months ended June 30, 2002 and 2001, respectively
and net of tax effect of $9 and $61 for the six months ended June 30, 2002 and 2001, respectively
See accompanying notes to condensed consolidated financial statements.
5
FILENET CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended June 30,
2002 2001
Cash flows from operating activities:
Net income (loss) $ 3,098 $ (16,266)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Purchased in-process research and development 400 -
Depreciation and amortization 10,724 11,936
Loss on sale of fixed assets 10 115
Provision for doubtful accounts 612 611
Deferred income taxes 9 (27)
Changes in operating assets and liabilities, net
of the effects of acquisition:
Accounts receivable (15,403) 28,604
Inventories 458 (453)
Prepaid expenses and other current assets (3,969) 260
Accounts payable 2,630 (5,252)
Accrued compensation and benefits 2,438 (6,420)
Customer deposits and advances (983) 4,823
Accrued legal fees - 4,022
Unearned maintenance revenue 9,845 14,934
Income taxes payable 886 (8,645)
Other (5,015) (2,457)
Net cash provided by operating activities 5,740 25,785
Cash flows from investing activities:
Capital expenditures (6,506) (9,809)
Proceeds from sale of property 40 83
Note receivable from officer (1,900) -
Cash paid for acquisition (9,359) -
Purchases of marketable securities (73,497) (72,995)
Proceeds from sales and maturities of marketable
securities 55,100 40,303
Net cash used in investing activities (36,122) (42,418)
Cash flows from financing activities:
Proceeds from issuance of common stock 3,603 5,510
Principal payments on capital lease obligations (854) (109)
Net cash provided by financing activities 2,749 5,401
Effect of exchange rate changes on cash and cash
equivalents 4,421 (3,041)
Net decrease in cash and cash equivalents (23,212) (14,273)
Cash and cash equivalents, beginning of year 107,502 101,497
Cash and cash equivalents, end of period $ 84,290 $ 87,224
Supplemental cash flow information:
Interest paid $ 51 $ 12
Income taxes paid $ 120 $ 4,097
See accompanying notes to condensed consolidated financial statements.
6
FILENET CORPORATION
Notes To Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements of FileNET Corporation (the "Company") reflect adjustments
(consisting of normal recurring adjustments) necessary to present fairly
the financial position of the Company at June 30, 2002, the results of its
operations and its comprehensive operations for the three and six months
ended June 30, 2002 and 2001 and its cash flows for the six months ended
June 30, 2002 and 2001. 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
condensed consolidated financial statements are adequate to ensure the
information presented is not misleading. These condensed 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,
2001 filed with the SEC on March 28, 2002. The results of operations for
the interim periods are not necessarily indicative of the operating results
for the year.
Certain reclassifications have been made to the prior year's condensed
consolidated financial statements to conform to the current year's
presentation.
2. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. SFAS
133, as amended, established accounting and reporting standards for
derivative instruments including certain derivative instruments embedded in
other contracts that were not formerly considered derivatives and now may
meet the definition of a derivative. Additionally, this standard requires
all derivatives to be reported on the balance sheet at fair value. For
derivatives that are fair value hedges, changes in the fair value of
derivatives are offset by the change in fair value of the hedged assets,
liabilities, or firm commitments. The Company adopted this standard
effective January 1, 2001 with no significant effect to its results of
operations, financial position, or cash flows.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which
was effective immediately. SFAS No. 141 requires that the purchase method
of accounting be used for all business combinations initiated after June
30, 2001; and it eliminated the pooling-of-interests method. The adoption
of this standard did not have a significant impact on the Company's
consolidated financial statements. The Company's April 2002 acquisition of
certain assets and certain liabilities of eGrail, Inc. has been accounted
for in compliance with this pronouncement (see Note 3 for details).
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which the Company adopted January 1, 2002. SFAS No. 142 requires
that goodwill and other intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually
and written down when impaired. SFAS No. 142 requires purchased intangible
assets other than goodwill to be amortized over their useful lives unless
these lives are determined to be indefinite. In accordance with this
Standard, the Company no longer amortizes goodwill and indefinite life
intangible assets but evaluates their carrying value annually or when
events or circumstances indicate that their carrying value may be impaired.
Assembled workforce no longer meets the definition of a
separately-identified intangible asset under the provisions of SFAS No.
141, and the balance of $182,000 was reclassified as goodwill at January 1,
2002. The Company ceased amortizing the goodwill balance of $10.1 million
from its 2000 acquisition of Applications Partner, Inc. as of January 1,
2002. In accordance with SFAS No. 142, the Company is required to perform a
two-step transitional impairment review. The first step of this review was
completed by June 30, 2002 with the determination of the fair value of the
Company's reporting units in order to identify whether the fair value of
each reporting unit is less than its carrying amount. In
the event that the fair value of the reporting unit is less than the
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carrying amount, the second step of the test would be required to determine
if the carrying value of goodwill exceeds the implied value. The Company
determined that it did not have a transitional impairment of goodwill. The
Company had no indefinite life intangible assets as of January 1, 2002. If
estimates change, a materially different impairment conclusion could
result.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment of long-lived assets and for
the disposal of long-lived assets and discontinued operations. SFAS No. 144
superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and is effective for
fiscal years beginning after December 15, 2001. The adoption of this
Standard on January 1, 2002 did not have a material impact on the Company's
financial position and results of operations.
In November 2001, the FASB announced Emerging Issues Task Force ("EITF")
Topic No. D-103, "Income Statement Characterization of Reimbursements
Received for Out-of-Pocket Expense Incurred", is required to be applied in
financial reporting periods beginning after December 15, 2001. The EITF
requires companies to characterize reimbursements received for
out-of-pocket expenses as revenues in the statement of operations.
Historically, the Company has netted reimbursements received for
out-of-pocket expenses against the related expenses in the statement of
operations. Application of this EITF requires that comparative financial
statements for prior periods be reclassified to comply with the guidance.
The Company adopted this EITF as of January 1, 2002 and has reclassified
its prior period consolidated financial statements to conform to the
current presentation. The adoption of this EITF did not have a material
effect on total revenues or gross margin percentages and has no impact on
results of operations as it required an equivalent increase to both revenue
and cost of revenue. Revenue and cost of revenue for the three months ended
June 30, 2001 increased by $642,000 and increased by $1.2 million for the
six months ended June 30, 2001.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities and
supersedes EITF Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 requires that costs
associated with exit or disposal activities be recognized when they are
incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS 146 also establishes that the liability should initially be
measured and recorded at fair value. The Company will adopt the provisions
of SFAS 146 for exit or disposal activities that are initiated after
December 31, 2002.
3. ACQUISITIONS
On April 2, 2002, the Company acquired certain assets and assumed certain
liabilities of eGrail, Inc. ("eGrail"), a Web content management company,
for $9.0 million in cash. This strategic acquisition provides additional
Web Content Management ("WCM") software application capabilities that
enhance the Company's position in the Enterprise Content Management ("ECM")
market. These enhancements are expected to expand our ECM offerings and
contributed to the purchase price that resulted in goodwill. In accordance
with SFAS No. 141, "Business Combinations," the acquisition has been
accounted for under the purchase method of accounting. The purchase price
for eGrail consisted of $9.0 million cash and direct acquisition costs of
$359,000. The purchase price was allocated as follows (in thousands):
Net tangible assets $ 581
Goodwill 5,793
Patents 24
Acquired technology 3,300
In-process research and development 400
Liabilities assumed (739)
$ 9,359
The amount allocated to in-process research and development and acquired
technology was determined through established valuation techniques in the
high-technology industry by an independent third-party appraiser.
In-process research and development was expensed upon acquisition because
technological feasibility had not been established and no future
alternative uses existed. New product development underway at eGrail at the
time of the acquisition included the next generation of their Web Content
Management product that was in the early stages of design and only 5%
complete at the date of the acquisition. The cost to complete the project
8
was estimated at approximately $3.0 million to occur over a twelve-month
period. As of June 30, 2002 the Company has incurred approximately $906,000
of research and development expenses related to the project. The remaining
purchase price was primarily allocated to tangible assets and goodwill. The
acquired technology of $3.3 million was assigned a useful life of five
years and patents of $24,000 were assigned a useful life of two years. In
accordance with SFAS No. 142, goodwill will not be amortized but will be
reviewed for impairment on an annual basis. Goodwill is tax deductible for
this asset purchase.
Actual results of operations of eGrail, as well as certain assets and
liabilities acquired on April 2, 2002, are included in the condensed
consolidated financial statements from the date of acquisition. Therefore,
the Company's financial results for the three months ended June 30, 2002
include the actual results of eGrail for this period. The pro forma results
of operations data for the six month periods ended June 30, 2001 and 2002
presented below assume that the acquisition had been made at the beginning
of fiscal 2001. The pro forma data is presented for informational purposes
only and is not necessarily indicative of the results of future operations
nor of the actual results that would have been achieved had the
acquisitions taken place at the beginning of fiscal 2001 (in thousands):
Six Months Ended June 30,
2002 2001
Revenue $ 175,220 $ 170,528
Net Income (Loss) 1,515 (17,269)
Earnings (Loss) per share:
Basic 0.04 (0.49)
Diluted 0.04 (0.49)
Alliant Partners acted as financial advisors to eGrail in this transaction
and was paid approximately $500,000 by eGrail. John Savage, a member of
FileNET's Board of Directors and the Audit Committee of FileNET's Board of
Directors, is Managing Partner of Alliant Partners and, accordingly,
recused himself from all discussions related to the transaction and
abstained from voting on this transaction.
4. GOODWILL AND PURCHASED INTANGIBLE ASSETS
In acquisitions accounted for using the purchase method, goodwill is
recorded as the difference, if any, between the aggregate consideration
paid for an acquisition and the fair value of the net tangible and
identified intangible assets acquired. Statement No. 142 requires that
ratable amortization of goodwill and indefinite life intangibles be
replaced with periodic review and analysis of goodwill for possible
impairment. Intangible assets with definite lives must be amortized over
their estimated useful lives. On January 1, 2002 the Company adopted SFAS
No. 142, and as a result, goodwill is no longer amortized. Summarized below
are the effects on net income (loss) per share data if the Company had
followed the amortization provisions of SFAS 142 for all periods presented
(in thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Net income (loss):
As reported $ 1,734 $ (10,695) $ 3,098 $ (16,266)
Add: goodwill amortization, net of taxes - 617 - 1,200
Adjusted net income (loss) $ 1,734 $ (10,078) $ 3,098 $ (15,066)
Basic net income (loss) per share:
As reported $ 0.05 $ (0.30) $ 0.09 $ (0.46)
Add: goodwill amortization, net of taxes - 0.02 - 0.03
Adjusted basic net income (loss) per
share $ 0.05 $ (0.28) $ 0.09 $ (0.43)
9
Diluted net income (loss) per share:
As reported $ 0.05 $ (0.30) $ 0.08 $ (0.46)
Add: goodwill amortization, net of taxes - 0.02 - 0.03
Adjusted diluted net income (loss) per
share $ 0.05 $ (0.28) $ 0.08 $ (0.43)
Note: Goodwill and intangible assets were allocated to our Ireland
subsidiary and therefore the following tables reflect amounts resulting
from foreign exchange translation.
The following table presents the changes in goodwill allocated to the
reportable segments during the first six months of 2002 (in thousands):
Balance at Foreign Balance at
December 31, Currency June 30,
2001 Acquired Adjustments Fluctuation 2002
Software $ 4,914 $ 3,654 $ 90 $ 322 $ 8,980
Customer support 3,271 406 60 215 3,952
Professional services
and education 1,768 1,733 32 116 3,649
Hardware - - - - -
Total $ 9,953 $ 5,793 $ 182 $ 653 $ 16,581
The adjustments during the first six months were due to the
reclassification of assembled workforce intangible to goodwill at January
1, 2002 as a result of the adoption of SFAS 142. The acquired goodwill
resulted from the acquisition of eGrail in April 2002.
Acquired technology and patents are the Company's only intangible assets
subject to amortization under Statement No. 142. These assets were recorded
in connection with the April 2002 eGrail acquisition and are comprised of
the following as of June 30, 2002 (in thousands):
Accumulated
Gross Amortization Net
Acquired technology $ 3,468 $ 173 $ 3,295
Patents 25 3 22
$ 3,493 $ 176 $ 3,317
Acquired technology is being amortized over a useful life of five years and
patents are being amortized over a useful life of two years. Amortization
expense for amortizing intangible assets was $168,190 for the three months
ended June 30, 2002 and estimated future amortization expense (excluding
foreign exchange effect) of purchased intangible assets as of June 30, 2002
is as follows (in thousands):
Fiscal
Year Amount
2002 (remaining 6 months) 336,380
2003 672,760
2004 663,190
2005 660,000
2006 660,000
2007 165,000
$ 3,157,330
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5. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss)
for the period by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing net
income by the weighted average number of common shares outstanding plus the
dilutive effect of outstanding stock options and shares issuable under the
employee stock purchase plan using the treasury stock method. The dilutive
loss per share excludes these adjustments, as the impact would be
anitidilutive. The following table sets forth the computation of basic and
diluted earnings (loss) per share for the three and six months ended June
30, 2002 and 2001:
(In thousands, except per share amounts) Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
Net income (loss) $ 1,734 $ (10,695) $ 3,098 $ (16,266)
Shares used in computing
basic earnings (loss) per share 35,543 35,281 35,452 35,139
Dilutive effect of stock plans 1,198 - 1,531 -
Shares used in computing
diluted earnings (loss) per share 36,741 35,281 36,983 35,139
Earnings (loss) per basic share $ 0.05 $ (0.30) $ 0.09 $ (0.46)
Earnings (loss) per diluted share $ 0.05 $ (0.30) $ 0.08 $ (0.46)
6. ACCUMULATED OTHER COMPREHENSIVE LOSS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires enterprises to report comprehensive income
and its components in general-purpose financial statements. SFAS No. 130
was effective for the Company beginning January 1, 1998. Accordingly, the
Company has prepared Statements of Comprehensive Operations for the six
months ended June 30, 2002. Accumulated other comprehensive loss as of June
30, 2002 is comprised of the following:
Foreign Unrealized Accumulated
Currency Holding Other
Translation Gains Comprehensive
(in thousands) Adjustment (Losses) Operations
Balance, December 31, 2001 $ (14,079) $ 39 $ (14,040)
Current period changes 4,991 14 5,005
Balance June 30, 2002 $ (9,088) $ 53 $ (9,035)
7. OPERATING SEGMENT DATA
The Company has prepared operating segment information in accordance with
SFAS No. 131, "Disclosures About Segments of An Enterprise and Related
Information," to report components that are evaluated regularly by the
Company's chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. The
Company is organized geographically and by line of business. The line of
business management structure is the primary basis upon which financial
performance is assessed and resources allocated.
The Company's reportable operating segments include Software, Customer
Support, Professional Services and Education, and Hardware. The Software
operating segment develops and markets the Company's Enterprise Content
Management and Business Process Management software products. The Customer
Support segment provides after-sale support for software, as well as
providing software upgrades pursuant to the Company's right to new versions
program. The Professional Services and Education segment provides fee-based
implementation and technical services related to the Company's software
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products, and also provides training. The Hardware operating segment
manufactures and markets the Company's line of Optical Storage And
Retrieval ("OSAR") libraries. The financial results of the segments reflect
allocation of certain functional expense categories consistent with the
basis and manner in which Company management internally disaggregates
financial information for the purpose of assisting in making internal
operating decisions, which are not the same as GAAP reporting. The Company
evaluates performance based on stand-alone segment operating results.
Because the Company does not evaluate performance based on the return on
assets at the operating segment level, assets are not tracked internally by
segment. Therefore, segment asset information is not presented.
Operating segments data for the three and six months ended June 30, 2002
and 2001 are as follows:
Three months ended June 30, Six months ended June 30,
In thousands 2002 2001 2002 2001
Software
Revenue $ 34,350 $ 28,788 $ 65,590 $ 61,531
Operating loss (12,984) (19,530) (25,408) (34,699)
Customer Support
Revenue $ 37,281 $ 32,690 $ 73,844 $ 61,829
Operating income 14,480 9,844 28,145 18,195
Professional Services and
Education Revenue $ 14,491 $ 18,707 $ 30,327 $ 35,934
Operating loss (1,234) (1,306) (1,679) (3,777)
Hardware
Revenue $ 2,105 $ 2,663 $ 4,707 $ 8,048
Operating income (loss) 22 (394) 136 (406)
Total
Revenue $ 88,227 $ 82,848 $ 174,468 $ 167,342
Operating income (loss) 284 (11,386) 1,194 (20,687)
8. LEGAL PROCEEDINGS
In the normal course of business, the Company is subject to ordinary
routine litigation incidental to the business. While the results of this
litigation cannot be predicted with certainty, the Company believes that
the final outcome of these matters will not have a materially adverse
effect on its consolidated results of operations or financial condition.
9. RELATED PARTY TRANSACTIONS
In July 2001, the Compensation Committee of the Company's Board of
Directors entered into discussions with Lee Roberts, the Company's Chief
Executive Officer, regarding a secured loan by the Company to Mr. Roberts
to enable him to purchase a home in Orange County, California. In July
2001, the Compensation Committee forwarded its recommendation to the Board
to approve, in principle, a secured loan, in the amount of $1.2 million to
Mr. Roberts. In September 2001, the Compensation Committee approved, in
principle, an increase in the previously requested loan amount to $1.9
million, subject to review of final loan documents and approval of the
Board. In May 2002, the Compensation Committee reviewed proposed loan
documentation for a secured loan to Mr. Roberts and forwarded its
recommendation to the Board to approve the loan on the terms set forth in
the loan documents. The loan documents provided that the loan would be
secured by the real estate purchased by Mr. Roberts. Subsequently, on June
5, 2002, the Board approved the loan documents and the loan. The authority
to grant such a loan is "grand fathered" under Section 13 of the Securities
Exchange Act of 1934, as amended by Section 402 of the Sarbanes-Oxley Act
on July 30, 2002.
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As of June 30, 2002, FileNET had an outstanding secured note receivable
from Mr. Roberts in the amount of $1.9 million that relates to the
above-referenced loan and is included in other assets on the condensed
consolidated balance sheet. The note bears interest at 2.89% per annum.
Accrued interest on the principal balance of this note is payable annually
beginning February 15, 2003 and on each February 15th thereafter until the
entire principal balance becomes due. The entire outstanding principal
balance of this note and any accrued interest is due and payable at the
earliest of (a) June 7, 2005, (b) one year after termination of Mr.
Roberts' employment by the Company, or (c) ninety (90) days after voluntary
termination of employment by Mr. Roberts. The difference between the stated
interest rate of the Note and a fair value interest rate of 7% was recorded
as a discount that is being amortized over the term of the Note to
compensation expense using the effective interest method.
10. FOREIGN CURRENCY TRANSACTIONS
As of June 30, 2002, we had forward foreign exchange contracts outstanding
totaling approximately $1,192,809 eight currencies. These contracts are
opened on the last business day of the quarter and mature within three
months. Accordingly, the fair value of such contracts is zero at June 30,
2002.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E
of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, and is subject to the safe harbors created
by those sections. These forward-looking statements are subject to a number of
risks and uncertainties, including those discussed in "Risk Factors That May
Affect Future Results" below and in the notes to our consolidated financial
statements for the year ended December 31, 2001. The actual results that we
achieve may differ materially from any forward-looking statements, which reflect
management's opinions only as of the date hereof. We undertake no obligation to
revise or publicly release the results of any revisions to these forward-looking
statements. Readers should carefully review the risk factors described below and
in other documents we file from time to time with the Securities and Exchange
Commission, including our Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.
Overview
FileNET Corporation develops, markets, implements and services Enterprise
Content Management ("ECM") and Business Process Management software products and
eBusiness applications and solutions for selected vertical markets. Our software
products enable organizations to improve operational efficiency and leverage
their content resources through the delivery of efficient, flexible, and
scalable eBusiness process management solutions. We also offer professional
services and training for the implementation of these software solutions, as
well as 24 hours a day, seven days a week technical support and services to our
customers on a global basis.
Significant Accounting Policies
We prepare the consolidated financial statements of FileNET in conformity with
accounting principles generally accepted in the United States of America. The
consolidated financial statements include our accounts and the accounts of our
wholly-owned subsidiaries. All intercompany balances and transactions have been
eliminated. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
significant accounting policies we believe are most critical to aid in fully
understanding and evaluating our reported financial results include the
following:
Revenue Recognition. Revenues from sales of software licenses sold through
direct and indirect channels, which do not contain multiple elements, are
recognized upon shipment of the related product if the requirements of Statement
of Position ("SOP") 97-2, as amended, are met. If the requirements of SOP 97-2,
including evidence of an arrangement, delivery, fixed or determinable fee,
collectibility or vendor specific evidence about the value of an element are not
met at the date of shipment, revenue is not recognized until such elements are
known or resolved. Software license revenue for arrangements to deliver
unspecified additional software products in the future is recognized ratably
over the term of the arrangement, beginning with the initial shipment. Revenue
from post-contract customer support is recognized ratably over the term of the
contract. Revenue from professional services and education is recognized as such
services are delivered and accepted by the customer. Anticipated losses on
13
fixed-price contracts are recognized in the period when they become known. We
recognize other revenue at the time of product delivery and accrue any remaining
costs, including vendor obligations. Based on historical experience, we maintain
a sales return allowance for the estimated amount of potential returns. While
such returns have historically been minimal and within our expectations of the
allowances established, we cannot guarantee that we will continue to experience
the same return rates that we have in the past.
Accounts Receivable. We evaluate the creditworthiness of our customers prior to
order fulfillment and we perform ongoing credit evaluations of our customers to
adjust credit limits based on payment history and the customer's current
creditworthiness. We monitor collections from our customers and maintain a
provision for estimated credit losses that is based on historical experience and
on specific customer collection issues. While such credit losses have
historically been within our expectations and the provisions established, we
cannot guarantee that we will continue to experience the same credit loss rates
that we have in the past. Since our revenue recognition policy requires
customers to be creditworthy, our accounts receivable are based on customers
whose payment is reasonably assured. Our accounts receivable are derived from
sales to a wide variety of customers. We do not believe a change in liquidity of
any one customer or our inability to collect from any one customer would have a
material adverse impact on our financial position.
Deferred Income Taxes. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. We
maintain a valuation allowance against a portion of the deferred tax asset due
to uncertainty regarding the future realization based on historical taxable
income, projected future taxable income, and the expected timing of the
reversals of existing temporary differences. If we operate at a loss or are
unable to generate sufficient future taxable income we could be required to
increase the valuation allowance against all or a significant portion of our
deferred tax assets which would result in a substantial increase to our
effective tax rate and could result in a material adverse impact on our
operating results.
Accounting for Impairment or Disposal of Long-Lived Assets. We account for the
impairment and disposition of long-lived assets in accordance with the Statement
of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In
accordance with SFAS No. 144, long-lived assets to be held are reviewed for
events or changes in circumstances that indicate that their carrying value may
not be recoverable. In August 2001, the Financial Accounting Standards Board
("FASB") issued SFAS No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets." This statement addresses financial accounting and reporting
for the impairment of long-lived assets and for the disposal of long-lived
assets. SFAS No. 144 superseded SFAS No. 121, and is effective for fiscal years
beginning after December 15, 2001. We evaluate the carrying value of intangible
assets for impairment of value based on undiscounted future cash flows, which
are subject to change. While we have not experienced impairment of intangible
assets in prior periods, we cannot guarantee that there will not be impairment
in the future.
Research and Development Costs. We expense research and development costs as
incurred. No amounts are required to be capitalized in accordance with SFAS No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," because our software is substantially completed
concurrently with the establishment of technological feasibility.
Results of Operations
The following table sets forth certain consolidated statements of operations
data as a percentage of total revenue for the periods indicated:
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
Revenue:
Software 38.9 % 34.7 % 37.6 % 36.8 %
Customer support 42.3 39.5 42.3 36.9
Professional services and
education 16.4 22.6 17.4 21.5
Hardware 2.4 3.2 2.7 4.8
Total Revenue 100.0 100.0 100.0 100.0
14
Cost of revenue:
Software 2.8 1.6 2.6 2.0
Customer support 11.1 13.8 11.4 14.0
Professional services and
education 15.0 19.7 15.3 19.9
Hardware 1.8 2.4 2.0 3.3
Total cost of revenue 30.7 37.5 31.3 39.2
Gross Profit 69.3 62.5 68.7 60.8
Operating expenses
Research and development 21.6 23.6 20.9 21.3
Selling, general and administrative 46.9 52.6 46.9 51.9
In-process research and development 0.5 - 0.2 -
Total operating expenses 69.0 76.2 68.0 73.2
Operating income (loss) 0.3 (13.7) 0.7 (12.4)
Other income, net 2.2 (2.2) 1.6 (0.1)
Income (loss) before income tax 2.5 % (15.9)% 2.3 % (12.5)%
Revenue
Total revenue was $88.2 million for the three months ended June 30, 2002
compared to $82.8 million for the three months ended June 30, 2001, representing
an increase of $5.4 million, or 6%. Total revenue was $174.5 million for the six
months ended June 30, 2002 and $167.3 million for the comparable six months
ended June 30, 2001, representing an increase of $7.2 million, or 4%. As more
fully discussed below, the increase in total revenue was primarily attributable
to an increase in software and customer support revenue partially offset by
lower professional services and education revenue.
Software revenue consists of fees earned from the licensing of our software
products to customers. Software revenue increased by 19%, or $5.6 million, to
$34.4 million for the three months ended June 30, 2002 from $28.8 million for
the three months ended June 30, 2001; and increased by 7%, or $4.1 million, to
$65.6 million for the six months ended June 30, 2002 from $61.5 million for the
six months ended June 30, 2001. Software revenue represented 38.9% of total
revenue for the three months ended June 30, 2002 compared to 34.7% for the
comparable period of 2001, and represented 37.6% of total revenues for the six
months ended June 30, 2002 compared to 36.8% for the comparable period of 2001.
Compared to 2001, the increases in software revenue in 2002 are primarily due to
increased revenue from channel partners across most geographies. While we saw
signs of potential improvement in customer spending in the second quarter of
2002, we are not currently able to assess the likely trend of software revenue
in future periods due to the continued slowdown in IT spending.
Customer support revenue consists of revenue from software maintenance
contracts, "fee for service" revenues and the sale of spare parts and supplies.
Customer support revenue increased by 14%, or $4.6 million, to $37.3 million for
the three months ended June 30, 2002 from $32.7 million for the three months
ended June 30, 2001; and increased by 19%, or $12.0 million, to $73.9 million
for the six months ended June 30, 2002 from $61.9 million for the six months
ended June 30, 2001. Customer support revenue represented 42.3% of total revenue
for the three months ended June 30, 2002 compared to 39.5% for the comparable
period of 2001; and represented 42.3% of total revenues for the six months ended
June 30, 2002 compared to 36.9% for the comparable period of 2001. The increase
in customer support revenue was primarily due to the growth in our base of
customers who receive ongoing maintenance as a result of new customer sales and
sales of additional products to our installed base along with a high rate of
renewal on the existing base. However, the occurrence of a prolonged economic
slowdown that continues to reduce software revenue will result in a decrease in
the future growth rate of customer support revenue.
Professional services and education revenue is generated primarily from
consulting and implementation services provided to end users of our software
products, technical consulting services provided to our resellers and training
services provided to end users and resellers. Professional services are
generally performed on a time and material basis. Professional services and
education revenue decreased by 22%, or $4.2 million, to $14.5 million for the
three months ended June 30, 2002 from $18.7 million for the three months ended
June 30, 2001; and decreased by 16%, or $5.6 million, to $30.3 million for the
15
six months ended June 30, 2002 compared to $35.9 million for the comparable
period of 2001. Professional services and education revenue represented 16.4% of
total revenue for the three months ended June 30, 2002 compared to 22.6% for the
comparable period in 2001, and represented 17.4% of total revenues for the six
months ended June 30, 2002 compared to 21.5% for the comparable period of 2001.
Professional services and education revenue generally reflects the trends in
software revenue that occurred two to three quarters prior. The decrease in
professional services and education revenue in 2002 compared to 2001 resulted
primarily from decreased software revenue that occurred in 2001 due to a
slowdown in IT spending. A prolonged economic slow down, which continues to
negatively affect software revenue, will most likely continue to have a negative
impact on professional services and education revenue.
Hardware revenue is generated primarily from the sale of 12-inch Optical Storage
and Retrieval ("OSAR") libraries. Hardware revenue decreased by 21%, or $0.6
million, to $2.1 million for the three months ended June 30, 2002 from $2.7
million for the three months ended June 30, 2001 and decreased by 42%, or $3.4
million, to $4.7 million for the six months ended June 30, 2002 compared to $8.1
million for the comparable period of 2001. Hardware revenue represented 2.4% of
total revenue for the three months ended June 30, 2002 compared to 3.2% for the
comparable period of 2001, and represented 2.7% of total revenues for the six
months ended June 30, 2002 compared to 4.8% for the comparable period of 2001.
Hardware is not a strategic focus for us and we expect hardware revenue to
continue to decrease as a percent of total revenue.
International revenue accounted for 27% of total revenue, or $23.7 million, for
the three months ended June 30, 2002 and 22% of total revenue, or $18.1 million,
for the three months ended June 30, 2001, and accounted for 27% of total
revenue, or $46.8 million, for the six months ended June 30, 2002, and 27%, or
$44.6 million, for the comparable period of 2001. This increase in international
sales for the first six months in 2002 of $2.2 million is primarily a result of
increased sales to our channel partners.
Cost of Revenue
Total cost of revenue decreased to $27.1 million for the three months ended June
30, 2002 from $31.1 million for the three months ended June 30, 2001,
representing a decrease of $4.0 million, or 13%. For the six months ended June
30, 2002, total cost of revenue decreased to $54.6 million from $65.6 million
for the comparable period in 2002, representing a decrease of $11.0 million, or
17%. This decrease is primarily due to decreases in the cost of customer support
revenue and professional services and education revenue as discussed more fully
below.
Cost of software revenue includes royalties paid to third parties, partner
commissions, software media costs, and the cost to manufacture and distribute
software. The cost of software revenue increased by 92% to $2.5 million for the
three months ended June 30, 2002 from $1.3 million for the three months ended
June 30, 2001, and increased by 35% to $4.6 million for the six months ended
June 30, 2002 from $3.4 million for the six months ended June 30, 2001. These
costs represented 7% and 5% of the related software revenue for each of the
three and six months ended June 30, 2002 and 2001, respectively. These increases
in absolute dollars are primarily the result of increased use of third party
software products resulting in higher royalty fees and increased partner
commissions as a consequence of increased channel revenue. Going forward we
anticipate cost of software revenue as a percent of software revenue to remain
comparable to current levels.
Cost of customer support revenue includes costs of customer support personnel,
cost of supplies and spare parts, and the cost of third-party hardware
maintenance. The cost of customer support revenue decreased by 15% to $9.8
million for the three months ended June 30, 2002 from $11.5 million for the
three months ended June 30, 2001; and decreased by 15% to $19.9 million for the
six months ended June 30, 2002 from $23.5 million for the six months ended June
30, 2001. These costs represented 26% and 35% of the related customer support
revenue for the three months ended June 30, 2002 and 2001, respectively; and 27%
and 38% of the related customer support revenue for the six months ended June
30, 2002 and 2001, respectively. The decrease in absolute dollars is primarily
attributable to lower compensation cost as a result of a reduction in workforce
in 2001. The decrease as a percentage of customer support revenue is primarily
attributable to automation and process improvements that allowed growth in the
customer base, which generated increased revenue, without a proportional
increase in support personnel and cost. We expect these costs to remain
relatively stable in absolute dollars for the foreseeable future.
Cost of professional services and education revenue consists primarily of costs
of professional services personnel, training personnel, and third-party
independent consultants. The cost of professional services and education revenue
decreased by 19% to $13.2 million for the three months ended June 30, 2002 from
$16.3 million for the three months ended June 30, 2001; and decreased by 20% to
$26.6 million for the six months ended June 30, 2002 from $33.3 million for the
six months ended June 30, 2001. These costs represented 91% and 87% of the
16
related professional services and education revenue for the three months ended
June 30, 2002 and 2001, respectively; and 88% and 93% of the related
professional services and education revenue for the six months ended June 30,
2002 and 2001, respectively. The decrease in absolute dollars was primarily
attributable to a reduction in the use of higher cost third-party independent
consultants and reduced variable compensation as a result of lower 2002 revenues
discussed above. We expect professional services and education costs as a
percentage of professional services and education revenue to vary from period to
period depending on the utilization rates of internal resources and the mix
between internal and third party independent consultants.
Cost of hardware revenue includes the cost of assembling and distributing our
OSAR library products, the cost of hardware integration personnel, and warranty
costs. The cost of hardware revenue decreased by 18% to $1.6 million for the
three months ended June 30, 2002 from $1.9 million for the three months ended
June 30, 2001; and decreased by 36% to $3.5 million for the six months ended
June 30, 2002 from $5.5 million for the six months ended June 30, 2001. These
costs represented 75% and 73% of the related hardware revenue for the three
months ended June 30, 2002 and 2001, respectively; and 75% and 68% of the
related hardware revenue for the six months ended June 30, 2002 and 2001,
respectively. The decrease in absolute dollars is directly related to the
decrease in sales of OSAR library products. The increase in cost of hardware
revenue as a percentage of hardware revenue was primarily due to unabsorbed
fixed costs.
Operating Expenses
Research and development expense primarily consists of costs of personnel to
support product development. Research and development expense decreased by 2% to
$19.1 million for the three months ended June 30, 2002 from $19.5 million for
the three months ended June 30, 2001, and represented 22% and 24% of total
revenue for these respective periods. Research and development expense increased
2% to $36.4 million for the six months ended June 30, 2002 from $35.6 million
for the six months ended June 30, 2001, and represented 21% of total revenue for
these respective periods. Excluding the impact of one-time charges in 2001,
explained below, and the added charges in 2002 more fully explained below,
expenses increased in the three and six-month periods ended June 30, 2002 over
the comparable periods in 2001 primarily due to increased headcount expense.
Expenses for the period ended June 30, 2001 included a one-time bonus payment of
$2.0 million related to the Applications Partners Incorporated ("API")
acquisition. The eGrail acquisition, which was completed on April 2, 2002,
contributed approximately $1.5 million of additional expenses, including a
one-time charge of $400,000 for in-process research and development and
amortization of purchased intangible assets of $168,000, in the three months
ended June 30, 2002.
Our research and development efforts are focused on developing our ECM
capabilities. These efforts will focus on improvements in Business Process
Management, Content Management, Web Content Management and associated
applications to provide a richer competitive product offering to our customers.
We intend to compliment internal development with third party software through
OEM agreements and may execute additional technology acquisitions. New product
development underway at eGrail at the time of the acquisition included the next
generation of their Web Content Management product that was in the early stages
of design and only 5% complete at the date of the acquisition. The cost to
complete the project was estimated at approximately $3.0 million to occur over a
twelve-month period. As of June 30, 2002 the Company has incurred approximately
$906,000 of research and development expenses related to the project.
We expect that competition for qualified technical personnel, while easing due
to the global economic slowdown in the short-term, will remain intense
thereafter and may result in higher levels of compensation expense for us in the
future. We believe that research and development expenditures, including
compensation of technical personnel, are essential to maintaining our
competitive position and expect these costs will continue to constitute a
significant percentage of total revenue.
Selling, general and administrative expense consists primarily of salaries,
benefits, sales commissions and other expenses related to the direct and
in-direct sales force; various marketing expenses; the cost of other market
development programs; personnel costs for finance, information technology,
legal, human resources and general management; and the cost of outside
professional services. Selling, general and administrative expense decreased by
5% to $41.4 million for the three months ended June 30, 2002 from $43.6 million
for the three months ended June 30, 2001, and represented 47% and 53% of total
revenues for these respective periods. Selling, general and administrative
expense decreased 6% to $81.8 million for the six months ended June 30, 2002
from $86.8 million for the six months ended June 30, 2001, and represented 47%
and 52% of total revenue for these respective periods. These decreases in 2002
were primarily due to a reduction in headcount during 2001 resulting in overall
reduced personnel costs, lower recruitment and training expense in addition to
decreased marketing development expense. The elimination of goodwill
amortization, which was $1.5 million for the six months ended June 30, 2001,
also contributed to this decrease (see "Amortization of Goodwill and Intangible
Assets" below).
17
We expect operating expenses to remain at or above these current levels for the
foreseeable future as a result of continued development of our ECM capabilities.
Amortization of Goodwill and Identifiable Intangible Assets
In connection with our acquisition of certain assets from API on May 18, 2000,
the purchase price amount allocated to goodwill of $14.6 million was being
amortized over a useful life of five years and assembled workforce of $386,000
was being amortized over a useful life of three years. These amortization costs
were recorded in selling, general and administrative expense. We ceased
amortizing goodwill and assembled workforce as of the beginning of the first
quarter of 2002 in compliance with SFAS No. 142. In contrast, we recognized
$762,000 of amortization expense in the three months ended June 30, 2001 and
$1.5 million of amortization expense in the six months ended June 30, 2001.
Assembled workforce no longer meets the definition of a separately-identified
intangible asset under the provisions of SFAS No. 141, "Business Combinations,"
and the balance of $182,000 was reclassified as goodwill at January 1, 2002.
SFAS No. 142 is effective for new business combinations that occur after June
30, 2001. Accordingly, goodwill of $5.8 million that was recorded in April 2002
in connection with the eGrail acquisition will not be amortized. We will
evaluate the carrying value of goodwill annually or when events or circumstances
indicate that their carrying value may be impaired. In accordance with SFAS No.
142, we are required to perform a two-step transitional impairment review. We
completed the first step of this review by June 30, 2002 with the determination
of the fair value of our reporting units in order to identify whether the fair
value of each reporting unit is less than its carrying amount. In the event that
the fair value of the reporting unit is less than the carrying amount, the
second step of the test would be required to determine if the carrying value of
goodwill exceeds the implied value. We determined that we did not have a
transitional impairment of goodwill. We had no indefinite life intangible assets
as of January 1, 2002. If estimates change, a materially different impairment
conclusion could result.
Other Income, Net
Other income, net consists primarily of interest income earned on our cash and
cash equivalents, short and long-term investments, and other items including
foreign exchange gains and losses, the gain (loss) on sale of fixed assets, and
interest expense. Other income, net was $1.9 million for the three months ended
June 30, 2002 compared to other loss, net of $1.8 million for the three months
ended June 30, 2001. Other income, net for the six months ended June 30, 2002
was $2.8 million compared to other loss, net of $166,000 for the comparable
six-month period in 2001. The loss in 2001 was due to a one-time charge of $4.0
million for a legal settlement that was recorded in the second quarter of 2001.
Included in other income, net in the second quarter of 2002 is a net gain on
foreign exchange of $1.1 million related to the strengthening of the euro
against the U.S. dollar during the quarter.
Income Taxes
Our combined federal, state and foreign annual effective tax rate for the three
months ended June 30, 2002, is 21% compared to 19% for the comparable period in
2001. The combined federal, state and foreign annual effective tax rate for the
six months ended June 30, 2002, is 23% compared to 22% for the comparable period
in 2001. FileNET management will continue weighing various factors throughout
the year to assess the recoverability of its recorded deferred assets and the
need for any valuation allowance against such amounts. Any adjustment to the
valuation allowance could affect the effective tax rate in subsequent quarters.
Liquidity and Capital Resources
At June 30, 2002, combined cash, cash equivalents and investments totaled $168.7
million, a decrease of $3.5 million from December 31, 2001. Cash provided by
operating activities during the six months ended June 30, 2002 totaled $5.7
million and resulted primarily from an increase in unearned maintenance revenue
related to prepaid maintenance contracts, an increase in accounts payable, net
income and additions to net income for depreciation and amortization expense,
offset by increases in accounts receivable and an increase in prepaid expenses.
Cash used for investing activities totaled $36.1 million and included capital
expenditures of $6.5 million, a $1.9 million note receivable from officer, $9.4
million for the eGrail acquisition, and net purchases of marketable securities
of $18.4 million. Cash provided by financing activities totaled $2.7 million and
was a result of proceeds received from the exercise of employee stock options
and stock purchases under the employee stock purchase plan offset by payments on
capital lease obligations. Exchange rate changes during the second quarter
provided an increase in cash of $4.4 million
Accounts receivable increased to $53.4 million at June 30, 2002 from $36.9
million at December 31, 2001. This increase is primarily a result of higher days
sales outstanding due to slightly slower overall collections.
18
Current liabilities increased to $95.3 million at June 30, 2002 from $79.6
million at December 31, 2001. This increase in current liabilities from $31.0
million at December 31, 2001 to $43.0 million at June 30, 2002 is primarily a
result of a significant increase in unearned maintenance revenue due to a large
portion of our customer base renewing their annual maintenance in the first
quarter of 2002.
We have a $5.0 million multi-currency revolving line of credit available until
June 27, 2003. Borrowings under the arrangement are unsecured and bear interest
at one hundred and twenty-five basis points over the London Interbank Offered
Rate. A standby letter of credit fee of one hundred and twenty five basis points
per annum and a commitment fee of fifty basis points is assessed against any
undrawn amounts. There were no borrowings outstanding at June 30, 2002. We are
subject to certain financial covenants that include, but are not limited to,
compliance with specific balance sheet ratios, no two consecutive quarterly
losses, an aggregate loan limit to the officers not to exceed $5.0 million, and
a capital expenditure limit under this line of credit. As of June 30, 2002, we
were in compliance with all covenants.
We expect capital expenditures to be slightly above current levels for the
remainder of 2002. We anticipate that our present cash balances together with
internally generated funds and credit lines will be sufficient to meet our
working capital and capital expenditure needs for at least the next twelve
months.
Other Financial Instruments
We enter into forward foreign exchange contracts as a hedge against the effects
of fluctuating currency exchange rates on monetary assets and liabilities
denominated in currencies other than the functional currency of the relevant
entity. We are exposed to market risk on the forward exchange contracts as a
result of changes in foreign exchange rates; however, the market risk should be
offset by changes in the valuation of the underlying exposures. Gains and losses
on these contracts, which equal the difference between the forward contract rate
and the prevailing market spot rate at the time of valuation, are recognized in
the consolidated statement of operations. These contracts mature every three
months at the end of each quarter. We open new hedge contracts on the last
business day of each quarter that will mature at the end of the following
quarter. The counterparties to these contracts are major financial institutions.
We use commercial rating agencies to evaluate the credit quality of the
counterparties and do not anticipate nonperformance by any counterparties. We do
not anticipate a material loss resulting from any credit risks related to any of
these institutions.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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. SFAS 133, as amended, established
accounting and reporting standards for derivative instruments including certain
derivative instruments embedded in other contracts that were not formerly
considered derivatives and now may meet the definition of a derivative.
Additionally, this standard requires all derivatives to be reported on the
balance sheet at fair value. For derivatives that are fair value hedges, changes
in the fair value of derivatives are offset by the change in fair value of the
hedged assets, liabilities, or firm commitments. We adopted this standard
effective January 1, 2001 and it has had no significant effect on our results of
operations, financial position, or cash flows.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which was
effective immediately. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001;
and it eliminated the pooling-of-interests method. The adoption of this standard
did not have a significant impact on our consolidated financial statements. Our
April 2002 acquisition of certain assets of eGrail, Inc. was accounted for in
compliance with this pronouncement (see Note 3 for details).
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which we adopted January 1, 2002. SFAS No. 142 requires that goodwill
and other intangible assets with indefinite useful lives no longer be amortized,
but instead be tested for impairment at least annually and written down when
impaired. SFAS No. 142 requires purchased intangible assets other than goodwill
to be amortized over their useful live unless these lives are determined to be
indefinite. In accordance with this Standard, we no longer amortize goodwill and
indefinite life intangible assets but evaluate their carrying value annually or
when events or circumstances indicate that their carrying value may be impaired.
Assembled workforce no longer meets the definition of a separately-identified
intangible asset under the provisions of SFAS No. 141, Business Combinations,
and the balance of $182,000 was reclassified as goodwill at January 1, 2002. We
ceased amortizing the goodwill balance of $10.1 million from our 2000
acquisition of Applications Partner Inc. as of January 1, 2002. In accordance
with SFAS No. 142, we are required to perform a two-step transitional impairment
review. We completed the first step of this review by June 30, 2002 with the
19
determination of the fair value of our reporting units in order to identify
whether the fair value of each reporting unit is less than its carrying amount.
In the event that the fair value of the reporting unit is less than the carrying
amount, the second step of the test would be required to determine if the
carrying value of goodwill exceeds the implied value. We determined that we did
not have a transitional impairment of goodwill. We had no indefinite life
intangible assets as of January 1, 2002. If estimates change, a materially
different impairment conclusion could result.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial accounting
and reporting for the impairment of long-lived assets and for the disposal of
long-lived assets and discontinued operations. SFAS No. 144 superseded SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and is effective for fiscal years beginning after
December 15, 2001. The adoption of this Standard on January 1, 2002 did not have
a material impact on our financial position and results of operations.
In November 2001, the FASB announced Emerging Issues Task Force ("EITF") Topic
No. D-103, "Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expense Incurred", is required to be applied in financial
reporting periods beginning after December 15, 2001. The EITF requires companies
to characterize reimbursements received for out-of-pocket expenses as revenues
in the statement of operations. Historically, we have netted reimbursements
received for out-of-pocket expenses against the related expenses in the
statement of operations. Application of this EITF requires that comparative
financial statements for prior periods be reclassified to comply with the
guidance. We adopted this EITF as of January 1, 2002 and have reclassified our
prior period consolidated financial statements to conform to the current
presentation. The adoption of this EITF did not have a material effect on total
revenues or gross margin percentages and has no impact on results of operations
as it required an equivalent increase to both revenue and cost of revenue.
Revenue and cost of revenue for the three months ended June 30, 2001 increased
by $642,000 and increased by $1.2 million for the six months ended June 30,
2001.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities," which addresses financial accounting and reporting
for costs associated with exit or disposal activities and supersedes EITF Issue
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that costs associated with exit or disposal
activities be recognized when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 also establishes that the
liability should initially be measured and recorded at fair value. We will adopt
the provisions of SFAS 146 for exit or disposal activities that are initiated
after December 31, 2002.
Other Matters
European Monetary Union. On January 1, 1999, 11 of the 15 member countries of
the European Union established fixed conversion rates between their existing
sovereign currencies and the euro. These countries agreed to adopt the euro as
their common legal currency from that date. The legacy currencies remained legal
tender in these countries as a denomination of the euro between January 1, 1999
and January 1, 2002. Beginning on January 1, 2002, euro-denominated bills and
coins are now issued for cash transactions. For a period of up to six months
from this date, both legacy currencies and the euro were legal tender. By July
1, 2002, the participating countries withdrew all legacy currencies and now use
the euro.
We have made the necessary changes to our internal business systems to support
transactions denominated in the euro, including establishing euro price lists
for affected countries. We have been transacting in the euro currency since 1999
and have evaluated the impact the euro has had on our financial condition and
results of operations. Based on this evaluation to date, we currently do not
believe that there has been or will be a material impact on our financial
condition or results of operations as a result of the euro conversion.
Environmental Matters. We are not aware of any issues related to environmental
matters that have, or are expected to have, a material affect on our business.
20
Risk Factors That May Affect Future Results
Our business, financial condition, operating results and prospects can be
impacted by a number of factors, including but not limited to those set forth
below and elsewhere in this report, any one of which could cause our actual
results to differ materially from recent results or from our anticipated future
results. Factors that may affect our business, financial condition and results
of operations include:
Our quarterly operating results may fluctuate in future periods and are not
predictable and, as a result, we may fail to meet expectations of investors and
analysts, causing our stock price to fluctuate or decline. Prior growth rates in
our revenue and operating results should not necessarily be considered
indicative of future growth or operating results. Our operating results have
fluctuated in the past and we anticipate our future operating results will
continue to fluctuate due to many factors, some of which are largely beyond our
control. These factors include, but are not limited to, the following:
o the industry-wide slow down in IT spending;
o general domestic and international economic and political
conditions;
o the discretionary nature of our customers' budget and purchase
cycles and the absence of long-term customer purchase
commitments;
o the tendency to realize a substantial percentage of our revenue
in the last weeks, or even days, of each quarter;
o the potential for delays or deferrals of customer orders;
o the budget cycles of our customers;
o the size, complexity and timing of individual transactions;
o changes in foreign currency exchange rates and the impact of
the euro currency;
o the length of our sales cycle;
o variations in the productivity of our sales force;
o the level of software product sold and price competition;
o the timing of new software introductions and software enhancements
by us and our competitors;
o the mix of sales by products, software, services and distribution
channels;
o project overruns associated with fixed-price contracts;
o acquisitions by us and our competitors;
o our ability to develop and market new software products and
control costs;
o the quality of our customer support; and
o the level of international sales.
The decision to implement our products is subject to each customer's resources
and budget availability. Our quarterly sales generally include a mix of medium
sized orders, along with several large individual orders, and as a result, the
loss or delay of an individual large order could have a significant impact on
our quarterly operating results and revenue. Our operating expenses are based on
projected revenue trends and are generally fixed. Therefore, any shortfall from
projected revenue may cause significant fluctuations in operating results from
quarter to quarter. As a result of these factors, revenues and operating results
for any quarter are subject to fluctuations and are not predictable with any
significant degree of accuracy. Therefore, we believe that period-to-period
comparisons of our results of operations should not be relied upon as
indications of future performance. Moreover, such factors could cause our
operating results in a given quarter to be below the expectations of public
market analysts and investors. In either case, the price of our common stock
could decline materially.
The markets in which we operate are highly competitive and we cannot be sure
that we will be able to continue to compete effectively, which could result in
lost market share and reduced revenue. The markets we serve are highly
competitive and we expect competition to intensify. Our future financial
performance will depend primarily on the continued growth of the markets for our
software products and services as well as the purchase of our products by
customers in these markets. If the markets we serve fail to grow or grow more
slowly than we currently anticipate, our business, financial condition and
operating results would be harmed. These intensely competitive markets are
highly fragmented and rapidly changing and there are certain competitors of ours
with substantially greater sales, marketing, development and financial
resources. Our present or future competitors may be able to develop software
products comparable or superior to those offered by us, offer lower priced
products or adapt more quickly than we do to new technologies or evolving
customer requirements. In order to be successful in the future, we must respond
to technological change, customer requirements and competitors' current software
products and innovations. We cannot assure that we will be able to continue to
compete effectively in our target markets or that future competition will not
have a material adverse effect on our 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
21
parties to increase the ability of their products to address the needs of the
markets we serve. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
Increased competition may result in price reductions, reduced gross margins and
loss of market share, any of which could have a material adverse effect on our
business, financial condition and results of operations.
We must develop and sell new products to keep up with rapid technological change
in order to achieve future revenue growth and profitability. The market for our
software and services is characterized by rapid technological developments,
evolving industry standards, changes in customer requirements and frequent new
product introductions and enhancements. Our ability to continue to sell products
will be dependent upon our ability to continue to enhance our existing software
and services offerings, develop and introduce, in a timely manner, new software
products incorporating technological advances and respond to customer
requirements. Our future success also depends, in part, on our ability to
execute on our strategy of developing a framework for Business Process
Management solutions for the ECM market. This strategy may require us to develop
and maintain relations with technology partners. We may not be successful in
maintaining these relationships or in developing, marketing and releasing new
products or new versions of our products that respond to technological
developments, evolving industry standards or changing customer requirements. We
may also experience difficulties that could delay or prevent the successful
development, introduction and sale of these products and enhancements. In
addition, these products and enhancements may not adequately meet the
requirements of the marketplace and may not achieve any significant degree of
market acceptance. If we fail to successfully maintain or establish
relationships with technology partners or to execute on our integrated product
solution strategy, or if release dates of any future products or enhancements
are delayed, or if these products or enhancements fail to achieve market
acceptance when released, our business operating results and financial condition
could be materially harmed. In the past, we have experienced delays in the
release dates of enhancements and new releases to our products and we cannot
assure that we will not experience significant future delays in product
introduction. From time to time, our competitors or we may announce new software
products, capabilities or technologies that have the potential to replace or
shorten the life cycles of our existing software products. We cannot assure that
announcements of currently planned or other new software products will not cause
customers to delay their purchasing decisions in anticipation of such software
products, and such delays could have a material adverse effect on our business
and operating results.
Protection of our intellectual property and other proprietary rights is limited,
which could result in the use of our technology by competitors or other third
parties. There is risk of third-party claims of infringement, which could expose
us to litigation and other costs. Our success depends, in part, on our ability
to protect our proprietary rights to the technologies used in our principal
products. We rely on a combination of copyrights, trademarks, trade secrets,
patents, confidentiality procedures and contractual provisions to protect our
proprietary rights in our software products. We cannot assure that our existing
or future copyrights, trademarks, trade secrets, patents or other intellectual
property rights will have sufficient scope or strength to provide meaningful
protection or a commercial advantage to us. In addition, the laws of some
foreign countries do not protect our proprietary rights to the same extent, as
do the laws of the United States. Our inability to protect our intellectual
property may have a material adverse effect on our business, financial condition
and results of operations.
We may, from time to time, be notified that we are infringing certain patent or
intellectual property rights of others. While there are no material actions
currently pending against us for infringement of patent or other proprietary
rights of third parties, we cannot assure that third parties will not initiate
infringement actions against us in the future. Combinations of technology
acquired through past or future acquisitions and our technology will create new
software products and technology that also may give rise to claims of
infringement. Infringement actions can result in substantial costs and diversion
of resources, regardless of the merits of the actions. If we were found to
infringe upon the rights of others, we cannot assure that we could redesign the
infringing products or could obtain licenses on acceptable terms, if at all.
Additionally, significant damages for past infringement could be assessed or
future litigation relative to any such licenses or usage could occur. An adverse
disposition of any claims or the advent of litigation arising out of any claims
of infringement may have a material adverse effect on our business, financial
condition and results of operations.
We depend on certain strategic relationships in order to license third-party
products and revenue related to these products could be at risk if we were
unable to maintain these relationships. In order to expand the distribution of
our products and broaden our product offerings, we have established strategic
relationships with a number of indirect channel partners and other consultants
that provide marketing and sales opportunities for us. We have entered into key
formal and informal agreements with other companies such as IBM Crossworlds,
Microsoft Corporation, SAP AG, Siebel Systems Inc, Sun Microsystems, Inc., BEA,
and Verity, Inc. Certain of these agreements do not have minimum purchase
requirements and/or are cancelable at will. We cannot assure that these
companies will not reduce or discontinue their relationships with, or support
of, FileNET and our products. Our failure to maintain these relationships, or to
establish new relationships in the future, could harm our business, financial
condition and results of operations.
22
We currently license certain software from third parties, including software
that is integrated with internally developed software and used in our products
to perform key functions. In the past, we have had difficulty renewing certain
licenses. The failure to continue to maintain these licenses would prohibit us
from selling certain products. We cannot assure that such third parties will
remain in business, that they will continue to support their software products
or that their software products will continue to be available to us on
acceptable terms. The loss or inability to maintain any of these software
licenses could result in shipment delays or reductions in software shipments
until equivalent software can be developed, identified, licensed, and
integrated. This could adversely affect our business, financial condition or
results of operations.
We must retain and attract key executives and personnel who are essential to our
business, which could result in increased personnel expenses. Our success
depends to a significant degree upon the continued contributions of our key
management, as well as other marketing, technical and operational personnel. The
loss of the services of one or more key employees could have a material adverse
effect on our operating results. We also believe our future success will depend
in large part upon our ability to attract and retain additional highly skilled
management, technical, marketing, product development and operational personnel
and consultants. There is competition for such personnel, particularly software
developers, professional service consultants and other technical personnel, and
pay scales in the software industry have significantly increased. We cannot
assure that in the future we will be successful in attracting and retaining such
personnel.
A significant percent of our revenue is derived internationally and we are
subject to many risks internationally, which could put our revenue at risk.
Historically, we have derived approximately 25%-30% of our total revenue from
international sales through our worldwide network of subsidiaries and channel
partners. International business is subject to certain risks including, but not
limited to, the following:
o tariffs and trade barriers;
o varying technical standards;
o political and economic instability;
o reduced protection for intellectual property rights in certain
countries;
o difficulties in staffing and maintaining foreign operations;
o difficulties in managing foreign distributors;
o varying requirements for localized products;
o potentially adverse tax consequences;
o currency restrictions and currency exchange fluctuations including
those related to the euro;
o the burden of complying with a wide variety of complex foreign
laws, regulations and treaties;
o the possibility of difficulties in collecting accounts receivable;
and
o longer payment cycles.
Any of these factors could have a material adverse effect on our business,
financial condition or results of operations in the future.
If our software contains errors we could incur unplanned expenses and delays
which could result in reduced revenue, lower profits and harmful publicity.
Software and products as complex as those we sell are susceptible to errors or
failures, especially when first introduced or when new versions are released.
Our software products are often intended for use in applications that are
critical to a customer's business. As a result, our customers may rely on the
effective performance of our software to a greater extent than the market for
software products generally. Despite internal testing and testing by current and
potential customers, new products or enhancements may contain undetected errors
or performance problems that are discovered only after a product has been
installed and used by customers. Errors or performance problems could cause
delays in product introduction and shipments or could require design
modifications, either of which could lead to a loss in or delay of revenue.
These problems could cause a diversion of development resources, harm our
reputation or result in increased service or warranty costs, or require the
payment of monetary damages, any of which could harm our business, operating
results and financial condition. While our license agreements with customers
typically contain provisions designed to limit our exposure to potential product
liability claims, it is possible that such limitation of liability provisions
may not be effective under the laws of certain jurisdictions.
Our stock price has been and may continue to be volatile causing fluctuations in
the market price of our stock, which would impact shareholder value. The trading
price of our common stock has fluctuated in the past and is subject to
significant fluctuations in response to the following factors, among others,
some of which are beyond our control:
o variations in quarterly operating results;
o fluctuations in our order levels;
23
o changes in earnings estimates by analysts;
o announcements of technological innovations or new products or
product enhancements by us or our competitors;
o key management changes;
o changes in joint marketing and development programs;
o developments relating to patents or other intellectual property
rights or disputes;
o developments in our relationships with our customers, resellers
and suppliers;
o our announcements of significant contracts, acquisitions,
strategic partnerships or joint ventures;
o general conditions in the software and computer industries;
o fluctuations in general stock market prices and volume, which
are particularly common among highly volatile securities of
Internet and software companies; and
o other general economic and political conditions.
In recent years, the stock market, in general, has experienced extreme price and
volume fluctuations that have affected the market price for many companies in
industries similar to ours. Some of these fluctuations have been unrelated to
the operating performance of the affected companies. These market fluctuations
may decrease the market price of our common stock in the future.
Acquisitions of companies or technologies may result in disruptions to our
business and diversion of management attention, which could cause our financial
performance to suffer. As part of our business strategy, we frequently evaluate
strategic acquisition opportunities. For example, on April 2, 2002, we acquired
certain assets and assumed certain liabilities of eGrail, Inc., a Web content
management company, for a purchase price of $9.0 million in cash. We anticipate
that our future growth may depend in part on our ability to identify and acquire
complementary businesses, technologies or product lines. Acquisitions involve
significant risks and could divert management's attention from the day-to-day
operations of our ongoing business. Additionally, such acquisitions may include
numerous other risks, including, but not limited to the following:
o difficulties in the integration of the operations, products and
personnel of the acquired companies;
o the incurrence of debt;
o liabilities and risks that are not known or identifiable at the
time of the acquisition;
o difficulties in retaining the acquired company's customer base;
and
o the potential loss of key personnel of the acquired company.
If we fail to successfully manage future acquisitions or fully integrate future
acquired businesses, products or technologies with our existing operations, we
may not receive the intended benefits of the acquisitions and such acquisitions
may harm our business and financial results.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates primarily
to our investment portfolio. We have not used derivative financial instruments
in our investment portfolio. We place our investments with high-quality issuers
and, by policy, limit the amount of credit exposure to any one issuer. We
protect and preserve our invested funds by limiting default, market and
reinvestment risk. Our investments in marketable securities consist primarily of
high-grade corporate and government securities with maturities of less than
three years. Investments purchased with an original maturity of three months or
less are considered to be cash equivalents. We classify all of our investments
as available-for-sale. Available-for-sale securities are carried at fair value,
with unrealized gains and losses, net of tax, reported in a separate component
of stockholders' equity.
The following table provides information about our cash and cash equivalents and
our investment portfolio at June 30, 2002 (dollars in thousands):
Weighted
Average
Portfolio Balance Yield
Cash and Equivalents-Domestic $ 30,542 1.81 %
Cash and Equivalents-International 46,269 3.05 %
Short Term Municipals - Taxable 10,881 2.05 %
24
Commercial Paper 6,045 1.87 %
Corporate 8,462 2.43 %
Governments/Agencies 66,494 2.50 %
Total 2.47 %
$ 168,693
Foreign Currency Fluctuations and Inflation
Our performance can be affected by changes in foreign currency values relative
to the U.S. dollar in relation to the Company's revenue and operating expenses.
As of June 30, 2002, we had forward foreign exchange contracts outstanding
totaling approximately $1,192,809 in eight currencies. These contracts are
opened on the last business day of the quarter and mature within three months.
Cumulative other comprehensive loss decreased $5.0 million for the six months
ended June 30, 2002 due to unrealized foreign currency translation gains
resulting from the strengthening of the euro against the U.S. dollar during the
second quarter of 2002.
Management believes that inflation has not had a significant impact on the
prices of our products, the cost of our materials, or our operating results for
the three and six months ended June 30, 2002 and 2001.
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 2002 Annual Meeting of Stockholders of the Company was held at 9:00
a.m. on May 22, 2002, in Costa Mesa, California.
(b) At the annual meeting, the following six individuals were elected to the
Company's Board of Directors, constituting all members of the Board of
Directors:
Nominee Affirmative Votes Votes Withheld
L. George Klaus 31,395,051 350,011
William P. Lyons 31,395,305 349,757
Lee D. Roberts 31,390,443 354,619
John C. Savage 31,407,971 337,091
Roger S. Siboni 30,550,236 1,194,826
Theodore J. Smith 31,307,695 437,367
(c) The Company's stockholders were asked to approve the 2002 Incentive Award
Plan pursuant to which an aggregate of 1,400,000 shares would be available
for issuance hereunder. This proposal was approved in accordance with the
following vote of stockholders:
Broker
Votes For Votes Against Abstentions Non-Votes
17,875,173 5,706,252 66,770 8,096,867
(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 1,100,000 shares. This proposal was approved in accordance
with the following vote of stockholders:
Broker
Votes For Votes Against Abstentions Non-Votes
21,948,564 1,635,177 64,424 8,096,897
25
(e) The Company's stockholders were asked to ratify the Company's appointment
of Deloitte and Touche LLP as independent accountants of the Company for
the fiscal year ending December 31, 2002. This proposal was approved in
accordance with the following vote of stockholders:
Votes For Votes Against Abstentions
30,957,296 743,428 44,338
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) Reports on Form 8-K
On April 12, 2002, the Registrant filed a report on
Form 8-K relating to the Registrant's acquisition of certain assets and
certain liabilities of eGrail, Inc., which report was amended on June 11,
2002.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FILENET CORPORATION
August 14, 2002
Date
By: /s/ Sam M. Auriemma
Sam M. Auriemma, Senior Vice President, Finance
(Principal Financial and Accounting Officer)
and Chief Financial Officer
27
Index to Exhibits
Exhibit
No. Exhibit Description
3.1* Restated Certificate of Incorporation, as amended (filed as Exhibit 3.1 to
Registrant's 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 Registrant's 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, filed on July 21, 1987; Registration No. 33-15004).
4.1* Form of certificate evidencing Common Stock (filed as Exhibit 4.1 to
Registrant's registration statement on Form S-1, filed on July 21, 1987;
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 Registrant's registration statement on
Form S-4 filed on January 26, 1996; Registration No. 333-00676).
4.3* Amendment One dated July 31, 1998 and Amendment Two dated November 9, 1998 to
Rights Agreement dated as of November 4, 1988 between FileNET Corporation and
BANKBOSTON, N.A. formerly known as The First National Bank of Boston (filed
as Exhibit 4.3 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998).
4.4* Amendment Three dated November 30, 2001 to Rights Agreement dated as of
November 4, 1988 between FileNET Corporation and Equiserve Trust Company, N.A.,
successors to BANKBOSTON, N.A. (filed as Exhibit 4.4 to Registrant's Annual
Report on Form 10-K filed for the year ended December 31, 2001).
10.1* Second Amended and Restated Credit Agreement (Multi-currency) by and between
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 Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999) as amended
by a Waiver and First Amendment to Credit Agreement dated as of June 29, 2001
and by a letter amendment dated as of April 5, 2002.
10.1.1* Waiver and First Amendment to Credit Agreement (Multi-currency) by and
between the Registrant and Bank of America, N.A., formerly known as Bank of
America National Trust and Savings Association, dated June 29, 2001, effective
June 29, 2001 (filed as Exhibit 10.1 to Registrant's Annual Report on Form 10-K
filed for the year ended December 31, 2001).
10.1.2 Letter amendment dated as of April 5, 2002 and Third Amendment to Credit
Agreement (Multi-currency) by and between the Registrant and Bank of
America, N.A., dated as of June 28, 2002.
10.2*+ Amended and Restated 1995 Stock Option Plan of FileNET (filed as Exhibit 99.1
to Registrant's registration statement on Form S-8 filed on October 15, 2001;
Registration No. 333-71598).
10.3*+ Second Amended and Restated 1986 Stock Option Plan of FileNET Corporation,
together with the forms of Incentive Stock Option Agreement and Non-Qualified
Stock Option Agreement (filed as Exhibits 4(a), 4(b) and 4(c), respectively,
to the Registrant's registration statement on Form S-8, filed on June 10, 1992;
Registration No. 33-48499), the first Amendment thereto (filed as Exhibit 4(d)
to the Registrant's registration statement on Form S-8, filed on October 4, 1993;
Registration No. 33-69920), and the Second Amendment thereto (filed as
Appendix A to the Registrant's Definitive Proxy Statement on Schedule 14A for
the Registrant's 1994 Annual Meeting of Stockholders, filed on April 29, 1994).
10.4*+ 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 Registrant's registration statement on Form S-8 filed on August 20, 1997).
10.5*+ 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 Registrant's registration statement on Form S-8 filed on
August 20, 1997).
10.6*+ Amended and Restated FileNET Corporation 1998 Employee Stock Purchase Plan
(filed as Appendix B to Registrant's Definitive Proxy Statement on Schedule
14A, for the Registrant's 2002 Annual Meeting of Stockholders, filed on
April 18, 2002).
10.7*+ FileNET Corporation International Employee Stock Purchase Plan (filed as
Appendix C to Registrant's Definitive Proxy Statement on Schedule 14A,for the
Registrant's 2002 Annual Meeting of Stockholders, filed on April 18, 2002).
28
10.8* Lease between the Registrant and C. J. Segerstrom and Sons for the
headquarters of the Company, dated September 1, 1999 (filed as
Exhibit 10.23 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999).
10.9* Asset Purchase Agreement between the Registrant and Application Partners, Inc.
dated May 18, 2000 (filed as Exhibit 10.24 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000).
10.10*+ Written Compensation Agreement and Non-Statutory Stock Option Agreement(with
Notice of Grant of Stock Option and Special Addendum) between Registrant and
Mr. Sam Auriemma (filed as Exhibit 99.1 and 99.2 to Registrant's registration
statement on Form S-8, filed on April 20, 2001; Registration No. 333-59274).
10.11* Asset Purchase Agreement, dated April 2, 2002 by and between 3565 Acquisition
Corporation and eGrail, Inc. (filed as Exhibit 10.1 to Registrant's Current
Report on Form 8-K, filed on April 12, 2002).
10.12 Secured Promissory Note between Registrant and Mr. Lee D Roberts, dated
June 14, 2002.
10.13 Option Exchange Agreement between Registrant and Mr. Ron L. Ercanbrack, dated
May 22, 2002, together with form of Incentive Stock Option Agreement and Grant
Notice.
10.14 The 2002 Incentive Award Plan, as approved by stockholders at the Registrant's
Annual Meeting on May 22, 2002, together with the forms of Incentive Option
Agreement and Non-Qualified Stock Option Agreement for Independent Directors.
* Incorporated herein by reference
+ Management contract, compensatory plan or arrangement
29
EXHIBIT 10.1.2
[Bank of America Letterhead]
[Office of Kevin McMahon]
April 10, 2002
Ms. Behshid Amini-Rad
Manager Treasury Operations
Filenet Corporation
3565 Harbor Blvd.
Costa Mesa, CA 92626-1420
Re: Extension of Bank Guarantee
Dear Behshid:
At your request, Bank of America, N.A., did not send a notice of
non-renewal which could have been sent April 5, 2002, with respect to Bank of
America's Guarantee #851271 issued to Engels-Hollandse Beleggingstrust N.V. as
beneficiary (the "Guarantee") on July 6, 2000 in the amount of EUR 106,000. The
consequence of not sending that notice was to permit the automatic extension of
the expiry date of the Guarantee from July 6, 2002, to July 6, 2003.
The Guarantee was issued pursuant to that certain Amended and Restated
Credit Agreement (Multicurrency) dated as of June 30, 1999, as amended by a
Waiver and First Amendment to Credit Agreement dated as of June 29, 2001 (the
"Credit Agreement") to which we are both parties. Section 2.06(b)(i) of the
Credit Agreement states that each Bank Guarantee shall expire no later than the
Final Maturity date which in respect of Bank Guarantees is June 28, 2003.
Notwithstanding Section 2.06(b)(i) Bank of America permitted the extension of
the Guarantee to July 6, 2003, at your request, and both Bank of America and
Filenet Corporation agree that Section 2.06(b)(i) of the Credit Agreement is
hereby amended solely to permit the extension of the expiry date of the
Guarantee to July 6, 2003. Except as amended hereby, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full force and effect
and constitute the legal, valid and binding obligations of Filenet Corporation
enforceable against it in accordance with its terms.
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Please confirm your acknowledgement and agreement to the foregoing by
countersigning and returning a copy of this letter. As always, we are pleased to
assist you.
Very truly yours,
Bank of America, N.A.
Acknowledged and agreed:
Filenet Corporation
By: /s/ Kevin M. McMahon
By: /s/ Sam M. Auriemma Name: Kevin M. McMahon
Name: Sam M. Auriemma Title: Managing Director
Title: Sr. Vice President and CFO
By: /s/ Lee D. Roberts
Name: Lee D. Roberts
Title: Chairman and CEO
Date: April ___, 2002
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
June 28, 2002, is entered into by and between FILENET CORPORATION (the
"Company") and BANK OF AMERICA, N. A. (the "Bank").
RECITALS
A. The Bank and the Company are parties to an Amended and Restated Credit
Agreement (Multicurrency) dated as of June 30, 1999, as amended by a
Waiver and First Amendment to Credit Agreement dated as of June 29,
2001 and by a letter amendment dated as of April 5, 2002 (the "Credit
Agreement") pursuant to which the Bank has extended certain credit
facilities to the Company and certain Acceptable Subsidiaries.
B. The Company has requested that the Bank agree to certain amendments of
the Credit Agreement.
C. The Bank is willing to amend the Credit Agreement, subject to the
terms and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms used
herein shall have the meanings, if any, assigned to them in the Credit
Agreement.
2. Amendments to Credit Agreement. The Credit Agreement shall be amended
as follows:
(a) Section 1.01 of the Credit Agreement shall be amended at the
defined term "Availability Period" by replacing the date "June
28, 2002" with "June 27, 2003."
(b) Section 1.01 of the Credit Agreement shall be amended at the
defined term "Final Maturity Date" by amending such defined term
in its entirety to read as follows:
"Final Maturity Date": (a) in respect of any Advances, June 27, 2003;
(b) in respect of any standby letters of credit, June 27, 2004;
and (c) in respect of any Bank Guaranties, June 27, 2004.
(c) Section 2.02(b) of the Credit Agreement shall be amended by
replacing the amount "1.20%" with the amount "1.25%."
(d) Section 2.04(d) of the Credit Agreement shall be amended by
replacing the amount "0.85%" with the amount "1.25%."
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(e) Section 2.09 of the Credit Agreement shall be amended by
replacing the amount "0.25%" with "0.50%."
3. Representations and Warranties. The Company hereby represents and
warrants to the Bank as follows:
(a) No Default or Event of Default has occurred and is continuing.
(b) The execution, delivery and performance by the Company of this
Amendment have been duly authorized by all necessary corporate
and other action and do not and will not require any registration
with, consent or approval of, notice to or action by, any person
or entity (including any governmental authority) in order to be
effective and enforceable. The Credit Agreement as amended by
this Amendment constitutes the legal, valid and binding
obligations of the Company, enforceable against it in accordance
with its respective terms, without defense, counterclaim or
offset.
(c) All representations and warranties of the Company contained in
the Credit Agreement are true and correct on and as of the date
hereof.
(d) The Company is entering into this Amendment on the basis of its
own investigation and for its own reasons, without reliance upon
the Bank or any other person or entity.
4. Effective Date. This Amendment will become effective the date first
above written (the "Effective Date"), provided:
(a) The Bank has received from the Company a duly executed original
(or, if elected by the Bank, an executed facsimile copy) of this
Amendment.
(b) The Bank has received from the Company a copy of a resolution
passed by the board of directors of such corporation, certified
by the Secretary or an Assistant Secretary of such corporation as
being in full force and effect on the Effective Date, authorizing
the execution, delivery and performance of this Amendment, along
with an incumbency certificate.
(c) All representations and warranties contained herein are true and
correct as of the Effective Date.
(d) The Bank has received from the Company the amount of $5,000,
representing payment in full of a non-refundable amendment fee,
which amount the Company covenants to pay to the Bank on demand.
5. Reservation of Rights. The Company acknowledges and agrees the
execution and delivery by the Bank of this Amendment shall not be
deemed to create a course of dealing or otherwise obligate the Bank to
enter into amendments under the same, similar or any other
circumstances in the future.
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6. Miscellaneous.
(a) Except as herein expressly amended, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full
force and effect and all references therein and in the other
Credit Documents to such Credit Agreement shall henceforth refer
to the Credit Agreement as amended by this Amendment. This
Amendment shall be deemed incorporated into, and a part of, the
Credit Agreement. This Amendment is a Credit Document.
(b) This Amendment shall be binding upon and inure to the benefit of
the parties hereto and to the Credit Agreement and their
respective successors and assigns. No third party beneficiaries
are intended in connection with this Amendment.
(c) This Amendment shall be governed by and construed in accordance
with the law of the State of California.
(d) This Amendment may be executed in any number of counterparts,
each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same
instrument. Each of the parties hereto understands and agrees
that this document (and any other document required herein) may
be delivered by any party thereto either in the form of an
executed original or an executed original sent by facsimile
transmission to be followed promptly by mailing of a hard copy
original, and that receipt by the Bank of a facsimile transmitted
document purportedly bearing the signature of the Company shall
bind the Company, with the same force and effect as the delivery
of a hard copy original. Any failure by the Bank to receive the
hard copy executed original of such document shall not diminish
the binding effect of receipt of the facsimile transmitted
executed original of such document which hard copy page was not
received by the Bank, and the Bank is hereby authorized to make
sufficient photocopies thereof to assemble complete counterparty
documents.
(e) This Amendment, together with the Credit Agreement, contains the
entire and exclusive agreement of the parties hereto with
reference to the matters discussed herein and therein. This
Amendment supersedes all prior drafts and communications with
respect thereto. This Amendment may not be amended except in
accordance with the provisions of Section 9.05 of the Credit
Agreement.
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision
shall be invalidated without affecting the remaining provisions
of this Amendment or the Credit Agreement, respectively.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
FILENET CORPORATION
By:
Name:
Title:
By:
Name:
Title:
BANK OF AMERICA, N.A.
By:
Name:
Title:
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EXHIBIT 10.12
SECURED PROMISSORY NOTE
$1,900,000 Costa Mesa, California
June 14, 2002
FOR VALUE RECEIVED, the undersigned, Lee D. Roberts ("Roberts"), hereby
promises to pay to the order of FileNET Corporation ("Payee"), the principal sum
of One Million Nine Hundred Thousand Dollars ($1,900,000), or so much thereof as
may be outstanding under this Note, with interest on the unpaid principal sum
owing hereunder at the rate of 2.89% per annum accruing from the date hereof,
all payable in the manner and at the time or times provided below, together with
all other amounts due Payee under this Note and the Deed of Trust (as defined
below).
Interest shall accrue from the date hereof. All interest shall be
calculated based upon a 365 day year and charged on the basis of actual days
elapsed.
Accrued interest on the principal balance of this Note shall be paid
annually beginning February 15, 2003 and on each February 15th thereafter until
the entire principal balance becomes due as provided in the next sentence. The
entire outstanding principal balance of this Note (and any accrued interest) is
due and payable at the earlier of (a) the second year plus 359 days anniversary
of the date of this Note, (b) one year after termination by Payee of Roberts'
employment with Payee, or (c) ninety (90) days after termination by Roberts of
his employment with Payee. Any other amounts due and unpaid under this Note and
the Deed of Trust shall be due and payable within ten (10) days of written
demand therefore. Except as may otherwise be specified by Payee from time to
time, all payments hereunder shall be paid to Payee at 3565 Harbor Boulevard,
Costa Mesa, California 92626.
Should Roberts sell, convey, transfer, lease, dispose of or further
encumber the Property (as defined in the Deed of Trust) or any portion thereof
(whether voluntarily or involuntarily), then Payee shall have the right, at its
option, to declare all sums secured hereby immediately due and payable.
This Note is secured by a Deed of Trust With Assignment of Rents of even
date herewith (the "Deed of Trust").
Roberts shall have the right to prepay the whole or any part of the unpaid
principal balance of this Note at any time without the payment of any additional
consideration therefore so long as such payment is accompanied by the payment of
all accrued and unpaid interest, if any.
If any installment of principal and interest is not made within five (5)
days of the date due, or if any other amount owing hereunder is not made within
the aforementioned ten (10) day period after demand therefore, then such amount
shall bear interest at the lesser rate of (a) ten and one-half percent (10.5%)
per annum or (b) the highest rate permissible under applicable law, commencing
on the first day after the amount becomes delinquent and continuing until such
amount is paid in full.
If Roberts exercises any FileNET stock options prior to the payment of all
principal and interest under this Note (whether or not due), fifty percent (50%)
of the net proceeds from such exercise of stock options will be paid by Roberts
to Payee and shall be applied against the principal outstanding under this Note.
This Note has been executed and delivered in the State of California and is
to be governed by and construed according to the laws thereof. Time is of the
essence with respect to every provision hereof.
All payments hereunder shall be made in lawful money of the United States
of America. In the event of any action or proceeding instituted to enforce or
construe any provision of this Note or the Deed of Trust, or as a consequence of
any default under this Note or the Deed of Trust, the prevailing party shall be
entitled to recover from the losing party all of its costs and expenses,
including, without limitation, court costs, all costs of appeals and reasonable
attorneys' fees.
No previous waiver and no failure or delay by Payee in acting with respect
to the terms of this Note or the Deed of Trust shall constitute a waiver of any
breach, default, or failure of condition under this Note, the Deed of Trust or
the obligations secured thereby. A waiver of any term of this Note, the Deed of
Trust or of any of the obligations secured thereby must be made in writing and
shall be limited to the express written terms of such waiver.
All agreements between the undersigned and Payee are expressly limited so
that in no contingency or event whatsoever, whether by reason of advancement of
the proceeds hereof, acceleration of maturity of the unpaid principal balance
hereof, or otherwise, shall the amount paid or agreed to be paid to the holder
hereof for the use, forbearance or detention of the money to be advanced
hereunder exceed the highest lawful rate permissible under applicable usury
laws. If, from any circumstances whatsoever, fulfillment of any provision
hereof, the Deed of Trust securing this Note or any other agreement referred to
herein, at the time performance of such provision shall be due, shall involve
transcending the limit of validity prescribed by law which a court of competent
jurisdiction may deem applicable hereto, then ipso facto, the obligation to be
fulfilled shall be reduced to the limit of such validity, and if from any
circumstances the holder hereof shall ever receive as interest an amount which
would exceed the highest lawful rate, such amount which would be excessive
interest shall be applied to the reduction of the unpaid principal balance due
hereunder and not to the payment of interest. This provision shall control every
other provision of all agreements between the undersigned and the holder hereof.
Roberts and Payee acknowledge that each party and its counsel have reviewed
and approved this Note and that the normal rule of construction to the effect
that any ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Note or any amendments or exhibits
hereto.
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Executed as of the date first written above.
LEE D. ROBERTS:
/s/ Lee D. Roberts
Lee D. Roberts
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EXHIBIT 10.13
OPTION EXCHANGE AGREEMENT
This Option Exchange Agreement (the "Agreement") is made effective as of
May 22, 2002 by and between FileNET Corporation, a Delaware corporation (the
"Company"), and Ron L. Ercanbrack ("Executive"). The Company and Executive are
referred to herein, individually as a "party" and, collectively, as the
"Parties."
Recitals
WHEREAS, the Compensation Committee (the "Committee") of the Board of
Directors of the Company granted to Executive on February 23, 2000, an option to
purchase 100,000 shares (the "2000 Option Shares") of the Company's Common Stock
("Common Stock") at an exercise price of $35.16 per share;
WHEREAS, the 2000 Option Shares have an exercise price that is
significantly higher than the current market price of the Company's common
stock;
WHEREAS, the Committee believes that the 2000 Option Shares are unlikely to
be exercised in the foreseeable future, which does not serve the purpose of such
options to promote the long-term success of the Company and the creation of
stockholder value by encouraging employees to focus on critical long-range
objectives, encouraging the attraction and retention of employees with
exceptional qualifications and linking employees' interests directly to those of
stockholders through increased stock ownership;
WHEREAS, the Committee and Executive believe that the 2000 Option shares
fail to provide Executive with a meaningful incentive to extend his best efforts
on behalf of the Company and its stockholders, and that it is in the best
interests of the Company and its stockholders to encourage maximum performance
by Executive at this time;
WHEREAS, the Committee has determined that it is advisable and in the best
interests of the Company and its stockholders to institute a stock option
exchange with Executive to provide him with the benefit of owning options that
over time may have a greater potential to increase in value, create better
performance incentives for Executive and thereby maximize stockholder value;
WHEREAS, the Executive and the Company desire to terminate and cancel the
out-of-the money 2000 Option Shares effective as of May 22, 2002, such that the
2000 Option Shares shall not at any time be deemed outstanding or exercisable,
in exchange for new options to be granted during the thirty day period beginning
on the first business day that is at least six months and one day from this date
of option cancellation; and
WHEREAS, the Committee and Executive desire to enter into this Agreement to
set forth the terms and conditions of the 2000 Option Shares cancellation and
exchange.
Agreement
In consideration of the foregoing recitals and the mutual representations
warranties, covenants and agreements contained herein, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and Executive, intending to be legally bound, do
hereby agree as follows:
1. Cancellation of the 2000 Option Shares. Executive and the Company
hereby mutually consent and agree to cancel the out-of-the money 2000
Option Shares effective as of May 22, 2002, such that as of and
following such date, the 2000 Option Shares shall not at any time be
deemed outstanding or exercisable.
2. Replacement Option Grant. In exchange for the cancellation of the 2000
Option Shares, as provided in Section 1 hereof, subject to
satisfaction of the conditions for Replacement Option grant set forth
in Section 3 hereof, the Company agrees to grant Executive an option
to purchase 100,000 shares of Common Stock (the "Replacement Option")
under the Company's 1995 Stock Option Plan, as amended, (the "Plan")
on a date selected by the Committee that is during the thirty day
period beginning on the first business day that is at least six months
and one day from this date of cancellation of the 2000 Option Shares
(i.e., during the thirty day period beginning on November 25, 2002).
Certain of the material terms of the Replacement Option grant are as
follows:
a. The exercise price for the Replacement Option shall equal the
average of the high and low selling price per share of the
Company's common stock on the Nasdaq National Market on the grant
date for the Replacement Option;
b. The Replacement Option shall commence vesting on the Replacement
Option grant date and will vest as to twenty-five percent (25%)
of the shares subject to the Replacement Option on the one year
anniversary of the Replacement Option grant date and 1/36 per
each month after the one year anniversary of the Replacement
Option grant date until the Replacement Option is fully vested on
the fourth anniversary of the Replacement Option grant date;
c. The Replacement Option will be designated a non-qualified stock
option, and will have a term of ten years following the grant
date for the Replacement Option, subject to earlier termination
upon the happening of certain events as specified in the option
agreement and Plan; and
d. The Replacement Option shall be evidenced by, and shall be
subject to all of the terms and conditions contained in, a stock
option agreement, substantially in the form attached hereto as
Exhibit A, which will be executed by the Company and Executive at
or about the time of the grant of the Replacement Option.
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3. Conditions to Grant of Replacement Option. The Company's obligation to
grant the Replacement Option is subject to satisfaction of the
following conditions:
a. Executive shall continue to serve as an executive officer of the
Company from the date hereof through and including the grant date
for the Replacement Option; and
b. The grant of the Replacement Option shall not be in violation of
any applicable law, rule or order.
In addition, the Company is reserving the right, in the event of a
merger, tender offer, exchange offer or similar transaction, to take
any actions the Company deems necessary or appropriate to complete a
transaction that the Company's Board of Directors believes is in the
best interest of the Company and its stockholders. This could include
terminating Executive's right to receive the Replacement Option. If
the Company terminates Executive's right to receive the Replacement
Option in connection with such a transaction, Executive would not
receive options to purchase securities of the acquiror or any other
consideration for the canceled 2000 Option Shares.
4. Executive's Understandings. Executive understands and agrees:
a. THE EXCHANGE OF OPTIONS CONTEMPLATED BY THIS AGREEMENT CARRIES
CONSIDERABLE RISK FOR EXECUTIVE, AND THERE ARE NO GUARANTEES OF
THE COMPANY'S FUTURE STOCK PERFORMANCE OR THE PRICE OF COMMON
STOCK ON THE REPLACEMENT GRANT DATE. The Company's stock price
could increase (or decrease) and the exercise price of the
Replacement Option could be higher (or lower) than the exercise
price of the 2000 Option Shares. The advisability of entering
into this Agreement depends largely on Executive's assumptions
about the future overall economic environment, and the
performance of the stock markets, the Common Stock and the
Company's business. Executive is informed and knowledgeable about
the Company's business, properties, results of operations,
condition (financial or otherwise), prospects and proposals;
b. Executive will receive no vesting credit with respect to the
cancelled 2000 Option Shares between the date hereof and the
Replacement Option grant date, a period which will be at least
six months and one day;
c. Executive is responsible for consulting his own tax advisor with
respect to the federal, state and local tax consequences of this
Agreement;
d. The Company will not grant any new options to Executive for at
least six months and one day after the date of this Agreement;
and
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e. This Agreement does not constitute an offer of continued
employment, and does not interfere with or restrict in any way
the rights of the Company, which are hereby expressly reserved,
to discharge Executive at any time with or without good cause.
5. Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the Parties and their
respective successors and assigns. Notwithstanding the foregoing,
neither this Agreement nor any rights hereunder may be assigned by any
Party without the prior written consent of the other Parties.
6. Governing Law. The Parties agree that this Agreement shall be
construed and enforced in accordance with the internal laws of the
State of California.
7. Acknowledgement. The Parties acknowledge that this Agreement is not
entered into in consideration of any promise, commitment, expectation
or agreement to provide Executive with any form of additional
consideration, including any future stock options.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered as
of the date first written above.
Executive
/s/ Ron L. Ercanbrack
Ron L. Ercanbrack
FileNET Corporation
/s/ Lee D. Roberts
By: Lee D. Roberts
Title: Chief Executive Officer
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EXHIBIT A
STOCK OPTION AGREEMENT AND GRANT NOTICE
EMPLOYEE AND CONSULTANTS
October 21, 1999
FILENET CORPORATION
STOCK OPTION AGREEMENT
RECITALS
The Board has adopted the Plan for the purpose of retaining the services of
selected Employees, non-employee members of the Board and consultants and other
independent advisors who provide services to the Corporation (or any Parent or
Subsidiary).
A. Optionee is to render valuable services to the Corporation (or a
Parent or Subsidiary), and this Agreement is executed pursuant to, and
is intended to carry out the purposes of, the Plan in connection with
the Corporation's grant of an option to Optionee.
B. All capitalized terms in this Agreement shall have the meaning
assigned to them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. Grant of Option. The Corporation hereby grants to Optionee, as of
the Grant Date, an option to purchase up to the number of Option
Shares specified in the Grant Notice. The Option Shares shall be
purchasable from time to time during the option term specified in
Paragraph 2 at the Exercise Price.
2. Option Term. This option shall have a term of ten (10) years
measured from the Grant Date and shall accordingly expire at the
close of business on the Expiration Date, unless sooner
terminated in accordance with Paragraph 5 or 6.
3. Limited Transferability. This option shall be neither
transferable nor assignable by Optionee other than by will or by
the laws of descent and distribution following Optionee's death
and may be exercised, during Optionee's lifetime, only by
Optionee. However, if this option is designated a Non-Qualified
Option in the Grant Notice, then this option may be assigned in
whole or in part during Optionee's lifetime in accordance with
the terms of a Qualified Domestic Relations Order. The assigned
portion shall be exercisable only by the person or persons who
acquire a proprietary interest in the option pursuant to such
Qualified Domestic Relations Order. The terms applicable to the
assigned portion shall be the same as those in effect for this
option immediately prior to such assignment and shall be set
forth in such documents issued to the assignee as the Plan
Administrator may deem appropriate.
4. Dates of Exercise. This option shall become exercisable for the
Option Shares in a series of one or more installments as
specified in the Grant Notice. As the option becomes exercisable
for one or more of those installments, the installments shall
accumulate and the option shall remain exercisable for the
accumulated installments until the Expiration Date or sooner
termination of the option term under Paragraph 5 or 6.
5. Cessation of Service. The option term specified in Paragraph 2
shall terminate (and this option shall cease to be outstanding)
prior to the Expiration Date should any of the following
provisions become applicable:
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(i) Should Optionee cease to remain in Service for any reason
(other than death or Permanent Disability) while this option
is outstanding, then Optionee shall have a period of three
(3) months (commencing with the date of such cessation of
Service) during which to exercise this option, but in no
event shall this option be exercisable at any time after the
Expiration Date.
(ii) Should Optionee die while this option is outstanding, then
the personal representative of Optionee's estate or the
person or persons to whom the option is transferred pursuant
to Optionee's will or in accordance with the laws of descent
and distribution shall have the right to exercise this
option. Such right shall lapse and this option shall cease
to be outstanding upon the earlier of (i) the expiration of
the twelve (12) month period measured from the date of
Optionee's death or (ii) the Expiration Date.
(iii)Should Optionee cease Service by reason of Permanent
Disability while this option is outstanding, then Optionee
shall have a period of twelve (12) months (commencing with
the date of such cessation of Service) during which to
exercise this option. In no event shall this option be
exercisable at any time after the Expiration Date.
(iv) Should Optionee's Service be terminated for Misconduct, then
this option shall terminate immediately and cease to remain
outstanding.
(v) During the applicable post-Service exercise period, this
option may not be exercised in the aggregate for more than
the number of Option Shares for which the option is
exercisable at the time of Optionee's cessation of Service.
Upon the expiration of such exercise period or (if earlier)
upon the Expiration Date, this option shall terminate and
cease to be outstanding for any exercisable Option Shares
for which the option has not been exercised. However, this
option shall, immediately upon Optionee's cessation of
Service, terminate and cease to be outstanding with respect
to any Option Shares for which the option is not otherwise
at that time exercisable.
6. Special Acceleration of Option.
(i) This option, to the extent outstanding at the time of a
Corporate Transaction but not otherwise fully exercisable,
shall automatically accelerate so that this option shall,
immediately prior to the effective date of the Corporate
Transaction, become exercisable for all of the Option Shares
at the time subject to this option and may be exercised for
any or all of those Option Shares as fully-vested shares of
Common Stock. No such acceleration of this option, however,
shall occur if and to the extent: (i) this option is, in
connection with the Corporate Transaction, either to be
assumed by the successor corporation (or parent thereof) or
to be replaced with a comparable option to purchase shares
of the capital stock of the successor corporation (or parent
thereof) or (ii) this option is to be replaced with a cash
incentive program of the successor corporation which
preserves the spread existing on the Option Shares at the
time of the Corporate Transaction (the excess of the Fair
Market Value of such Option Shares over the aggregate
Exercise Price payable for those shares) and provides for
subsequent pay-out in accordance with the option exercise
schedule set forth in the Grant Notice. The determination of
option comparability under clause (i) shall be made by the
Plan Administrator, and such determination shall be final,
binding and conclusive.
(ii) Immediately following the Corporate Transaction, this option
shall terminate and cease to be outstanding, except to the
extent assumed by the successor corporation (or parent
thereof) in connection with the Corporate Transaction.
(iii)If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately
adjusted, immediately after such Corporate Transaction, to
apply to the number and class of securities which would have
been issuable to Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior
to such Corporate Transaction, and appropriate adjustments
shall also be made to the Exercise Price, provided the
aggregate Exercise Price shall remain the same.
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(iv) This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or
any part of its business or assets.
7. Adjustment in Option Shares. Should any change be made to the
Common Stock by reason of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the number and/or class of
securities subject to this option, (ii) the minimum number and/or
class of securities for which this option must be exercised, and
(iii) the Exercise Price in order to reflect such change and
thereby preclude a dilution or enlargement of benefits hereunder.
8. Stockholder Rights. The holder of this option shall not have any
stockholder rights with respect to the Option Shares until such
person shall have exercised the option, paid the Exercise Price
and become a holder of record of the purchased shares.
9. Manner of Exercising Option.
(i) In order to exercise this option with respect to all or any
part of the Option Shares for which this option is at the
time exercisable, Optionee (or any other person or persons
exercising the option) must take the following actions:
(ii) Execute and deliver to the Corporation a Notice of Exercise
for the number of Option Shares for which the option is
exercised.
(iii)Pay the aggregate Exercise Price for the purchased shares
in one or more of the following forms:
(A) cash or check made payable to the Corporation;
(B) a promissory note payable to the Corporation, but only
to the extent authorized by the Plan Administrator in
accordance with Paragraph 13;
(C) shares of Common Stock held by Optionee (or any other
person or persons exercising the option) for the
requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes
and valued at Fair Market Value on the Exercise Date;
or
(D) through a special sale and remittance procedure
pursuant to which Optionee (or any other person or
persons exercising the option) shall concurrently
provide irrevocable written instructions (a) to a
Corporation-designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the
settlement date, sufficient funds to cover the
aggregate Exercise Price payable for the purchased
shares plus all applicable Federal, state and local
income and employment taxes required to be withheld by
the Corporation by reason of such exercise and (b) to
the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm in
order to complete the sale.
Except to the extent the sale and remittance procedure
is utilized in connection with the option exercise,
payment of the Exercise Price must accompany the Notice
of Exercise.
(iv) Furnish to the Corporation appropriate documentation that
the person or persons exercising the option (if other than
Optionee) have the right to exercise this option.
8
(v) Make appropriate arrangements with the Corporation (or
Parent or Subsidiary employing or retaining Optionee) for
the satisfaction of all Federal, state and local income and
employment tax withholding requirements applicable to the
option exercise, if the Option is designated a Non-Qualified
Option in the Grant Notice.
(vi) As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any
other person or persons exercising this option) a
certificate for the purchased Option Shares.
(vii)In no event may this option be exercised for any fractional
shares.
10. Compliance with Laws and Regulations.
(i) The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by
the Corporation and Optionee with all applicable
requirements of law relating thereto and with all applicable
regulations of any stock exchange (or the Nasdaq National
Market, if applicable) on which the Common Stock may be
listed for trading at the time of such exercise and
issuance.
(ii) The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation
to be necessary to the lawful issuance and sale of any
Common Stock pursuant to this option shall relieve the
Corporation of any liability with respect to the
non-issuance or sale of the Common Stock as to which such
approval shall not have been obtained. The Corporation,
however, shall use its best efforts to obtain all such
approvals.
11. Successors and Assigns. Except to the extent otherwise provided
in Paragraphs 3 and 6, the provisions of this Agreement shall
inure to the benefit of, and be binding upon, the Corporation and
its successors and assigns and Optionee, Optionee's assigns and
the legal representatives, heirs and legatees of Optionee's
estate.
12. Notices. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing
and addressed to the Corporation at its principal corporate
offices. Any notice required to be given or delivered to Optionee
shall be in writing and addressed to Optionee at the address
indicated below Optionee's signature line on the Grant Notice.
All notices shall be deemed effective upon personal delivery or
upon deposit in the U.S. mail, postage prepaid and properly
addressed to the party to be notified.
13. Financing. The Plan Administrator may, in its absolute discretion
and without any obligation to do so, permit Optionee to pay the
Exercise Price for the purchased Option Shares by delivering a
promissory note payable to the Corporation. The terms of any such
promissory note (including the interest rate, the requirements
for collateral and the terms of repayment) shall be established
by the Plan Administrator in its sole discretion.(1/)
14. Excess Shares. If the Option Shares covered by this Agreement
exceed, as of the Grant Date, the number of shares of Common
Stock which may without stockholder approval be issued under the
Plan, then this option shall be void with respect to such excess
shares, unless stockholder approval of an amendment sufficiently
increasing the number of shares of Common Stock issuable under
the Plan is obtained in accordance with the provisions of the
Plan.
15. Construction. This Agreement and the option evidenced hereby are
made and granted pursuant to the Plan and are in all respects
limited by and subject to the terms of the Plan. All decisions of
the Plan Administrator with respect to any question or issue
arising under the Plan or this Agreement shall be conclusive and
binding on all persons having an interest in this option.
(1/) Payment of the Exercise Price by promissory note may, under currently
proposed Treasury Regulations, result in the loss of incentive stock option
treatment under the Federal tax laws.
9
16. Governing Law. The interpretation, performance and enforcement of
this Agreement shall be governed by the laws of the State of
California without resort to that State's conflict-of-laws rules.
17. Leave of Absence. The following provisions shall apply upon the
Optionee's commencement of an authorized leave of absence:
(i) The exercise schedule in effect under the Grant Notice shall
be frozen as of the first day of the authorized leave, and
the option shall not become exercisable for any additional
installments of the Option Shares during the period Optionee
remains on such leave.
(ii) Should Optionee resume active Employee status within sixty
(60) days after the start date of the authorized leave,
Optionee shall, for purposes of the exercise schedule set
forth in the Grant Notice, receive Service credit for the
entire period of such leave. If Optionee does not resume
active Employee status within such sixty (60) day periods,
then no Service credit shall be given for the period of the
leave.
(iii)If the option is designated as an Incentive Stock Option in
the Grant Notice, then the following additional provision
shall apply:
(A) If the leave of absence continues for more than ninety
(90) days, then the option shall automatically convert
to a non-qualified option under the federal tax laws on
the ninety-first (91st) day of such leave, unless the
Optionee's reemployment rights are guaranteed by
statute or by written agreement. Following any such
conversion of the option, all subsequent exercises of
such option, whether effected before or after
Optionee's return to active Employee status, shall
result in an immediate taxable event, and the
Corporation shall be required to collect from Optionee
the federal, state and local income and employment
withholding taxes applicable to such exercise.
(iv) In no event shall this option become exercisable for any
additional Option Shares or otherwise remain outstanding if
Optionee does not resume Employee status prior to the
Expiration Date of the option term.
10
APPENDIX
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Option Agreement.
B. Board shall mean the Corporation's Board of Directors.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
D. Common Stock shall mean the Corporation's common stock.
E. Corporate Transaction shall mean either of the following
stockholder-approved transactions to which the Corporation is a
party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are
transferred to a person or persons different from the
persons holding those securities immediately prior to such
transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete
liquidation or dissolution of the Corporation.
F. Corporation shall mean FileNET Corporation, a Delaware
corporation.
G. Domestic Relations Order shall mean any judgment, decree or order
(including approval of a property settlement agreement) which
provides or otherwise conveys, pursuant to applicable State
domestic relations laws (including community property laws),
marital property rights to any spouse or former spouse of the
Optionee.
H. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control
and direction of the employer entity as to both the work to be
performed and the manner and method of performance.
I. Exercise Date shall mean the date on which the option shall have
been exercised in accordance with Paragraph 9 of the Agreement.
J. Exercise Price shall mean the exercise price per share as
specified in the Grant Notice.
K. Expiration Date shall mean the date on which the option expires
as specified in the Grant Notice.
L. Fair Market Value per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(v)(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the
average of the high and low selling prices per share of
Common Stock on the date in question, as such prices are
reported by the National Association of Securities Dealers
on the Nasdaq National Market or any successor system. If
there are no selling prices quoted for the Common Stock on
the date in question, then the Fair Market Value shall be
the average of the high and low selling prices on the last
preceding date for which such quotations exist.
(vi)(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the average
high and low selling prices per share of Common Stock on the
date in question on the Stock Exchange determined by the
Plan Administrator to be the primary market for the Common
Stock, as such prices are officially quoted in the composite
tape of transactions on such exchange. If there are no
selling prices quoted for the Common Stock on the date in
question, then the Fair Market Value shall be the average of
the high and low selling prices on the last preceding date
for which such quotations exist.
M. Grant Date shall mean the date of grant of the option as
specified in the Grant Notice.
N. Grant Notice shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been
informed of the basic terms of the option evidenced hereby.
O. Incentive Option shall mean an option that satisfies the
requirements of Code Section 422.
P. Misconduct shall mean the commission of any act of fraud,
embezzlement or dishonesty by Optionee, any unauthorized use or
disclosure by Optionee of confidential information or trade
secrets of the Corporation (or any Parent or Subsidiary), or any
other intentional misconduct by Optionee adversely affecting the
business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall
not be deemed to be inclusive of all the acts or omissions which
the Corporation (or any Parent or Subsidiary) may consider as
grounds for the dismissal or discharge of Optionee or any other
individual in the Service of the Corporation (or any Parent or
Subsidiary).
Q. Non-Qualified Option shall mean an option not intended to satisfy
the requirements of Code Section 422.
R. Notice of Exercise shall mean the written notice of the option
exercise on the form provided by the Corporation for such
purpose.
S. Option Shares shall mean the number of shares of Common Stock
subject to the option as specified in the Grant Notice.
T. Optionee shall mean the person to whom the option is granted as
specified in the Grant Notice.
U. Parent shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations ending with the Corporation,
provided each corporation in the unbroken chain (other than the
Corporation) owns, at the time of the determination, stock
possessing fifty percent (50%) or more of the total combined
voting power of all classes of stock in one of the other
corporations in such chain.
V. Permanent Disability shall mean the inability of Optionee to
engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which is
expected to result in death or has lasted or can be expected to
last for a continuous period of twelve (12) months or more.
W. Plan shall mean the Corporation's 1995 Stock Option Plan.
X. Plan Administrator shall mean either the Board or a committee of
Board members, to the extent the committee is at the time
responsible for the administration of the Plan.
Y. Qualified Domestic Relations Order shall mean a Domestic
Relations Order which substantially complies with the
requirements of Code Section 414(p). The Plan Administrator shall
have the sole discretion to determine whether a Domestic
Relations Order is a Qualified Domestic Relations Order.
Z. Service shall mean the Optionee's performance of services for the
Corporation (or any Parent or Subsidiary) in the capacity of an
Employee, a non-employee member of the board of directors or a
consultant or independent advisor.
AA. Stock Exchange shall mean the American Stock Exchange or the New
York Stock Exchange.
BB. Subsidiary shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with
the Corporation, provided each corporation (other than the last
corporation) in the unbroken chain owns, at the time of the
determination, stock possessing fifty percent (50%) or more of
the total combined voting power of all classes of stock in one of
the other corporations in such chain.
FileNET Corporation ID: 95-3757924
Notice of Grant of Stock Options
and Option Agreement
Ron L. Ercanbrack Option Number:
10 Le Conte Plan: 95
Laguna Niguel, CA 92677 ID:
Effective __/__/02 been granted a Non-Qualified Option to buy 100,000 shares of
FileNET Corporation (the Company) stock at $x.xx per share.
The total option price of the shares granted is $xxx,xxx.xx.
Shares in each period will become fully vested on the date shown.
Shares Vest Type Full Vest Expiration
25,000 On First Anniversary __/__/03 __ /__ /12
of Grant Date
75,000 1/36 Monthly __/__/06 __/ __/12
commencing
By your signature and the Company's signature below, you and the Company agree
that these options are granted under and governed by the terms and conditions of
the 1995 FileNET Corporation Stock Option Plan as amended and the Option
Agreement, all of which are located and may be accessed via FileNET's Intranet,
now.
FileNET Corporation Date
Ron L. Ercanbrack
Exhibit 10.14
THE 2002 INCENTIVE AWARD PLAN
OF
FILENET CORPORATION
FileNET Corporation, a Delaware corporation, has adopted the 2002 Incentive
Award Plan of FileNET Corporation, (the "Plan"), effective May 22, 2002
("Effective Date"), for the benefit of its eligible employees, consultants and
directors.
The purposes of the Plan are as follows:
(1) To provide an additional incentive for directors, key Employees and
Consultants (as such terms are defined below) to further the growth, development
and financial success of the Company by personally benefiting through the
ownership of Company stock and/or rights which recognize such growth,
development and financial success.
(2) To enable the Company to obtain and retain the services of directors,
key Employees and Consultants considered essential to the long range success of
the Company by offering them an opportunity to own stock in the Company and/or
rights which will reflect the growth, development and financial success of the
Company.
ARTICLE I.
DEFINITIONS
Wherever the following terms are used in the Plan they shall have the
meanings specified below, unless the context clearly indicates otherwise. The
singular pronoun shall include the plural where the context so indicates.
1.1. "Administrator" shall mean the entity that conducts the general
administration of the Plan as provided herein. With reference to the
administration of the Plan with respect to Options granted to Independent
Directors, the term "Administrator" shall refer to the Board. With reference to
the administration of the Plan with respect to any other Award, the term
"Administrator" shall refer to the Committee, unless the Board has assumed the
authority for administration of the Plan generally as provided in Section 10.1
or the Committee has delegated its authority to administer the Plan as provided
in Section 10.5, in which events "Administrator" shall refer to the Board or
such delegated sub-committee, as applicable.
1.2. "Award" shall mean an Option, a Restricted Stock award, a Performance
Award, a Dividend Equivalents award, a Deferred Stock award, a Stock Payment
award or a Stock Appreciation Right which may be awarded or granted under the
Plan (collectively, "Awards").
1.3. "Award Agreement" shall mean a written agreement executed by an
authorized officer of the Company and the Holder, which shall contain such terms
and conditions with respect to an Award as the Administrator shall determine,
consistent with the Plan.
1.4. "Award Limit" shall mean 400,000 shares of Common Stock, as adjusted
pursuant to Section 11.3; provided, however, that solely with respect to
Performance Awards granted pursuant to Section 8.2(b), Award Limit shall mean
Seven Hundred Fifty Thousand Dollars ($750,000).
1.5. "Board" shall mean the Board of Directors of the Company.
1.6. "Change in Control" shall mean a change in ownership or control of
the Company effected through any of the following transactions:
1
(a) Any person or related group of persons (other than the Company or
a person that, prior to such transaction, directly or indirectly controls,
is controlled by, or is under common control with, the Company) directly or
indirectly acquires beneficial ownership (within the meaning of Rule 13d-3
under the Exchange Act) of securities possessing more than 50% of the total
combined voting power of the Company's outstanding securities pursuant to a
tender or exchange offer made directly to the Company's stockholders which
the Board does not recommend such stockholders accept; or
(b) There is a change in the composition of the Board over a period of
36 consecutive months (or less) such that a majority of the Board members
(rounded up to the nearest whole number) ceases, by reason of one or more
proxy contests for the election of Board members, to be comprised of
individuals who either (i) have been Board members continuously since the
beginning of such period, or (ii) have been elected or nominated for
election as Board members during such period by at least a majority of the
Board members described in clause (i) who were still in office at the time
such election or nomination was approved by the Board; or
1.7. "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.8. "Committee" shall mean the Compensation Committee of the Board, or
another committee or subcommittee of the Board, appointed as provided in Section
10.1.
1.9. "Common Stock" shall mean the common stock of the Company, par value
$0.01 per share.
1.10. "Company" shall mean FileNET Corporation, a Delaware corporation.
1.11. "Consultant" shall mean any consultant or adviser if:
(a) The consultant or adviser renders bona fide services to the
Company;
(b) The services rendered by the consultant or adviser are not in
connection with the offer or sale of securities in a capital-raising
transaction and do not directly or indirectly promote or maintain a market
for the Company's securities; and
(c) The consultant or adviser is a natural person who has contracted
directly with the Company to render such services.
1.12. "Corporate Transaction" shall mean:
(a) The stockholders of the Company approve a merger or consolidation
of the Company with any other corporation (or other entity), other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the combined voting
power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; provided,
however, that a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no person
acquires more than 25% of the combined voting power of the Company's then
outstanding securities shall not constitute a Change in Control; or
(b) The stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or substantially all of the Company's assets.]
1.13. "Deferred Stock" shall mean Common Stock awarded under Article VIII
of the Plan.
1.14. "Director" shall mean a member of the Board.
2
1.15. "Dividend Equivalent" shall mean a right to receive the equivalent
value (in cash or Common Stock) of dividends paid on Common Stock, awarded under
Article VIII of the Plan.
1.16. "DRO" shall mean a domestic relations order as defined by the Code or
Title I of the Employee Retirement Income Security Act of 1974, as amended, or
the rules thereunder.
1.17. "Effective Date" shall mean May 22, 2002.
1.18. "Employee" shall mean any officer or other employee (as defined in
accordance with Section 3401(c) of the Code) of the Company, or of any
corporation that is a Subsidiary.
1.19. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
1.20. "Fair Market Value" of a share of Common Stock as of a given date
shall be (a) the average of the high and low selling prices of a share of Common
Stock on the principal exchange or the Nasdaq Stock Market on which shares of
Common Stock are then trading, if any (or as reported on any composite index
which includes such principal exchange), on such date, or if shares were not
traded on such date, then on the next preceding date on which a trade occurred,
or (b) if Common Stock is not traded on an exchange or the Nasdaq Stock Market,
but is quoted on Nasdaq or a successor quotation system, the average of the
closing representative bid and asked prices for the Common Stock on such date as
reported by Nasdaq or such successor quotation system, or (c) if Common Stock is
not publicly traded on an exchange and not quoted on Nasdaq or a successor
quotation system, the Fair Market Value of a share of Common Stock as
established by the Administrator acting in good faith.
1.21. "Holder" shall mean a person who has been granted or awarded an
Award.
1.22. "Incentive Stock Option" shall mean an option which conforms to the
applicable provisions of Section 422 of the Code and which is designated as an
Incentive Stock Option by the Administrator.
1.23. "Independent Director" shall mean a member of the Board who is not an
Employee of the Company.
1.24. "Non-Qualified Stock Option" shall mean an Option that is not
designated as an Incentive Stock Option by the Administrator.
1.25. "Option" shall mean a stock option granted under Article IV of the
Plan. An Option granted under the Plan shall, as determined by the
Administrator, be either a Non-Qualified Stock Option or an Incentive Stock
Option; provided, however, that Options granted to Independent Directors and
Consultants shall be Non-Qualified Stock Options.
1.26. "Performance Award" shall mean a cash bonus, stock bonus or other
performance or incentive award that is paid in cash, Common Stock or a
combination of both, awarded under Article VIII of the Plan.
1.27. "Performance Criteria" shall mean the following business criteria
with respect to the Company, any Subsidiary or any division or operating unit:
(a) net income, (b) pre-tax income, (c) operating income, (d) cash flow, (e)
earnings per share, (f) return on equity, (g) return on invested capital or
assets, (h) cost reductions or savings, (i) funds from operations, (j)
appreciation in the fair market value of Common Stock, and (k) earnings before
any one or more of the following items: interest, taxes, depreciation or
amortization each as determined in accordance with generally accepted accounting
principles or subject to such adjustments as may be specified by the Committee
with respect to a Performance Award.
1.28. "Permanent Disability" shall mean, for purposes of Awards granted to
Independent Directors, the inability of the Holder to perform his usual duties
as a Board member by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
months or more.
1.29. "Plan" shall mean the 2002 Incentive Award Plan of FileNET
Corporation, as amended and/or restated from time to time.
3
1.30. "Restricted Stock" shall mean Common Stock awarded under Article VII
of the Plan.
1.31. "Rule 16b-3" shall mean Rule 16b-3 promulgated under the Exchange
Act, as such Rule may be amended from time to time.
1.32. "Section 162(m) Participant" shall mean any key Employee designated
by the Administrator as a key Employee whose compensation for the fiscal year in
which the key Employee is so designated or a future fiscal year may be subject
to the limit on deductible compensation imposed by Section 162(m) of the Code.
1.33. "Securities Act" shall mean the Securities Act of 1933, as amended.
1.34. "Stock Appreciation Right" shall mean a stock appreciation right
granted under Article IX of the Plan.
1.35. "Stock Payment" shall mean (a) a payment in the form of shares of
Common Stock, or (b) an option or other right to purchase shares of Common
Stock, as part of a deferred compensation arrangement, made in lieu of all or
any portion of the compensation, including without limitation, salary, bonuses
and commissions, that would otherwise become payable to a key Employee or
Consultant in cash, awarded under Article VIII of the Plan.
1.36. "Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
1.37. "Substitute Award" shall mean an Option granted under this Plan upon
the assumption of, or in substitution for, outstanding equity awards previously
granted by a company or other entity in connection with a corporate transaction,
such as a merger, combination, consolidation or acquisition of property or
stock; provided, however, that in no event shall the term "Substitute Award" be
construed to refer to an award made in connection with the cancellation and
repricing of an Option.
1.38. "Termination of Consultancy" shall mean the time when the engagement
of a Holder as a Consultant to the Company or a Subsidiary is terminated for any
reason, with or without cause, including, but not by way of limitation, by
resignation, discharge, death or retirement, but excluding terminations where
there is a simultaneous commencement of employment with the Company or any
Subsidiary. The Administrator, in its absolute discretion, shall determine the
effect of all matters and questions relating to Termination of Consultancy,
including, but not by way of limitation, the question of whether a Termination
of Consultancy resulted from a discharge for good cause, and all questions of
whether a particular leave of absence constitutes a Termination of Consultancy.
Notwithstanding any other provision of the Plan, the Company or any Subsidiary
has an absolute and unrestricted right to terminate a Consultant's service at
any time for any reason whatsoever, with or without cause, except to the extent
expressly provided otherwise in writing.
1.39. "Termination of Directorship" shall mean the time when a Holder who
is an Independent Director ceases to be a Director for any reason, including,
but not by way of limitation, a termination by resignation, failure to be
elected, death or retirement. The Board, in its sole and absolute discretion,
shall determine the effect of all matters and questions relating to Termination
of Directorship with respect to Independent Directors.
1.40. "Termination of Employment" shall mean the time when the
employee-employer relationship between a Holder and the Company or any
Subsidiary is terminated for any reason, with or without cause, including, but
not by way of limitation, a termination by resignation, discharge, death,
disability or retirement; but excluding (a) terminations where there is a
simultaneous reemployment or continuing employment of a Holder by the Company or
any Subsidiary, (b) at the discretion of the Administrator, terminations which
result in a temporary severance of the employee-employer relationship, and (c)
at the discretion of the Administrator, terminations which are followed by the
simultaneous establishment of a consulting relationship by the Company or a
Subsidiary with the former employee. The Administrator, in its absolute
discretion, shall determine the effect of all matters and questions relating to
Termination of Employment, including, but not by way of limitation, the question
4
of whether a Termination of Employment resulted from a discharge for good cause,
and all questions of whether a particular leave of absence constitutes a
Termination of Employment; provided, however, that, with respect to Incentive
Stock Options, unless otherwise determined by the Administrator in its
discretion, a leave of absence, change in status from an employee to an
independent contractor or other change in the employee-employer relationship
shall constitute a Termination of Employment if, and to the extent that, such
leave of absence, change in status or other change interrupts employment for the
purposes of Section 422(a)(2) of the Code and the then applicable regulations
and revenue rulings under said Section.
ARTICLE II.
SHARES SUBJECT TO PLAN
2.1. Shares Subject to Plan.
(a) The shares of stock subject to Awards shall be Common Stock,
initially shares of the Company's Common Stock. Subject to adjustment as
provided in Section 11.3, the aggregate number of such shares which may be
issued upon exercise of such Options or rights or upon any other Awards
under the Plan shall not exceed One Million Four Hundred Thousand
(1,400,000) shares, and the aggregate number of shares that may be issued
as Restricted Stock shall not exceed One Hundred and Forty Thousand
(140,000) shares. The shares of Common Stock issuable upon exercise of such
Options or rights or upon any other Awards may be either previously
authorized but unissued shares or treasury shares.
(b) The maximum number of shares which may be subject to Awards
granted under the Plan to any individual in any calendar year shall not
exceed the Award Limit.
2.2 Add-back of Options and Other Awards. If any Option, or other right to
acquire shares of Common Stock under any other Award under the Plan, expires or
is canceled without having been fully exercised, or is exercised in whole or in
part for cash as permitted by the Plan, the number of shares subject to such
Option or other right but as to which such Option or other right was not
exercised prior to its expiration, cancellation or exercise may again be
optioned, granted or awarded hereunder, subject to the limitations of Section
2.1. Furthermore, any shares subject to Awards which are adjusted pursuant to
Section 11.3 and become exercisable with respect to shares of stock of another
corporation shall be considered cancelled and may again be optioned, granted or
awarded hereunder, subject to the limitations of Section 2.1. Shares of Common
Stock which are delivered by the Holder or withheld by the Company upon the
exercise of any Award under the Plan, in payment of the exercise price thereof
or tax withholding thereon, may again be optioned, granted or awarded hereunder,
subject to the limitations of Section 2.1. If any shares of Restricted Stock are
surrendered by the Holder or repurchased by the Company pursuant to Section 7.4
or 7.5 hereof, such shares may again be optioned, granted or awarded hereunder,
subject to the limitations of Section 2.1. Notwithstanding the provisions of
this Section 2.2, no shares of Common Stock may again be optioned, granted or
awarded if such action would cause an Incentive Stock Option to fail to qualify
as an incentive stock option under Section 422 of the Code.
ARTICLE III.
GRANTING OF AWARDS
3.1. Award Agreement. Each Award shall be evidenced by an Award Agreement.
Award Agreements evidencing Awards intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall contain such
terms and conditions as may be necessary to meet the applicable provisions of
Section 162(m) of the Code. Award Agreements evidencing Incentive Stock Options
shall contain such terms and conditions as may be necessary to meet the
applicable provisions of Section 422 of the Code.
3.2. Provisions Applicable to Section 162(m) Participants.
(a) The Administrator, in its discretion, may determine whether an
Award is to qualify as performance-based compensation as described in
Section 162(m)(4)(C) of the Code.
5
(b) Notwithstanding anything in the Plan to the contrary, the
Administrator may grant any Award to a Section 162(m) Participant,
including Restricted Stock the restrictions with respect to which lapse
upon the attainment of performance goals which are related to one or more
of the Performance Criteria and any performance or incentive award
described in Article VIII that vests or becomes exercisable or payable upon
the attainment of performance goals which are related to one or more of the
Performance Criteria.
(c) To the extent necessary to comply with the performance-based
compensation requirements of Section 162(m)(4)(C) of the Code, with respect
to any Award granted under Articles VII and VIII which may be granted to
one or more Section 162(m) Participants, no later than ninety (90) days
following the commencement of any fiscal year in question or any other
designated fiscal period or period of service (or such other time as may be
required or permitted by Section 162(m) of the Code), the Administrator
shall, in writing, (i) designate one or more Section 162(m) Participants,
(ii) select the Performance Criteria applicable to the fiscal year or other
designated fiscal period or period of service, (iii) establish the various
performance targets, in terms of an objective formula or standard, and
amounts of such Awards, as applicable, which may be earned for such fiscal
year or other designated fiscal period or period of service, and (iv)
specify the relationship between Performance Criteria and the performance
targets and the amounts of such Awards, as applicable, to be earned by each
Section 162(m) Participant for such fiscal year or other designated fiscal
period or period of service. Following the completion of each fiscal year
or other designated fiscal period or period of service, the Administrator
shall certify in writing whether the applicable performance targets have
been achieved for such fiscal year or other designated fiscal period or
period of service. In determining the amount earned by a Section 162(m)
Participant, the Administrator shall have the right to reduce (but not to
increase) the amount payable at a given level of performance to take into
account additional factors that the Administrator may deem relevant to the
assessment of individual or corporate performance for the fiscal year or
other designated fiscal period or period of service.
(d) Furthermore, notwithstanding any other provision of the Plan or
any Award which is granted to a Section 162(m) Participant and is intended
to qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code shall be subject to any additional limitations set
forth in Section 162(m) of the Code (including any amendment to Section
162(m) of the Code) or any regulations or rulings issued thereunder that
are requirements for qualification as performance-based compensation as
described in Section 162(m)(4)(C) of the Code, and the Plan shall be deemed
amended to the extent necessary to conform to such requirements.
3.3. Limitations Applicable to Section 16 Persons. Notwithstanding any
other provision of the Plan, the Plan, and any Award granted or awarded to any
individual who is then subject to Section 16 of the Exchange Act, shall be
subject to any additional limitations set forth in any applicable exemptive rule
under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of
the Exchange Act) that are requirements for the application of such exemptive
rule. To the extent permitted by applicable law, the Plan and Awards granted or
awarded hereunder shall be deemed amended to the extent necessary to conform to
such applicable exemptive rule.
3.4. Consideration. In consideration of the granting of an Award under the
Plan, the Holder shall agree, in the Award Agreement, to remain in the employ of
(or to consult for or to serve as an Independent Director of, as applicable) the
Company or any Subsidiary for a period of at least one year (or such shorter
period as may be fixed in the Award Agreement or by action of the Administrator
following grant of the Award) after the Award is granted (or, in the case of an
Independent Director, until the next annual meeting of stockholders of the
Company).
3.5. At-Will Employment. Nothing in the Plan or in any Award Agreement
hereunder shall confer upon any Holder any right to continue in the employ of,
or as a Consultant for, the Company or any Subsidiary, or as a director of the
Company, or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly reserved, to discharge
any Holder at any time for any reason whatsoever, with or without cause, except
to the extent expressly provided otherwise in a written employment agreement
between the Holder and the Company and any Subsidiary.
6
ARTICLE IV.
GRANTING OF OPTIONS TO EMPLOYEES,
CONSULTANTS AND INDEPENDENT DIRECTORS
4.1. Eligibility. Any Employee or Consultant selected by the Administrator
pursuant to Section 4.4(a)(i) shall be eligible to be granted an Option. Each
Independent Director of the Company shall be eligible to be granted Options at
the times and in the manner set forth in Section 4.5.
4.2. Disqualification for Stock Ownership. No person may be granted an
Incentive Stock Option under the Plan if such person, at the time the Incentive
Stock Option is granted, owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or any then
existing Subsidiary or parent corporation (within the meaning of Section 422 of
the Code) unless such Incentive Stock Option conforms to the applicable
provisions of Section 422 of the Code.
4.3. Qualification of Incentive Stock Options. No Incentive Stock Option
shall be granted to any person who is not an Employee.
4.4. Granting of Options to Employees and Consultants.
(a) The Administrator shall from time to time, in its absolute
discretion, and subject to applicable limitations of the Plan:
(i) Determine which Employees are key Employees and select from
among the key Employees or Consultants (including Employees or
Consultants who have previously received Awards under the Plan) such
of them as in its opinion should be granted Options;
(ii) Subject to the Award Limit, determine the number of shares
to be subject to such Options granted to the selected key Employees or
Consultants;
(iii) Subject to Section 4.3, determine whether such Options are
to be Incentive Stock Options or Non-Qualified Stock Options and
whether such Options are to qualify as performance-based compensation
as described in Section 162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options,
consistent with the Plan; provided, however, that the terms and
conditions of Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall
include, but not be limited to, such terms and conditions as may be
necessary to meet the applicable provisions of Section 162(m) of the
Code.
(b) Upon the selection of a key Employee or Consultant to be granted
an Option, the Administrator shall instruct the Secretary of the Company to
issue the Option and may impose such conditions on the grant of the Option
as it deems appropriate.
(c) Any Incentive Stock Option granted under the Plan may be modified
by the Administrator, with the consent of the Holder, to disqualify such
Option from treatment as an "incentive stock option" under Section 422 of
the Code.
4.5. Automatic Granting of Options to Independent Directors. During the
term of the Plan, each person who is an Independent Director as of the Effective
Date automatically shall be granted an Option to purchase 7,000 shares of Common
Stock (subject to adjustment as provided in Section 11.3) on the date of each
annual meeting of stockholders at which the Independent Director is reelected to
the Board, commencing with the 2002 Annual Meeting of Stockholders. During the
term of the Plan, a person who is initially elected or appointed to the Board
after the Effective Date and who is an Independent Director at the time of such
initial election or appointment automatically shall be granted (x) an Option to
purchase 25,000 shares of Common Stock (subject to adjustment as provided in
Section 11.3) on the date of such initial election or appointment, and (y) an
Option to purchase 7,000 shares of Common Stock (subject to adjustment as
provided in Section 11.3) on the date of each annual meeting of stockholders
7
after such initial election or appointment, at which the Independent Director is
reelected to the Board, provided such individual has served as an Independent
Director for at least six months prior to the date of such annual meeting of
stockholders. Members of the Board who are employees of the Company who
subsequently retire from the Company and remain on the Board will not receive an
initial Option grant pursuant to clause (x) of the preceding sentence, but to
the extent that they are otherwise eligible, will receive, after retirement from
employment with the Company, Options as described in clause (y) of the preceding
sentence. Certain material terms of the Options granted pursuant to this Section
4.5 are set forth in Section 5.4. All the foregoing Option grants authorized by
this Section 4.5 are subject to stockholder approval of the Plan.
4.6. Discretionary Granting of Options to Independent Directors. The Board
may from time to time, in its absolute discretion, and subject to applicable
limitations of the Plan:
(a) Select from among the Independent Directors (including Independent
Directors who have previously received Options under the Plan) such of them
as in its opinion should be granted Options;
(b) Subject to the Award Limit, determine the number of shares to be
subject to such Options granted to the selected Independent Directors;
(c) Subject to the provisions of Article 5, determine the terms and
conditions of such Options, consistent with the Plan.
4.7. Options in Lieu of Cash Compensation. Options may be granted under the
Plan to Employees and Consultants in lieu of cash bonuses which would otherwise
be payable to such Employees and Consultants and to Independent Directors in
lieu of directors' fees which would otherwise be payable to such Independent
Directors, pursuant to such policies which may be adopted by the Administrator
from time to time.
ARTICLE V.
TERMS OF OPTIONS
5.1 Option Price. The price per share of the shares subject to each Option
granted to Employees and Consultants shall be set by the Administrator;
provided, however, that such price shall be no less than 85% of the Fair Market
Value of a share of Common Stock on the date the Option is granted and:
(a) In the case of Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code, such price
shall not be less than 100% of the Fair Market Value of a share of Common
Stock on the date the Option is granted;
(b) In the case of Incentive Stock Options such price shall not be
less than 100% of the Fair Market Value of a share of Common Stock on the
date the Option is granted (or the date the Option is modified, extended or
renewed for purposes of Section 424(h) of the Code);
(c) In the case of Incentive Stock Options granted to an individual
then owning (within the meaning of Section 424(d) of the Code) more than
10% of the total combined voting power of all classes of stock of the
Company or any Subsidiary or parent corporation thereof (within the meaning
of Section 422 of the Code), such price shall not be less than 110% of the
Fair Market Value of a share of Common Stock on the date the Option is
granted (or the date the Option is modified, extended or renewed for
purposes of Section 424(h) of the Code).
5.2 Option Term. The term of an Option granted to an Employee or consultant
shall be set by the Administrator in its discretion; provided, however, that,
the term shall not be more than ten years from the date the Option is granted,
or five years from the date the Incentive Stock Option is granted if the
Incentive Stock Option is granted to an individual then owning (within the
meaning of Section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of stock of the Company or any Subsidiary or parent
corporation thereof (within the meaning of Section 422 of the Code). Except as
limited by requirements of Section 422 of the Code and regulations and rulings
thereunder applicable to Incentive Stock Options, the Administrator may extend
8
the term of any outstanding Option in connection with any Termination of
Employment or Termination of Consultancy of the Holder, or amend any other term
or condition of such Option relating to such a termination.
5.3 Option Vesting.
(a) The period during which the right to exercise, in whole or in
part, an Option granted to an Employee or a Consultant vests in the Holder
shall be set by the Administrator and the Administrator may determine that
an Option may not be exercised in whole or in part for a specified period
after it is granted. At any time after grant of an Option, the
Administrator may, in its sole and absolute discretion and subject to
whatever terms and conditions it selects, accelerate the period during
which an Option granted to an Employee or Consultant vests.
(b) No portion of an Option granted to an Employee or Consultant which
is unexercisable at Termination of Employment or Termination of
Consultancy, as applicable, shall thereafter become exercisable, except as
may be otherwise provided by the Administrator either in the Award
Agreement or by action of the Administrator following the grant of the
Option.
(c) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section
422 of the Code, but without regard to Section 422(d) of the Code) are
exercisable for the first time by a Holder during any calendar year (under
the Plan and all other incentive stock option plans of the Company and any
parent or subsidiary corporation, within the meaning of Section 422 of the
Code) of the Company, exceeds $100,000, such Options shall be treated as
Non-Qualified Stock Options to the extent required by Section 422 of the
Code. The rule set forth in the preceding sentence shall be applied by
taking Options into account in the order in which they were granted. For
purposes of this Section 5.3(c), the Fair Market Value of stock shall be
determined as of the time the Option with respect to such stock is granted.
5.4 Terms of Options Automatically Granted to Independent Directors
Pursuant to Section 4.5. Options granted to an Independent Director pursuant to
Section 4.5 shall be subject to the following terms and conditions:
(a) The exercise price per share shall equal 100% of the Fair Market
Value of a share of Common Stock on the date the Option is granted.
(b) The Options shall become exercisable in cumulative annual
installments of 25% on each of the first, second, third and fourth
anniversaries of the date of Option grant, except that any Option granted
to an Independent Director shall become immediately exercisable in full
upon the Termination of Directorship due to death or Permanent Disability
of the Independent Director.
(c) Subject to Section 6.6, the term of each Option granted to an
Independent Director shall be ten years from the date the Option is
granted.
(d) No portion of an Option which is unexercisable at Termination of
Directorship shall thereafter become exercisable.
(e) Each vested Option may be exercised until the earlier of (i) the
expiration of the Option term or (ii) 12 months following the Independent
Director's cessation of service on the Board for any reason.
5.5 Substitute Awards. Notwithstanding the foregoing provisions of this
Article V to the contrary, in the case of an Option that is a Substitute Award,
the price per share of the shares subject to such Option may be less than the
Fair Market Value per share on the date of grant, provided, that the excess of:
(a) The aggregate Fair Market Value (as of the date such Substitute
Award is granted) of the shares subject to the Substitute Award; over
9
(b) The aggregate exercise price thereof;
does not exceed the excess of:
(c) The aggregate fair market value (as of the time immediately
preceding the transaction giving rise to the Substitute Award, such fair
market value to be determined by the Administrator) of the shares of the
predecessor entity that were subject to the grant assumed or substituted
for by the Company; over
(d) The aggregate exercise price of such shares.
ARTICLE VI.
EXERCISE OF OPTIONS
6.1. Partial Exercise. An exercisable Option may be exercised in whole or
in part. However, an Option shall not be exercisable with respect to fractional
shares and the Administrator may require that, by the terms of the Option, a
partial exercise be with respect to a minimum number of shares.
6.2. Manner of Exercise. All or a portion of an exercisable Option shall be
deemed exercised upon delivery of all of the following to the Secretary of the
Company or his or her office:
(a) A notice complying with the applicable rules established by the
Administrator stating that the Option, or a portion thereof, is exercised.
(b) Such representations and documents as the Administrator, in its
absolute discretion, deems necessary or advisable to effect compliance with
all applicable provisions of the Securities Act and any other federal or
state securities laws or regulations. The Administrator may, in its
absolute discretion, also take whatever additional actions it deems
appropriate to effect such compliance including, without limitation,
placing legends on share certificates and issuing stop-transfer notices to
agents and registrars;
(c) In the event that the Option shall be exercised pursuant to
Section 11.1 by any person or persons other than the Holder, appropriate
proof of the right of such person or persons to exercise the Option; and
(d) Full cash payment to the of the Company for the shares with
respect to which the Option, or portion thereof, is exercised. However, the
Administrator may, in its discretion, (i) allow a delay in payment up to 30
days from the date the Option, or portion thereof, is exercised; (ii) allow
payment, in whole or in part, through the delivery of shares of Common
Stock which have been owned by the Holder for at least six months, duly
endorsed for transfer to the Company with a Fair Market Value on the date
of delivery equal to the aggregate exercise price of the Option or
exercised portion thereof; (iii) allow payment, in whole or in part,
through the surrender of shares of Common Stock then issuable upon exercise
of the Option having a Fair Market Value on the date of Option exercise
equal to the aggregate exercise price of the Option or exercised portion
thereof; (iv) allow payment, in whole or in part, through the delivery of
property of any kind which constitutes good and valuable consideration; (v)
allow payment, in whole or in part, through the delivery of a full recourse
promissory note bearing interest (at no less than such rate as shall then
preclude the imputation of interest under the Code) and payable upon such
terms as may be prescribed by the Administrator; (vi) allow payment, in
whole or in part, through the delivery of a notice that the Holder has
placed a market sell order with a broker with respect to shares of Common
Stock then issuable upon exercise of the Option, and that the broker has
been directed to pay a sufficient portion of the net proceeds of the sale
to the Company in satisfaction of the Option exercise price,
provided that payment of such proceeds is then made to the Company
upon settlement of such sale; or (vii) allow payment through any
combination of the consideration provided in the foregoing subparagraphs
(ii), (iii), (iv), (v) and (vi). In the case of a promissory note, the
Administrator may also prescribe the form of such note and the security to
be given for such note.
10
The Option may not be exercised, however, by delivery of a promissory note
or by a loan from the Company when or where such loan or other extension of
credit is prohibited by law.
6.3. Conditions to Issuance of Stock Certificates. The Company shall not be
required to issue or deliver any certificate or certificates for shares of stock
purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law, or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental
regulatory body which the Administrator shall, in its absolute discretion,
deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Administrator shall, in its absolute
discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the exercise
of the Option as the Administrator may establish from time to time for
reasons of administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax, which in the
discretion of the Administrator may be in the form of consideration used by
the Holder to pay for such shares under Section 6.2(d).
6.4. Rights as Stockholders. Holders shall not be, nor have any of the
rights or privileges of, stockholders of the Company in respect of any shares
purchasable upon the exercise of any part of an Option unless and until
certificates representing such shares have been issued by the Company to such
Holders.
6.5. Ownership and Transfer Restrictions. The Administrator, in its
absolute discretion, may impose such restrictions on the ownership and
transferability of the shares purchasable upon the exercise of an Option as it
deems appropriate. Any such restriction shall be set forth in the respective
Award Agreement and may be referred to on the certificates evidencing such
shares. The Holder shall give the Company prompt notice of any disposition of
shares of Common Stock acquired by exercise of an Incentive Stock Option within
(a) two years from the date of granting (including the date the Option is
modified, extended or renewed for purposes of Section 424(h) of the Code) such
Option to such Holder, or (b) one year after the transfer of such shares to such
Holder.
6.6. Limitations on Exercise of Options Granted to Independent Directors.
No Option granted to an Independent Director may be exercised to any extent by
anyone after the first to occur of the following events:
(a) The expiration of twelve months from the date of the Holder's
Termination of Directorship; or
(b) The expiration of ten years from the date the Option was granted.
6.7. Additional Limitations on Exercise of Options. Holders may be required
to comply with any timing or other restrictions with respect to the settlement
or exercise of an Option, including a window-period limitation, as may be
imposed in the discretion of the Administrator.
11
ARTICLE VII.
AWARD OF RESTRICTED STOCK
7.1. Eligibility. Subject to the Award Limit, Restricted Stock may be
awarded to any Employee who the Administrator determines is a key Employee or
any Consultant who the Administrator determines should receive such an Award.
7.2. Award of Restricted Stock.
(a) The Administrator may from time to time, in its absolute
discretion:
(i) Determine which Employees are key Employees and select from
among the key Employees or Consultants (including Employees or
Consultants who have previously received other awards under the Plan)
such of them as in its opinion should be awarded Restricted Stock; and
(ii) Determine the purchase price, if any, and other terms and
conditions applicable to such Restricted Stock, consistent with the
Plan.
(b) The Administrator shall establish the purchase price, if any, and
form of payment for Restricted Stock; provided, however, that such purchase
price shall be no less than the par value of the Common Stock to be
purchased, unless otherwise permitted by applicable state law. In all
cases, legal consideration shall be required for each issuance of
Restricted Stock.
(c) Upon the selection of a key Employee or Consultant to be awarded
Restricted Stock, the Administrator shall instruct the Secretary of the
Company to issue such Restricted Stock and may impose such conditions on
the issuance of such Restricted Stock as it deems appropriate.
7.3. Rights as Stockholders. Subject to Section 7.4, upon delivery of the
shares of Restricted Stock to the escrow holder pursuant to Section 7.6, the
Holder shall have, unless otherwise provided by the Administrator, all the
rights of a stockholder with respect to said shares, subject to the restrictions
in his or her Award Agreement, including the right to receive all dividends and
other distributions paid or made with respect to the shares; provided, however,
that in the discretion of the Administrator, any extraordinary distributions
with respect to the Common Stock shall be subject to the restrictions set forth
in Section 7.4.
7.4. Restriction. All shares of Restricted Stock issued under the Plan
(including any shares received by holders thereof with respect to shares of
Restricted Stock as a result of stock dividends, stock splits or any other form
of recapitalization) shall, in the terms of each individual Award Agreement, be
subject to such restrictions as the Administrator shall provide, which
restrictions may include, without limitation, restrictions concerning voting
rights and transferability and restrictions based on duration of employment with
the Company, Company performance and individual performance; provided, however,
that, unless the Administrator otherwise provides in the terms of the Award
Agreement or otherwise, no share of Restricted Stock granted to a person subject
to Section 16 of the Exchange Act shall be sold, assigned or otherwise
transferred until at least six months and one day have elapsed from the date on
which the Restricted Stock was issued, and provided, further, that, except with
respect to shares of Restricted Stock granted to Section 162(m) Participants and
intended to be "performance-based" compensation under Section 162(m) of the
Code, by action taken after the Restricted Stock is issued, the Administrator
may, on such terms and conditions as it may determine to be appropriate, remove
any or all of the restrictions imposed by the terms of the Award Agreement.
Restricted Stock may not be sold or encumbered until all restrictions are
terminated or expire.
If no consideration was paid by the Holder upon issuance, a Holder's rights
in unvested Restricted Stock shall lapse, and such Restricted Stock shall be
surrendered to the Company without consideration, upon Termination of Employment
or, if applicable, upon Termination of Consultancy with the Company; provided,
however, that the Administrator in its sole and absolute discretion may provide
that such rights shall not lapse in the event of a Termination of Employment
following a "change of ownership or control" (within the meaning of Treasury
Regulation Section 1.162-27(e)(2)(v) or any successor regulation thereto) of the
Company or because of the Holder's death or disability; provided, further,
12
except with respect to shares of Restricted Stock granted to Section 162(m)
Participants, the Administrator in its sole and absolute discretion may provide
that no such lapse or surrender shall occur in the event of a Termination of
Employment, or a Termination of Consultancy, without cause or following any
Change in Control of the Company or because of the Holder's retirement, or
otherwise.
7.5. Repurchase of Restricted Stock. The Administrator shall provide in the
terms of each individual Award Agreement that the Company shall have the right
to repurchase from the Holder the Restricted Stock then subject to restrictions
under the Award Agreement immediately upon a Termination of Employment or, if
applicable, upon a Termination of Consultancy between the Holder and the
Company, at a cash price per share equal to the price paid by the Holder for
such Restricted Stock; provided, however, that the Administrator in its sole and
absolute discretion may provide that no such right of repurchase shall exist in
the event of a Termination of Employment following a "change of ownership or
control" (within the meaning of Treasury Regulation Section 1.162-27(e)(2)(v) or
any successor regulation thereto) of the Company or because of the Holder's
death or disability; provided, further, that, except with respect to shares of
Restricted Stock granted to Section 162(m) Participants, the Administrator in
its sole and absolute discretion may provide that no such right of repurchase
shall exist in the event of a Termination of Employment or a Termination of
Consultancy without cause or following any Change in Control of the Company or
because of the Holder's retirement, or otherwise.
7.6. Escrow. The Secretary of the Company or such other escrow holder as
the Administrator may appoint shall retain physical custody of each certificate
representing Restricted Stock until all of the restrictions imposed under the
Award Agreement with respect to the shares evidenced by such certificate expire
or shall have been removed.
7.7. Legend. In order to enforce the restrictions imposed upon shares of
Restricted Stock hereunder, the Administrator shall cause a legend or legends to
be placed on certificates representing all shares of Restricted Stock that are
still subject to restrictions under Award Agreements, which legend or legends
shall make appropriate reference to the conditions imposed thereby.
7.8. Section 83(b) Election. If a Holder makes an election under Section
83(b) of the Code, or any successor section thereto, to be taxed with respect to
the Restricted Stock as of the date of transfer of the Restricted Stock rather
than as of the date or dates upon which the Holder would otherwise be taxable
under Section 83(a) of the Code, the Holder shall deliver a copy of such
election to the Company immediately after filing such election with the Internal
Revenue Service.
ARTICLE VIII.
PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS, DEFERRED STOCK, STOCK PAYMENTS
8.1. Eligibility. Subject to the Award Limit, one or more Performance
Awards, Dividend Equivalents, awards of Deferred Stock and/or Stock Payments may
be granted to any Employee whom the Administrator determines is a key Employee
or any Consultant whom the Administrator determines should receive such an
Award.
8.2. Performance Awards.
(a) Any key Employee or Consultant selected by the Administrator may
be granted one or more Performance Awards. The value of such Performance
Awards may be linked to any one or more of the Performance Criteria or
other specific performance criteria determined appropriate by the
Administrator, in each case on a specified date or dates or over any period
or periods determined by the Administrator. In making such determinations,
the Administrator shall consider (among such other factors as it deems
relevant in light of the specific type of award) the contributions,
responsibilities and other compensation of the particular key Employee or
Consultant.
(b) Without limiting Section 8.2(a), the Administrator may grant
Performance Awards to any 162(m) Participant in the form of a cash bonus
payable upon the attainment of objective performance goals which are
established by the Administrator and relate to one or more of the
Performance Criteria, in each case on a specified date or dates or over any
period or periods determined by the Administrator. Any such bonuses paid to
162(m) Participants shall be based upon objectively determinable bonus
13
formulas established in accordance with the provisions of Section 3.2. The
maximum amount of any Performance Award payable to a 162(m) Participant
under this Section 8.2(b) shall not exceed the Award Limit with respect to
any calendar year of the Company. Unless otherwise specified by the
Administrator at the time of grant, the Performance Criteria payable to a
Section 162(m) Participant shall be determined on the basis of generally
accepted accounting principles.
8.3. Dividend Equivalents.
(a) Any key Employee or Consultant selected by the Administrator may
be granted Dividend Equivalents based on the dividends declared on Common
Stock, to be credited as of dividend payment dates, during the period
between the date a Stock Appreciation Right, Deferred Stock or Performance
Award is granted, and the date such Stock Appreciation Right, Deferred
Stock or Performance Award is exercised, vests or expires, as determined by
the Administrator. Such Dividend Equivalents shall be converted to cash or
additional shares of Common Stock by such formula and at such time and
subject to such limitations as may be determined by the Administrator.
(b) Any Holder of an Option who is an Employee or Consultant selected
by the Administrator may be granted Dividend Equivalents based on the
dividends declared on Common Stock, to be credited as of dividend payment
dates, during the period between the date an Option is granted, and the
date such Option is exercised, vests or expires, as determined by the
Administrator. Such Dividend Equivalents shall be converted to cash or
additional shares of Common Stock by such formula and at such time and
subject to such limitations as may be determined by the Administrator.
(c) Any Holder of an Option who is an Independent Director selected by
the Board may be granted Dividend Equivalents based on the dividends
declared on Common Stock, to be credited as of dividend payment dates,
during the period between the date an Option is granted and the date such
Option is exercised, vests or expires, as determined by the Board. Such
Dividend Equivalents shall be converted to cash or additional shares of
Common Stock by such formula and at such time and subject to such
limitations as may be determined by the Board.
(d) Dividend Equivalents granted with respect to Options intended to
be qualified performance-based compensation for purposes of Section 162(m)
of the Code shall be payable, with respect to pre-exercise periods,
regardless of whether such Option is subsequently exercised.
8.4. Stock Payments. Any key Employee or Consultant selected by the
Administrator may receive Stock Payments in the manner determined from time to
time by the Administrator. The number of shares shall be determined by the
Administrator and may be based upon the Performance Criteria or other specific
performance criteria determined appropriate by the Administrator, determined on
the date such Stock Payment is made or on any date thereafter.
8.5. Deferred Stock. Any key Employee or Consultant selected by the
Administrator may be granted an award of Deferred Stock in the manner determined
from time to time by the Administrator. The number of shares of Deferred Stock
shall be determined by the Administrator and may be linked to the Performance
Criteria or other specific performance criteria determined to be appropriate by
the Administrator, in each case on a specified date or dates or over any period
or periods determined by the Administrator. Common Stock underlying a Deferred
Stock award will not be issued until the Deferred Stock award has vested,
pursuant to a vesting schedule or performance criteria set by the Administrator.
Unless otherwise provided by the Administrator, a Holder of Deferred Stock shall
have no rights as a Company stockholder with respect to such Deferred Stock
until such time as the Award has vested and the Common Stock underlying the
Award has been issued.
8.6. Term. The term of a Performance Award, Dividend Equivalent, award of
Deferred Stock and/or Stock Payment shall be set by the Administrator in its
discretion.
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8.7. Exercise or Purchase Price. The Administrator may establish the
exercise or purchase price of a Performance Award, shares of Deferred Stock or
shares received as a Stock Payment; provided, however, that such price shall not
be less than the par value of a share of Common Stock, unless otherwise
permitted by applicable state law.
8.8. Exercise Upon Termination of Employment, Termination of Consultancy or
Termination of Directorship. A Performance Award, Dividend Equivalent, award of
Deferred Stock and/or Stock Payment is exercisable or payable only while the
Holder is an Employee, Consultant or Independent Director, as applicable;
provided, however, that the Administrator in its sole and absolute discretion
may provide that the Performance Award, Dividend Equivalent, award of Deferred
Stock and/or Stock Payment may be exercised or paid subsequent to a Termination
of Employment following a "change of control or ownership" (within the meaning
of Section 1.162-27(e)(2)(v) or any successor regulation thereto) of the
Company; provided, further, that except with respect to Performance Awards
granted to Section 162(m) Participants, the Administrator in its sole and
absolute discretion may provide that Performance Awards may be exercised or paid
following a Termination of Employment or a Termination of Consultancy without
cause, or following a Change in Control of the Company, or because of the
Holder's retirement, death or disability, or otherwise.
8.9. Form of Payment. Payment of the amount determined under Section 8.2 or
8.3 above shall be in cash, in Common Stock or a combination of both, as
determined by the Administrator. To the extent any payment under this Article
VIII is effected in Common Stock, it shall be made subject to satisfaction of
all provisions of Section 6.3.
ARTICLE IX.
STOCK APPRECIATION RIGHTS
9.1. Grant of Stock Appreciation Rights. A Stock Appreciation Right may be
granted to any key Employee or Consultant selected by the Administrator. A Stock
Appreciation Right may be granted (a) in connection and simultaneously with the
grant of an Option, (b) with respect to a previously granted Option, or (c)
independent of an Option. A Stock Appreciation Right shall be subject to such
terms and conditions not inconsistent with the Plan as the Administrator shall
impose and shall be evidenced by an Award Agreement.
9.2. Coupled Stock Appreciation Rights.
(a) A Coupled Stock Appreciation Right ("CSAR") shall be related to a
particular Option and shall be exercisable only when and to the extent the
related Option is exercisable.
(b) A CSAR may be granted to the Holder for no more than the number of
shares subject to the simultaneously or previously granted Option to which
it is coupled.
(c) A CSAR shall entitle the Holder (or other person entitled to
exercise the Option pursuant to the Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the
extent then exercisable pursuant to its terms) and to receive from the
Company in exchange therefor an amount determined by multiplying the
difference obtained by subtracting the Option exercise price from the Fair
Market Value of a share of Common Stock on the date of exercise of the CSAR
by the number of shares of Common Stock with respect to which the CSAR
shall have been exercised, subject to any limitations the Administrator may
impose.
9.3. Independent Stock Appreciation Rights.
(a) An Independent Stock Appreciation Right ("ISAR") shall be
unrelated to any Option and shall have a term set by the Administrator. An
ISAR shall be exercisable in such installments as the Administrator may
determine. An ISAR shall cover such number of shares of Common Stock as the
Administrator may determine; provided, however, that unless the
Administrator otherwise provides in the terms of the ISAR or otherwise, no
ISAR granted to a person subject to Section 16 of the Exchange Act shall be
15
exercisable until at least six months have elapsed from (but excluding) the
date on which the Option was granted. The exercise price per share of
Common Stock subject to each ISAR shall be set by the Administrator. An
ISAR is exercisable only while the Holder is an Employee or Consultant;
provided, that the Administrator may determine that the ISAR may be
exercised subsequent to Termination of Employment or Termination of
Consultancy without cause, or following a Change in Control of the Company,
or because of the Holder's retirement, death or disability, or otherwise.
(b) An ISAR shall entitle the Holder (or other person entitled to
exercise the ISAR pursuant to the Plan) to exercise all or a specified
portion of the ISAR (to the extent then exercisable pursuant to its terms)
and to receive from the Company an amount determined by multiplying the
difference obtained by subtracting the exercise price per share of the ISAR
from the Fair Market Value of a share of Common Stock on the date of
exercise of the ISAR by the number of shares of Common Stock with respect
to which the ISAR shall have been exercised, subject to any limitations the
Administrator may impose.
9.4. Payment and Limitations on Exercise.
(a) Payment of the amounts determined under Section 9.2(c) and 9.3(b)
above shall be in cash, in Common Stock (based on its Fair Market Value as
of the date the Stock Appreciation Right is exercised) or a combination of
both, as determined by the Administrator. To the extent such payment is
effected in Common Stock it shall be made subject to satisfaction of all
provisions of Section 6.3 above pertaining to Options.
(b) Holders of Stock Appreciation Rights may be required to comply
with any timing or other restrictions with respect to the settlement or
exercise of a Stock Appreciation Right, including a window-period
limitation, as may be imposed in the discretion of the Administrator.
ARTICLE X.
ADMINISTRATION
10.1. Compensation Committee. The Compensation Committee (or another
committee or a subcommittee of the Board assuming the functions of the Committee
under the Plan) shall consist solely of two or more Independent Directors
appointed by and holding office at the pleasure of the Board, each of whom is
both a "non-employee director" as defined by Rule 16b-3 and an "outside
director" for purposes of Section 162(m) of the Code. Appointment of Committee
members shall be effective upon acceptance of appointment. Committee members may
resign at any time by delivering written notice to the Board. Vacancies in the
Committee may be filled by the Board. In its absolute discretion, the Board may
at any time and from time to time exercise any and all rights and duties of the
Committee under the Plan except with respect to matters which under Rule 16b-3
or Section 162(m) of the Code, or any regulations or rules issued thereunder,
are required to be determined in the sole discretion of the Committee.
Notwithstanding the foregoing, the full Board, acting by a majority of its
members in office, shall conduct the general administration of the Plan with
respect to Awards granted to Independent Directors.
10.2. Duties and Powers of the Administrator. It shall be the duty of the
Administrator to conduct the general administration of the Plan in accordance
with its provisions. The Administrator shall have the power to interpret the
Plan and the Award Agreements, and to adopt such rules for the administration,
interpretation and application of the Plan as are consistent therewith, to
interpret, amend or revoke any such rules and to amend any Award Agreement
provided that the rights or obligations of the Holder of the Award that is the
subject of any such Award Agreement are not affected adversely. Any such grant
or award under the Plan need not be the same with respect to each Holder. Any
such interpretations and rules with respect to Incentive Stock Options shall be
consistent with the provisions of Section 422 of the Code.
10.3. Majority Rule; Unanimous Written Consent. The Administrator shall act
by a majority of its members in attendance at a meeting at which a quorum is
present or by a memorandum or other written instrument signed by all members of
the Administrator.
16
10.4. Compensation; Professional Assistance; Good Faith Actions. Members of
the Administrator shall receive such compensation, if any, for their services as
members as may be determined by the Board. All expenses and liabilities, which
members of the Administrator incur in connection with the administration of the
Plan, shall be borne by the Company. The Administrator may, with the approval of
the Board, employ attorneys, consultants, accountants, appraisers, brokers or
other persons. The Administrator, the Company and the Company's officers and
Directors shall be entitled to rely upon the advice, opinions or valuations of
any such persons. All actions taken and all interpretations and determinations
made by the Administrator or the Board in good faith shall be final and binding
upon all Holders, the Company and all other interested persons. No members of
the Administrator or Board shall be personally liable for any action,
determination or interpretation made in good faith with respect to the Plan or
Awards, and all members of the Administrator and the Board shall be fully
protected by the Company in respect of any such action, determination or
interpretation.
10.5. Delegation of Authority to Grant Awards. The Committee may, but need
not, delegate from time to time some or all of its authority to grant Awards
under the Plan and administer the Plan as to such Awards to a committee
consisting of one or more members of the Committee or of one or more officers of
the Company; provided, however, that the Committee may not delegate its
authority to grant Awards to individuals (a) who are subject on the date of the
grant to the reporting rules under Section 16(a) of the Exchange Act, (b) who
are Section 162(m) Participants, or (c) who are officers of the Company who are
delegated authority by the Committee hereunder. Any delegation hereunder shall
be subject to the restrictions and limits that the Committee specifies at the
time of such delegation of authority and may be rescinded at any time by the
Committee. At all times, any committee appointed under this Section 10.5 shall
serve in such capacity at the pleasure of the Committee.
ARTICLE XI.
MISCELLANEOUS PROVISIONS
11.1. Transferability of Awards.
(a) Except as provided in Section 11.1(b):
(i) No Award under the Plan may be sold, pledged, assigned or
transferred in any manner other than by will or the laws of descent
and distribution or, subject to the consent of the Administrator,
pursuant to a DRO, unless and until such Award has been exercised, or
the shares underlying such Award have been issued, and all
restrictions applicable to such shares have lapsed.
(ii) No Award or interest or right therein shall be liable for
the debts, contracts or engagements of the Holder or his or her
successors in interest or shall be subject to disposition by transfer,
alienation, anticipation, pledge, encumbrance, assignment or any other
means whether such disposition be voluntary or involuntary or by
operation of law by judgment, levy, attachment, garnishment or any
other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect,
except to the extent that such disposition is permitted by the
preceding sentence.
(iii) During the lifetime of the Holder, only he or she may
exercise an Option or other Award (or any portion thereof) granted to
him or her under the Plan, unless it has been disposed of with the
consent of the Administrator pursuant to a DRO. After the death of the
Holder, any exercisable portion of an Option or other Award may, prior
to the time when such portion becomes unexercisable under the Plan or
the applicable Award Agreement, be exercised by his or her personal
representative or by any person empowered to do so under the deceased
Holder's will or under the then applicable laws of descent and
distribution.
(b) Notwithstanding Section 11.1(a), the Administrator, in its sole
discretion, may determine to permit a Holder to transfer an Option to any
one or more Permitted Transferees (as defined below), subject to the
following terms and conditions:
17
(i) an Option transferred to a Permitted Transferee shall not be
assignable or transferable by the Permitted Transferee other than by
will or the laws of descent and distribution; (ii) an Option which is
transferred to a Permitted Transferee shall continue to be subject to
all the terms and conditions of the Option as applicable to the
original Holder (other than the ability to further transfer the
Option); and
(iii) the Holder and the Permitted Transferee shall execute any
and all documents requested by the Administrator, including, without
limitation documents to (A) confirm the status of the transferee as a
Permitted Transferee, (B) satisfy any requirements for an exemption
for the transfer under applicable federal and state securities laws
and (C) evidence the transfer.
For purposes of this Section 11.1(b), "Permitted Transferee"
shall mean, with respect to a Holder, any child, stepchild,
grandchild, parent, stepparent, grandparent, spouse, former spouse,
sibling, niece, nephew, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, or sister-in-law, including adoptive
relationships, any person sharing the Holder's household (other than a
tenant or employee), a trust in which these persons (or the Holder)
control the management of assets, and any other entity in which these
persons (or the Holder) own more than fifty percent of the voting
interests, or any other transferee specifically approved by the
Administrator after taking into account any state or federal tax or
securities laws applicable to transferable Options."
11.2. Amendment, Suspension or Termination of the Plan. Except as otherwise
provided in this Section 11.2, the Plan may be wholly or partially amended or
otherwise modified, suspended or terminated at any time or from time to time by
the Administrator. However, without approval of the Company's stockholders given
within 12 months before or after the action by the Administrator, no action of
the Administrator may, except as provided in Section 11.3, increase the limits
imposed in Section 2.1 on the maximum number of shares which may be issued under
the Plan. No amendment, suspension or termination of the Plan shall, without the
consent of the Holder, alter or impair any rights or obligations under any Award
theretofore granted or awarded, unless the Award itself otherwise expressly so
provides. No Awards may be granted or awarded during any period of suspension or
after termination of the Plan, and in no event may any Incentive Stock Option be
granted under the Plan after the first to occur of the following events:
(a) The expiration of ten years from the date the Plan is adopted by
the Board; or
(b) The expiration of ten years from the date the Plan is approved by
the Company's stockholders under Section 11.4.
11.3. Changes in Common Stock or Assets of the Company, Acquisition or
Liquidation of the Company and Other Corporate Events.
(a) Subject to Section 11.3(e), in the event that the Administrator
determines that any dividend or other distribution (whether in the form of
cash, Common Stock, other securities or other property), recapitalization,
reclassification, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, liquidation,
dissolution, or sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, or exchange of Common Stock
or other securities of the Company, issuance of warrants or other rights to
purchase Common Stock or other securities of the Company, or other similar
corporate transaction or event, in the Administrator's sole discretion,
affects the Common Stock such that an adjustment is determined by the
Administrator to be appropriate in order to prevent dilution or enlargement
of the benefits or potential benefits intended to be made available under
the Plan or with respect to an Award, then the Administrator shall, in such
manner as it may deem equitable, adjust any or all of:
(i) The number and kind of shares of Common Stock (or other
securities or property) with respect to which Awards may be granted or
awarded (including, but not limited to, adjustments of the limitations
in Section 2.1 on the maximum number and kind of shares which may be
issued and adjustments of the Award Limit);
18
(ii) The number and kind of shares of Common Stock (or other
securities or property) subject to outstanding Awards; and
(iii) The grant or exercise price with respect to any Award.
(b) Subject to Section 11.3(c) and 11.3(e), in the event of any
transaction or event described in Section 11.3(a), any Change in Control,
any Corporate Transaction or any unusual or nonrecurring transactions or
events affecting the Company, any affiliate of the Company, or the
financial statements of the Company or any affiliate, or of changes in
applicable laws, regulations or accounting principles, the Administrator,
in its sole and absolute discretion, and on such terms and conditions as it
deems appropriate, either by the terms of the Award or by action taken
prior to the occurrence of such transaction or event and either
automatically or upon the Holder's request, is hereby authorized to take
any one or more of the following actions whenever the Administrator
determines that such action is appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made
available under the Plan or with respect to any Award under the Plan, to
facilitate such transactions or events or to give effect to such changes in
laws, regulations or principles:
(i) To provide for either the purchase of any such Award for an
amount of cash equal to the amount that could have been attained upon
the exercise of such Award or realization of the Holder's rights had
such Award been currently exercisable or payable or fully vested or
the replacement of such Award with other rights or property selected
by the Administrator in its sole discretion;
(ii) To provide that the Award cannot vest, be exercised or
become payable after such event;
(iii) To provide that such Award shall be exercisable as to all
shares covered thereby, notwithstanding anything to the contrary in
Section 5.3 or 5.4 or the provisions of such Award;
(iv) To provide that such Award be assumed by the successor or
survivor corporation, or a parent or subsidiary thereof, or shall be
substituted for by similar options, rights or awards covering the
stock of the successor or survivor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and
kind of shares and prices; and
(v) To make adjustments in the number and type of shares of
Common Stock (or other securities or property) subject to outstanding
Awards, and in the number and kind of outstanding Restricted Stock or
Deferred Stock and/or in the terms and conditions of (including the
grant or exercise price), and the criteria included in, outstanding
options, rights and awards and options, rights and awards which may be
granted in the future.
(vi) To provide that, for a specified period of time prior to
such event, the restrictions imposed under an Award Agreement upon
some or all shares of Restricted Stock or Deferred Stock may be
terminated, and, in the case of Restricted Stock, some or all shares
of such Restricted Stock may cease to be subject to repurchase under
Section 7.5 or forfeiture under Section 7.4 after such event.
(c) In the event of a Change in Control or a Corporate Transaction
each Option granted to an Independent Director shall be exercisable as to
all shares covered thereby upon such Change in Control or during the five
days immediately preceding the consummation of such Corporate Transaction
and subject to such consummation, notwithstanding anything to the contrary
in Section 5.4 or the vesting schedule of such Options. In the event of a
Change in Control, each Option granted to an Independent Director shall
remain exercisable for such fully-vested option shares until the expiration
or sooner termination of the Option term. In the event of a Corporate
Transaction, to the extent that the Board does not have the ability under
Rule 16b-3 to take or to refrain from taking the discretionary actions set
forth in Section 11.3(b)(ii) above, no Option granted to an Independent
Director may be exercised following such Corporate Transaction unless such
19
Option is, in connection with such Corporate Transaction, either assumed by
the successor or survivor corporation (or parent or subsidiary thereof) or
replaced with a comparable right with respect to shares of the capital
stock of the successor or survivor corporation (or parent or subsidiary
thereof).
(d) Subject to Sections 11.3(e), 3.2 and 3.3, the Administrator may,
in its discretion, include such further provisions and limitations in any
Award, agreement or certificate, as it may deem equitable and in the best
interests of the Company.
(e) With respect to Awards which are granted to Section 162(m)
Participants and are intended to qualify as performance-based compensation
under Section 162(m)(4)(C), no adjustment or action described in this
Section 11.3 or in any other provision of the Plan shall be authorized to
the extent that such adjustment or action would cause such Award to fail to
so qualify under Section 162(m)(4)(C), or any successor provisions thereto.
No adjustment or action described in this Section 11.3 or in any other
provision of the Plan shall be authorized to the extent that such
adjustment or action would cause the Plan to violate Section 422(b)(1) of
the Code. Furthermore, no such adjustment or action shall be authorized to
the extent such adjustment or action would result in short-swing profits
liability under Section 16 or violate the exemptive conditions of Rule
16b-3 unless the Administrator determines that the Award is not to comply
with such exemptive conditions. The number of shares of Common Stock
subject to any Award shall always be rounded to the next whole number.
(f) The existence of the Plan, the Award Agreement and the Awards
granted hereunder shall not affect or restrict in any way the right or
power of the Company or the shareholders of the Company to make or
authorize any adjustment, recapitalization, reorganization or other change
in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of stock or of options, warrants or
rights to purchase stock or of bonds, debentures, preferred or prior
preference stocks whose rights are superior to or affect the Common Stock
or the rights thereof or which are convertible into or exchangeable for
Common Stock, or the dissolution or liquidation of the company, or any sale
or transfer of all or any part of its assets or business, or any other
corporate act or proceeding, whether of a similar character or otherwise.
11.4. Approval of Plan by Stockholders. The Plan will be submitted for the
approval of the Company's stockholders within 12 months after the date of the
Board's initial adoption of the Plan. Awards may be granted or awarded prior to
such stockholder approval, provided that such Awards shall not be exercisable
nor shall such Awards vest prior to the time when the Plan is approved by the
stockholders, and provided further that if such approval has not been obtained
at the end of said twelve-month period, all Awards previously granted or awarded
under the Plan shall thereupon be canceled and become null and void. In
addition, if the Board determines that Awards other than Options or Stock
Appreciation Rights which may be granted to Section 162(m) Participants should
continue to be eligible to qualify as performance-based compensation under
Section 162(m)(4)(C) of the Code, the Performance Criteria must be disclosed to
and approved by the Company's stockholders no later than the first stockholder
meeting that occurs in the fifth year following the year in which the Company's
stockholders previously approved the Performance Criteria.
11.5. Tax Withholding. The Company shall be entitled to require payment in
cash or deduction from other compensation payable to each Holder of any sums
required by federal, state or local tax law to be withheld with respect to the
issuance, vesting, exercise or payment of any Award. The Administrator may in
its discretion and in satisfaction of the foregoing requirement allow such
Holder to elect to have the Company withhold shares of Common Stock otherwise
issuable under such Award (or allow the return of shares of Common Stock) having
a Fair Market Value equal to the sums required to be withheld. Notwithstanding
any other provision of the Plan, the number of shares of Common Stock which may
be withheld with respect to the issuance, vesting, exercise or payment of any
Award (or which may be repurchased from the Holder of such Award within six
months after such shares of Common Stock were acquired by the Holder from the
Company) in order to satisfy the Holder's federal and state income and payroll
tax liabilities with respect to the issuance, vesting, exercise or payment of
the Award shall be limited to the number of shares which have a Fair Market
Value on the date of withholding or repurchase equal to the aggregate amount of
such liabilities based on the minimum statutory withholding rates for federal
and state tax income and payroll tax purposes that are applicable to such
supplemental taxable income.
20
11.6. Loans. The Administrator may, in its discretion, extend one or more
loans to key Employees in connection with the exercise or receipt of an Award
granted or awarded under the Plan, or the issuance of Restricted Stock or
Deferred Stock awarded under the Plan. The terms and conditions of any such loan
shall be set by the Administrator.
11.7. Forfeiture Provisions. Pursuant to its general authority to determine
the terms and conditions applicable to Awards under the Plan, the Administrator
shall have the right to provide, in the terms of Awards made under the Plan, or
to require a Holder to agree by separate written instrument, that (a)(i) any
proceeds, gains or other economic benefit actually or constructively received by
the Holder upon any receipt or exercise of the Award, or upon the receipt or
resale of any Common Stock underlying the Award, must be paid to the Company,
and (ii) the Award shall terminate and any unexercised portion of the Award
(whether or not vested) shall be forfeited, if (b)(i) a Termination of
Employment, Termination of Consultancy or Termination of Directorship occurs
prior to a specified date, or within a specified time period following receipt
or exercise of the Award, or (ii) the Holder at any time, or during a specified
time period, engages in any activity in competition with the Company, or which
is inimical, contrary or harmful to the interests of the Company, as further
defined by the Administrator or (iii) the Holder incurs a Termination of
Employment, Termination of Consultancy or Termination of Directorship for cause.
11.8. Effect of Plan Upon Options and Compensation Plans. The adoption of
the Plan shall not affect any other compensation or incentive plans in effect
for the Company or any Subsidiary. Nothing in the Plan shall be construed to
limit the right of the Company (a) to establish any other forms of incentives or
compensation for Employees, Directors or Consultants of the Company or any
Subsidiary, or (b) to grant or assume options or other rights or awards
otherwise than under the Plan in connection with any proper corporate purpose
including but not by way of limitation, the grant or assumption of options in
connection with the acquisition by purchase, lease, merger, consolidation or
otherwise, of the business, stock or assets of any corporation, partnership,
limited liability company, firm or association.
11.9. Compliance with Laws. The Plan, the granting and vesting of Awards
under the Plan and the issuance and delivery of shares of Common Stock and the
payment of money under the Plan or under Awards granted or awarded hereunder are
subject to compliance with all applicable federal and state laws, rules and
regulations (including but not limited to state and federal securities law and
federal margin requirements) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Company, be
necessary or advisable in connection therewith. Any securities delivered under
the Plan shall be subject to such restrictions, and the person acquiring such
securities shall, if requested by the Company, provide such assurances and
representations to the Company as the Company may deem necessary or desirable to
assure compliance with all applicable legal requirements. To the extent
permitted by applicable law, the Plan and Awards granted or awarded hereunder
shall be deemed amended to the extent necessary to conform to such laws, rules
and regulations.
11.10. Titles. Titles are provided herein for convenience only and are not
to serve as a basis for interpretation or construction of the Plan.
11.11. Governing Law. The Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State of
California without regard to conflicts of laws thereof.
* * *
I hereby certify that the foregoing Plan was duly adopted by the Board of
Directors of FileNet Corporation on March 28, 2002. I hereby certify that the
foregoing Plan was approved by the stockholders of FileNet Corporation on May
22, 2002.
Executed on this ____ day of May 2002.
Secretary
21
Effective as of 2002
STOCK OPTION AGREEMENT
TERMS AND CONDITIONS
These Terms and Conditions constitute a part of the Stock Option Agreement,
dated as of the date set forth on the Signature Page to Stock Option Agreement
Terms and Conditions made a part hereof (the "Signature Page"), concerning
certain Options granted by FileNET Corporation, a Delaware corporation
hereinafter referred to as "Company," to the employee of the Company (or a
Subsidiary of the Company) listed on the Signature Page, hereinafter referred to
as "Optionee." These Terms and Conditions and the Signature Page are
collectively referred to as the "Agreement."
WHEREAS, the Company wishes to afford the Optionee the opportunity to
purchase shares of its $0.01 par value Common Stock;
WHEREAS, the Company wishes to carry out The 2002 Incentive Award Plan of
FileNET Corporation, as the same may be amended from time to time (the "Plan")
(the terms of which are hereby incorporated by reference and made a part of this
Agreement); and
WHEREAS, the Administrator under the Plan has determined that it would be
to the advantage and best interest of the Company and its stockholders to grant
the Option provided for herein to the Optionee as an inducement to enter into or
remain in the service of the Company or a Subsidiary of the Company and as an
incentive for increased efforts during such service, and has advised the Company
thereof and instructed the undersigned officers to issue said Option.
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I.
DEFINITIONS
Whenever the following terms are used in this Agreement, they shall have
the meaning specified below unless the context clearly indicates to the
contrary. The masculine pronoun shall include the feminine and neuter, and the
singular the plural, where the context so indicates. Capitalized terms used but
not defined in this Agreement shall have the meaning ascribed to such terms in
the Plan.
Section 1.1. Cause
"Cause" shall mean: (i) Optionee's commission of any act of theft, fraud,
embezzlement or dishonesty; or (ii) Optionee's willful or intentional misconduct
adversely affecting the business or affairs of the Company or any Subsidiary; or
(iv) Optionee's unauthorized use or disclosure of confidential information or
trade secrets of the Company or any Subsidiary. The foregoing definition shall
not be deemed to be inclusive of all acts or omissions that the Company or any
Subsidiary may consider as grounds for the dismissal or discharge of any
Optionee.
ARTICLE II.
GRANT OF OPTION
Section 2.1. Grant of Option
Effective as of the date set forth on the Signature Page, the Company
irrevocably grants to the Optionee the option to purchase any part or all of the
aggregate number of shares of its Common Stock set forth on the Signature Page,
all upon the terms and conditions set forth in this Agreement (the "Option").
Section 2.2. Purchase Price
The purchase price of the shares of Common Stock covered by the Option is
set forth on the Signature Page, and shall not be subject to commission or other
charge.
Section 2.3. Consideration to Company
In consideration of the granting of this Option by the Company, the
Optionee agrees to render faithful and efficient services to the Company or its
any Subsidiary, with such duties and responsibilities as the Company or any
Subsidiary shall from time to time prescribe, for a period of at least one (1)
year from the date this Option is granted.
ARTICLE III.
PERIOD OF EXERCISABILITY
Section 3.1. Commencement of Exercisability
The Option shall become exercisable in the time and manner set forth on the
Signature Page. Except as otherwise may be provided by the Administrator, no
portion of the Option that is unexercisable at Termination of Employment shall
thereafter become exercisable.
Section 3.2. Duration of Exercisability
The installments provided for in Section 3.1 are cumulative. Each such
installment that becomes exercisable pursuant to Section 3.1 shall remain
exercisable until it becomes unexercisable under Section 3.3.
Section 3.3. Expiration of Option
Except to the extent otherwise set forth in the Severance Agreement, if
applicable, the Option may not be exercised to any extent by anyone after the
first to occur of the following events:
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(a) The expiration of ten (10) years from the date the Option was granted,
as set forth on the Signature Page;
(b) The time of the Optionee's Termination of Employment for Cause;
(c) The expiration of three (3) months from the date of the Optionee's
Termination of Employment by reason of his retirement, resignation or
termination of his employment not for Cause, unless the Optionee dies
within said three-month period;
(d) The expiration of one (1) year from the date of the Optionee's
Termination of Employment by reason of his disability;
(e) The expiration of one (1) year from the date of the Optionee's death;
or
(f) The effective date of a Corporate Transaction, unless the successor
corporation or a parent or subsidiary of the successor corporation
assumes or substitutes the Option as described in Section 3.5. At
least fifteen (15) days prior to the effective date of a Corporate
Transaction as to which the successor corporation or a parent or
subsidiary of the successor corporation does not assume or substitute
the Option, the Administrator shall give the Optionee notice of such
event if the Option has then neither been fully exercised nor become
unexercisable under this Section 3.3.
Section 3.4. Special Tax Consequences
The Optionee acknowledges that, to the extent that the aggregate fair
market value of stock with respect to which "incentive stock options" (within
the meaning of Section 422 of the Code, but without regard to Section 422(d) of
the Code), including all or such portion of the Option elected by the Optionee
to be treated as an incentive stock option, are exercisable for the first time
by the Optionee during any calendar year (under the Plan and all other incentive
stock option plans of the Company and any Subsidiary of the Company) exceeds
$100,000, such options shall be treated for all purposes as not qualifying under
Section 422 of the Code and therefore shall be subject to taxation as
non-qualified options. The Optionee further acknowledges that the rules set
forth in the preceding sentence shall be applied by taking options into account
in the order in which they were granted. For purposes of these rules, the fair
market value of stock shall be determined as of the time the option with respect
to such stock option is granted.
Section 3.5. Acceleration of Option
(a) This Option, to the extent outstanding at the time of a Corporate
Transaction, but not otherwise fully exercisable, shall automatically
accelerate so that this Option shall, immediately prior to the
effective date of the Corporate Transaction, become exercisable for
all of the Option Shares at the time subject to this Option and may be
exercised for any or all of those Option Shares as fully-vested shares
of Common Stock. No such acceleration of this Option, however, shall
occur if and to the extent this Option is, in connection with the
Corporate Transaction: (i) to be assumed by the successor corporation
(or parent or subsidiary thereof) or to be substituted with a
comparable right to purchase or receive, for each share of optioned
stock subject to the Option immediately prior to the Corporate
Transaction, the consideration (whether stock, cash, or other
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securities or property) received in the Corporate Transaction by
holders of Common Stock for each share held on the effective date of
the transaction; or (ii) to be replaced with a cash incentive program
of the successor corporation which preserves the spread exiting on the
Option shares at the time of the Corporate Transaction (the excess of
the Fair Market Value of such Option shares over the aggregate
exercise price payable for those shares, appropriately adjusted) and
provides for subsequent pay-out in accordance with the Option exercise
schedule. The determination of Option comparability under clause (i)
shall be made by the Plan Administrator, and such determination shall
be final, binding and conclusive.
(b) Immediately following the Corporate Transaction, this Option shall
terminate and cease to be outstanding, except to the extent assumed or
substituted by the successor corporation (or parent or subsidiary
thereof) in connection with the Corporate Transaction.
(c) If this Option is assumed in connection with the Corporate
Transaction, then this Option shall be appropriately adjusted,
immediately after such Corporate Transaction, to apply to the number
of and class of securities which would have been isssuable to the
Optionee in consummation of such Corporate Transaction had the Option
been exercised immediately prior to such Corporate Transaction, and
appropriate adjustments shall also be made to the exercise price;
provided, that the aggregate exercise price shall remain the same.
(d) This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or
assets.
ARTICLE IV.
EXERCISE OF OPTION
Section 4.1. Person Eligible to Exercise
(a) Except as provided in Section 4.1(b), during the lifetime of the
Optionee, only he or she may exercise the Option (or any portion
thereof), unless it has been disposed of with the consent of the
Committee pursuant to a DRO. After the death of the Optionee, any
exercisable portion of the Option may, prior to the time when such
portion becomes unexercisable under Section 3.3, be exercised by his
or her personal representative or by any person empowered to do so
under the deceased Optionee's will or under the then applicable laws
of descent and distribution.
(b) Notwithstanding Section 4.1(a), with the consent of the Administrator,
the Optionee may transfer the Option to any one or more Permitted
Transferees, subject to the following terms and conditions:
(i) the Option shall not be assignable or transferable by the
Permitted Transferee other than by will or the laws of descent
and distribution;
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(ii) the Option shall continue to be subject to all the terms and
conditions of the Option as applicable to the Optionee (other
than the ability to further transfer the Option); and
(iii) the Optionee and the Permitted Transferee execute any and all
documents requested by the Administrator, including, without
limitation documents to (A) confirm the status of the transferee
as a Permitted Transferee, (B) satisfy any requirements for an
exemption for the transfer under applicable federal and state
securities laws and (C) evidence the transfer.
Section 4.2. Partial Exercise
(a) Any exercisable portion of the Option or the entire Option, if then
wholly exercisable, may be exercised in whole or in part at any time
prior to the time when the Option or portion thereof becomes
unexercisable under Section 3.3.
Section 4.3. Manner of Exercise
The Option, or any exercisable portion thereof, may be exercised solely by
delivery to the Secretary of the Company or his office of all of the following
prior to the time when the Option or such portion becomes unexercisable under
Section 3.3:
(a) Notice in writing signed by the Optionee or the other person then
entitled to exercise the Option or portion, stating that the Option or
portion is thereby exercised, such notice complying with all
applicable rules established by the Administrator;
(b) Full payment (in cash) for the shares with respect to which such
Option or portion is exercised; or
(i) With the consent of the Administrator, a delay in payment of up
to 30 days from the date the Option, or portion thereof, is
exercised; or
(ii) With the consent of the Administrator, (A) shares of the
Company's Common Stock owned by the Optionee for at least six
months, duly endorsed for transfer to the Company, with a Fair
Market Value on the date of delivery equal to the aggregate
exercise price of the Option or exercised portion thereof, or
(B) shares of the Company's Common Stock issuable to the
Optionee upon exercise of the Option, with a Fair Market Value
on the date of exercise of the Option or any portion thereof
equal to the aggregate exercise price of the Option or
exercised portion thereof; or
(iii) With the consent of the Administrator, a full recourse
promissory note bearing interest (at no less than such rate as
shall then preclude the imputation of interest under the Code or
successor provision) and payable upon such terms as may be
prescribed by the Administrator. The Administrator may also
prescribe the form of such note and the security to be given for
such note. The Option may not be exercised, however, by delivery
of a promissory note or by a loan from the Company when or where
such loan or other extension of credit is prohibited by law; or
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(iv) With the consent of the Administrator, property of any kind
which constitutes good and valuable consideration; or
(v) With the consent of the Administrator, a notice that the Optionee
has placed a market sell order with a broker with respect to
shares of the Company's Common Stock then issuable upon exercise
of the Option, and that the broker has been directed to pay a
sufficient portion of the net proceeds of the sale to the Company
in satisfaction of the Option exercise price; or
(vi) With the consent of the Administrator, any combination of the
consideration provided in the foregoing subparagraphs (i), (ii),
(iii), (iv) and (v);
(c) A bona fide written representation and agreement, in a form
satisfactory to the Administrator, signed by the Optionee or other
person then entitled to exercise such Option or portion, stating that
the shares of stock are being acquired for his own account, for
investment and without any present intention of distributing or
reselling said shares or any of them except as may be permitted under
the Securities Act and then applicable rules and regulations
thereunder, and that the Optionee or other person then entitled to
exercise such Option or portion will indemnify the Company against and
hold it free and harmless from any loss, damage, expense or liability
resulting to the Company if any sale or distribution of the shares by
such person is contrary to the representation and agreement referred
to above. The Administrator may, in its absolute discretion, take
whatever additional actions it deems appropriate to insure the
observance and performance of such representation and agreement and to
effect compliance with the Securities Act and any other federal or
state securities laws or regulations. Without limiting the generality
of the foregoing, the Administrator may require an opinion of counsel
acceptable to it to the effect that any subsequent transfer of shares
acquired on an Option exercise does not violate the Securities Act,
and may issue stop-transfer orders covering such shares. Share
certificates evidencing stock issued on exercise of this Option shall
bear an appropriate legend referring to the provisions of this
subsection (c) and the agreements herein. The written representation
and agreement referred to in the first sentence of this subsection (c)
shall, however, not be required if the shares to be issued pursuant to
such exercise have been registered under the Securities Act, and such
registration is then effective in respect of such shares;
(d) Full payment to the Company (or Subsidiary employer) of all amounts
which, under federal, state or local tax law, it is required to
withhold upon exercise of the Option, which, with the consent of the
Administrator, may be in the form of shares of the Company's Common
Stock issuable to the Optionee upon exercise of the Option with a Fair
Market Value on the date of exercise of the Option or any portion
thereof equal to the sums required to be withheld, may be used to make
all or part of such payment; provided that the number of shares of
Common Stock which may be withheld with respect to the issuance,
vesting, exercise or payment of any Option (or which may be
repurchased from the Optionee of such Option within six months after
such shares of Common Stock were acquired by the Optionee from the
Company) in order to satisfy the Optionee's federal and state income
and payroll tax liabilities with respect to the issuance, vesting,
exercise or payment of the Option shall be limited to the number of
shares which have a Fair Market Value on the date of withholding or
repurchase equal to the aggregate amount of such liabilities based on
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the minimum statutory withholding rates for federal and state tax
income and payroll tax purposes that are applicable to such
supplemental taxable income; and
(e) In the event the Option or portion shall be exercised pursuant to
Section 4.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise
the Option.
Section 4.4. Conditions to Issuance of Stock Certificates
The shares of stock deliverable upon the exercise of the Option, or any
portion thereof, may be either previously authorized but unissued shares or
issued shares that have then been reacquired by the Company. Such shares shall
be fully paid and nonassessable. The Company shall not be required to issue or
deliver any certificate or certificates for shares of stock purchased upon the
exercise of the Option or portion thereof prior to fulfillment of all of the
following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law or under rulings or regulations
of the Securities and Exchange Commission or of any other governmental
regulatory body, which the Administrator shall, in its absolute
discretion, deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Administrator shall, in its
absolute discretion, determine to be necessary or advisable;
(d) The receipt by the Company (or Subsidiary employer) of full payment
for such shares, including payment of all amounts which, under
federal, state or local tax law, it is required to withhold upon
exercise of the Option; and
(e) The lapse of such reasonable period of time following the exercise of
the Option as the Administrator may from time to time establish for
reasons of administrative convenience.
Section 4.5. Rights as Stockholder
The holder of the Option shall not be, nor have any of the rights or
privileges of, a stockholder of the Company in respect of any shares purchasable
upon the exercise of any part of the Option unless and until certificates
representing such shares shall have been issued by the Company to such holder.
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ARTICLE V.
OTHER PROVISIONS
Section 5.1. Administration
The Administrator shall have the power to interpret the Plan and this
Agreement and to adopt such rules for the administration, interpretation and
application of the Plan as are consistent therewith and to interpret or revoke
any such rules. All actions taken and all interpretations and determinations
made by the Administrator in good faith shall be final and binding upon the
Optionee, the Company and all other interested persons. No member of the
Administrator shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or the Option. In its
absolute discretion, the Board may at any time and from time to time exercise
any and all rights and duties of the Administrator under this Plan except with
respect to matters which under Rule 16b-3 or Section 162(m) of the Code, or any
regulations or rules issued thereunder, are required to be determined in the
sole discretion of the Administrator.
Section 5.2. Option Not Transferable
Except as provided in Section 4.1(b), neither the Option nor any interest
or right therein or part thereof shall be liable for the debts, contracts or
engagements of the Optionee or his successors in interest or shall be subject to
disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be voluntary or
involuntary or by operation of law by judgment, levy, attachment, garnishment or
any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect; provided,
however, that this Section 5.2 shall not prevent transfers by will or by the
applicable laws of descent and distribution or, with the consent of the
Committee, pursuant to a DRO.
Section 5.3. Shares to Be Reserved
The Company shall at all times during the term of the Option reserve and
keep available such number of shares of stock as will be sufficient to satisfy
the requirements of this Agreement.
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Section 5.4. Notices
Any notice to be given under the terms of this Agreement to the Company
shall be addressed to the Company in care of its Secretary, and any notice to be
given to the Optionee shall be addressed to him at the address given beneath his
signature hereto. By a notice given pursuant to this Section 5.4, either party
may hereafter designate a different address for notices to be given to him. Any
notice that is required to be given to the Optionee shall, if the Optionee is
then deceased, be given to the Optionee's personal representative if such
representative has previously informed the Company of his status and address by
written notice under this Section 5.4. Any notice shall be deemed duly given
when enclosed in a properly sealed envelope or wrapper addressed as aforesaid,
deposited (with postage prepaid) in a post office or branch post office
regularly maintained by the United States Postal Service.
Section 5.5. Titles
Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of this Agreement.
Section 5.6. Construction
This Agreement shall be administered, interpreted and enforced under the
laws of the State of California.
Section 5.7. Conformity to Securities Laws
The Optionee acknowledges that the Plan and this Agreement are intended to
conform to the extent necessary with all provisions of the Securities Act and
the Exchange Act and any and all regulations and rules promulgated by the
Securities and Exchange Commission thereunder, including without limitation Rule
16b-3. Notwithstanding anything herein to the contrary, the Plan shall be
administered, and the Option is granted and may be exercised, only in such a
manner as to conform to such laws, rules and regulations. To the extent
permitted by applicable law, the Plan and this Agreement shall be deemed amended
to the extent necessary to conform to such laws, rules and regulations.
Section 5.8. More Favorable Terms of Severance Programs Take Precedemnce
To the extent the terms and conditions contained in any severance or change
in control program, plan or agreement, or any employment agreement, with the
Optionee provide more favorable terms for the Option then those set forth herein
(including without limitation terms regarding accelerated vesting and extended
exercise periods), the more favorable terms of any such severance or change in
control program, plan or agreement or any employment agreement with the Optionee
will control.
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Signature Page to the Stock Option Agreement Terms and Conditions
THE 2002 INCENTIVE AWARD PLAN
OF FILENET CORPORATION
3565 Harbor Boulevard, Costa Mesa, CA 92626
[First_Name] [Middle_Name] [Last_Name] [Address_Line_1]
[Address_Line_2]
[Address_Line_3]
Optionee's Tax ID #: [Extra_Field_1] [City] [State] [Zip_Code]
Effective ____________________ (the "Grant Date"), you have been granted an
Option to buy an aggregate of [Shares_Granted] shares of Common Stock of
FileNET Corporation at an exercise price per share of $[Option_Price]. This
Option expires on _________________.*
This Option will vest and become exercisable in increments on the following
dates:
Twenty-five percent (25%) of the shares of Common Stock subject to the Option
(rounded down to the next whole number of shares) shall vest one year after the
Grant Date, and 1/36th of the shares of Common Stock subject to the Option on
the date of grant (rounded down to the next whole number of shares) shall vest
on the first day of each full month thereafter, so that all of the Shares shall
be vested on the first day of the thirty-sixth (36th) month after the Grant
Date.
*This Option will not vest and the expiration date will be sooner than shown
under certain circumstances, including your Termination from Employment. See the
Stock Option Agreement Terms and Conditions.
Type of Option
(TM) Non-qualified option
(TM) Incentive stock option (subject to the maximum number
permitted by the Code) and non-qualified option as
to all other shares.
You and the Company agree that these Options are granted under and governed by
the terms and conditions of the Stock Option Agreement Terms and Conditions,
which together with this Signature Page, are a binding agreement, and the Plan.
You acknowledge that you have read and understand the Stock Option Agreement
Terms and Conditions, this Signature Page, and the Plan, and that you understand
the terms and conditions of your Option grant, including the provisions
governing the vesting and termination of your Options, the exercise procedures,
and the other restrictions contained therein.
FILENET CORPORATION OPTIONEE
By: [First_Name] [Last_Name]
Its:
FILENET CORPORATION
NON-QUALIFIED STOCK OPTION AGREEMENT
FOR INDEPENDENT DIRECTORS
TERMS AND CONDITIONS
These Terms and Conditions constitute a part of the Stock Option Agreement,
dated as of the date set forth on the Signature Page to Stock Option Agreement
Terms and Conditions made a part hereof (the "Signature Page"), concerning
certain Options granted by FileNET Corporation, a Delaware corporation
hereinafter referred to as "Corporation," to the director of the Corporation
listed on the Signature Page, hereinafter referred to as "Optionee." These Terms
and Conditions and the Signature Page are collectively referred to as the
"Agreement."
Recitals
WHEREAS, the Corporation wishes to carry out The 2002 Incentive Award Plan
of FileNET Corporation, as the same may be amended from time to time (the
"Plan"), the terms of which are hereby incorporated by reference and made a part
of this Agreement; and
WHEREAS, in order to provide such directors with a meaningful incentive to
continue to serve as members of the Corporation's Board, the Plan provides for
the automatic grant to the Corporation's Independent Directors of Options to
purchase the Corporation's common stock over the period of such director's Board
service to the Corporation; and
WHEREAS, the Optionee is an Independent Director of the Corporation;
WHEREAS, all capitalized terms in this Agreement shall have the meaning
assigned to them in the Plan.
Agreement
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
1. Grant of Option. The Corporation hereby irrevocable grants to Optionee,
as of the grant date specified on the Signature Page (the "Grant Date"), a
Non-Qualified Option to purchase up to the number of shares of the Corporation's
Common Stock, par value $0.01 per share, specified on the Signature Page (the
"Option"). The exercise price per share of Common Stock subject to the Option is
set forth on the Signature Page, which is the average of the high and low
selling price per share of Common Stock as of the Option Grant Date, and shall
not be subject to commission or other charge.
2. Vesting.
(a) The Option shall vest 25% per year on each of the first, second,
third and fourth anniversary of the Option Grant Date, provided
the Optionee continues as an Independent Director on each such
anniversary.
(b) Notwithstanding the foregoing:
(i) in the event of Termination of Directorship due to death or
Permanent Disability, the Option shall become automatically
100% vested and exercisable in full upon such date of
Termination of Directorship; and
(ii) in the event of a Change in Control or Corporate
Transaction, the Option shall become automatically 100%
vested and exercisable in full upon such Change in Control
or upon the fifth day immediately preceding the consummation
of such Corporate Transaction.
(c) In no event shall any portion of the Option vest following
Optionee's Termination of Directorship.
(d) The vesting installments provided for in this Section 2 are
cumulative. Each such installment that becomes exercisable shall
remain exercisable until the Option terminates or expires under
Section 3.
3. Option Term and Exercise Period.
(a) The Option shall have a term of ten (10) years measured from the
Option Grant Date and shall accordingly expire, and become
unexercisable at the close of business on the Option expiration
date specified on the Signature Page, subject to earlier
termination in accordance with the following paragraph (b).
(b) The Option shall terminate and may not be exercised to any extent
by anyone as of the first to occur of the following events:
(i) The expiration of ten (10) years from the Option Grant Date;
or
(ii) The expiration of twelve (12) months from the date of the
Optionee's Termination of Directorship for any reason.
(iii) The effective date of a Corporate Transaction, unless the
Board waives this provision in connection with such
transaction and such waiver is consistent with Rule 16b-3,
or unless the Option is, in connection with such Corporate
Transaction, either assumed by the successor or survivor
corporation (or parent or subsidiary thereof) or replaced
with a comparable right with respect to share of the
capital stock of the successor or survivor corporation (or
parent or subsidiary thereof).
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(c) Upon the Termination of Directorship, the portion of the Option
representing shares that are not at that time vested shall
immediately terminate and cease to be outstanding.
4. Limited Transferability.
(a) Except as may be permitted pursuant to paragraph (b) below, the
Option shall be neither transferable nor assignable by Optionee
other than by will or by the laws of descent and distribution and
may be exercised during Optionee's lifetime only by Optionee.
After the death of the Optionee, any exercisable portion of the
Option may, prior to the time when such portion terminates and
becomes unexercisable under Section 3, be exercised by his or her
personal representative or by any person empowered to do so under
the deceased Optionee's will or under the then applicable laws of
descent and distribution.
(b) Notwithstanding paragraph (a) above, the Option may be assigned
in whole or in part during Optionee's lifetime to the Optionee's
spouse in accordance with the terms of a DRO, and, with the
consent of the Administrator, the Optionee may transfer the
Option to any one or more Permitted Transferees, subject to the
following terms and conditions:
(i) the Option shall not be assignable or transferable by the
Permitted Transferee or such spouse other than by will or
the laws of descent and distribution;
(ii) the Option shall continue to be subject to all the terms
and conditions of the Option as applicable to the Optionee
(other than the ability to further transfer the Option);
and
(iii) the Optionee and the Permitted Transferee or such spouse,
as applicable, shall execute any and all documents
requested by the Administrator, including, without
limitation documents to (A) confirm the status of the
transferee as a Permitted Transferee or the validity of the
DRO, (B) satisfy any requirements for an exemption for the
transfer under applicable federal and state securities
laws, and (C) evidence the transfer.
5. Corporate Transaction. In the event of a Corporate Transaction, that
portion of the Option representing shares that are not then vested
shall automatically become 100% vested so that the Option shall, as of
five days prior to the effective date of such Corporate Transaction,
become exercisable in full. Effective as of the Corporate Transaction,
this Option shall terminate and cease to be exercisable, except to the
extent the Option is assumed by the successor or survivor corporation
(or parent or subsidiary thereof) or replaced with a comparable right
with respect to share of the capital stock of the successor or
survivor corporation (or parent or subsidiary thereof) in such
Corporate Transaction, or unless the Board waives this provision in
connection with such Corporate Transaction and such waiver is
consistent with Rule 16b-3.
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6. Change in Control. In the event of a Change in Control, that portion
of the Option representing shares that are not vested shall
automatically become 100% vested so that the Option shall, as of the
effective date of such Change in Control, become exercisable in full.
7. Manner of Exercising Option.
(a) Any vested portion of the Option or the entire Option, if then
100% vested and exercisable, may be exercised in whole or in part
at any time prior to the time when the Option or portion thereof
terminates or expires and becomes unexercisable under Section 3.
The Option may be exercised for whole shares only.
(b) In order to exercise all or any portion of the vested Option,
Optionee (or any other person or persons permitted to exercise
the Option under this Agreement) must take the following actions:
(i) Execute and deliver to the Corporation a notice of exercise
for the vested portion of the Option being exercised, such
notice complying with all applicable rules established by
the Administrator;
(ii) Pay the aggregate exercise price and applicable Federal,
state and local tax withholding obligation for the
purchased shares in one or more of the following forms:
(A) cash or check made payable to the Corporation; or
(B) through a special sale and remittance procedure
pursuant to which Optionee (or any other permitted
person) shall provide to a Corporation-designated
brokerage firm an irrevocable market sell order to
effect the sale of the purchased shares and remit to
the Corporation, out of the sale proceeds available on
the settlement date, sufficient funds to cover the
aggregate exercise price and applicable taxes.
(iii) With the prior consent of the Administrator, the aggregate
exercise price and applicable Federal, state and local tax
withholding obligation for the purchased shares may also be
paid in one or more of the following forms:
(A) shares of Common Stock held by Optionee (or any other
permitted person) for at least six months, or issuable
upon exercise of the Option, and valued at Fair Market
Value on the exercise date, or
(B) with any other form of consideration permitted by the
Plan.
(iv) Furnish to the Corporation appropriate documentation that
the person or persons exercising the Option (if other than
Optionee) have the right to exercise this Option.
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8. Compliance with Laws and Regulations.
The shares of stock deliverable upon the exercise of the Option, or any
portion thereof, may be either previously authorized but unissued shares or
issued shares which have then been reacquired by the Corporation. Such shares
shall be fully paid and nonassessable. The Corporation shall not be required to
issue or deliver any certificate or certificates for shares of stock purchased
upon the exercise of the Option or portion thereof prior to fulfillment of all
of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law or under rulings or
regulations of the Securities and Exchange Commission or of any
other governmental regulatory body, which the Board shall, in its
absolute discretion, deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any state
or federal governmental agency which the Board shall, in its
absolute discretion, determine to be necessary or advisable;
(d) The receipt by the Corporation of full payment for such shares,
including payment of all amounts which, under federal, state or
local tax law, it is required to withhold upon exercise of the
Option; and
(e) The lapse of such reasonable period of time following the
exercise of the Option as the Board may from time to time
establish for reasons of administrative convenience.
9. Stockholder Rights. The holder of the Option shall not have any
stockholder rights with respect to the shares of Common Stock
purchasable upon exercise of the Option until such person shall have
exercised the Option, paid the exercise price and applicable taxes,
satisfies all other conditions of exercise and become a holder of
record of the purchased shares.
10. Adjustment in Option Shares.
(a) Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of
shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's
receipt of consideration, or in the event of a Corporate
Transaction or Change in Control, appropriate adjustments shall
be made to (i) the number and/or class of securities subject to
this Option and (ii) the exercise price in order to reflect such
change and thereby preclude a dilution or enlargement of benefits
hereunder.
(b) This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change
5
its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its
business or assets.
11. Successors and Assigns. The provisions of this Agreement shall inure
to the benefit of, and be binding upon, the Corporation and its
successors and assigns and Optionee, Optionee's assigns and the legal
representatives, heirs and legatees of Optionee's estate.
12. Notices. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and
addressed to the Corporation at its principal corporate offices. Any
notice required to be given or delivered to Optionee shall be in
writing and addressed to Optionee at the address indicated on the
Signature Page. All notices shall be deemed effective upon personal
delivery or upon deposit in the U.S. mail, postage prepaid and
properly addressed to the party to be notified.
13. Construction. This Agreement and the Option evidenced hereby are made
and granted pursuant to the automatic Option grant program in effect
under the Plan and are in all respects limited by and subject to the
applicable terms of the Plan.
14. Governing Law. The interpretation, performance and enforcement of this
Agreement shall be governed by the laws of the State of California
without resort to that State's conflict-of-laws rules.
15. Conformity to Securities Laws. The Optionee acknowledges that the Plan
and this Agreement are intended to conform to the extent necessary
with all provisions of the Securities Act and the Exchange Act and any
and all regulations and rules promulgated by the Securities and
Exchange Commission thereunder, including without limitation Rule
16b-3. Notwithstanding anything herein to the contrary, the Plan shall
be administered, and the Option is granted and may be exercised, only
in such a manner as to conform to such laws, rules and regulations. To
the extent permitted by applicable law, the Plan and this Agreement
shall be deemed amended to the extent necessary to conform to such
laws, rules and regulations.
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SIGNATURE PAGE TO THE
INDEPENDENT DIRECTOR
STOCK OPTION AGREEMENT TERMS AND CONDITIONS
THE 2002 INCENTIVE AWARD PLAN
OF FILENET CORPORATION
3565 Harbor Boulevard, Costa Mesa, CA 92626
[First_Name] [Middle_Name] [Last_Name] [Address_Line_1]
[Address_Line_2]
[Address_Line_3]
Optionee's Tax ID #: [Extra_Field_1] [City] [State] [Zip_Code]
Effective ____________________ (the "Grant Date"), you have been granted a
Non-qualified Stock Option to buy an aggregate of [Shares_Granted] shares of
Common Stock of FileNET Corporation at an exercise price per share of
$[Option_Price]. This Option expires on _________________.*
*This Option will not vest and the expiration date will be sooner than shown
under certain circumstances, including your Termination from Directorship. See
the Stock Option Agreement Terms and Conditions.
You and the Company agree that these Options are granted under and governed by
the terms and conditions of the Stock Option Agreement Terms and Conditions,
which together with this Signature Page, are a binding agreement, and the Plan.
You acknowledge that you have read and understand the Stock Option Agreement
Terms and Conditions, this Signature Page, and the Plan, and that you understand
the terms and conditions of your Option grant, including the provisions
governing the vesting and termination of your Options, the exercise procedures,
and the other restrictions contained therein.
FILENET CORPORATION OPTIONEE
By: [First_Name] [Last_Name]
Its: