Back to GetFilings.com
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, 2003
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
corporation or organization Identification No.)
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 |_|
Indicate by check mark whether the Registrant is an accelerated filer as defined in Rule
12b-2 of the Securities Exchange Act of 1943:
Yes |X| No |_|
As of August 12, 2003, there were 36,496,332 shares of the Registrant's common stock
outstanding.
FILENET CORPORATION
Index
Page
Number
PART I. FINANCIAL INFORMATION.......................................... 3
Item 1. Unaudited Condensed Consolidated Financial Statements ........ 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 37
Item 4. Controls and Procedures........................................ 38
PART II. OTHER INFORMATION.............................................. 39
Item 1. Legal Proceedings.............................................. 39
Item 4. Submission of Matters to a Vote of Shareholders................ 39
Item 6. Exhibits and Reports on Form 8-K............................... 40
SIGNATURE ............................................................... 41
INDEX TO EXHIBITS............................................................. 42
2
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
FILENET CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
June 30, December 31,
2003 2002
ASSETS
Current assets:
Cash and cash equivalents $ 157,330 $ 130,154
Short-term investments 25,694 29,188
Accounts receivable, net 37,611 44,839
Inventories, net 1,919 2,568
Prepaid expenses and other current assets 15,201 13,317
Deferred income taxes 802 802
Total current assets 238,557 220,868
Property, net 30,883 34,641
Long-term investments 22,814 25,864
Goodwill 24,480 16,907
Intangible assets, net 8,606 3,029
Deferred income taxes 20,048 21,792
Other assets 3,929 4,935
Total assets $ 349,317 $ 328,036
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,074 $ 7,706
Customer deposits 4,611 2,962
Accrued compensation and benefits 18,213 20,729
Unearned maintenance revenue 51,348 38,945
Other accrued liabilities 14,237 15,224
Total current liabilities 95,483 85,566
Unearned maintenance revenue and other liabilities 2,584 3,565
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock - $0.10 par value; 7,000,000 shares
authorized; none issued and outstanding
Common stock - $0.01 par value; 100,000,000 shares
authorized; 37,464,825 shares issued and 36,366,825
shares outstanding at June 30, 2003; and
37,014,512 shares issued and 35,916,512 shares
outstanding at December 31, 2002 210,911 206,676
Retained earnings 55,966 53,178
Accumulated other comprehensive loss (1,060) (6,382)
Treasury stock, at cost; 1,098,000 shares (14,567) (14,567)
Net stockholders' equity 251,250 238,905
Total liabilities and stockholders' equity $ 349,317 $ 328,036
See accompanying notes to unaudited condensed consolidated financial statements.
3
FILENET CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
Revenue:
Software $ 33,555 $ 34,350 $ 69,077 $ 65,590
Customer support 41,164 37,281 79,862 73,844
Professional services and education 11,802 14,491 23,933 30,327
Hardware 596 2,105 1,294 4,707
Total revenue 87,117 88,227 174,166 174,468
Costs:
Software 3,608 2,674 6,616 4,755
Customer support 8,715 9,807 18,484 19,895
Professional services and education 10,335 13,187 21,415 26,642
Hardware 1,253 1,585 2,055 3,510
Total cost of revenue 23,911 27,253 48,570 54,802
Gross Profit 63,206 60,974 125,596 119,666
Operating expenses:
Sales and marketing 34,856 32,761 69,255 65,050
Research and development 19,680 18,924 38,982 36,229
In-process research and development - 400 - 400
General and administrative 8,326 8,605 16,152 16,793
Total operating expenses 62,862 60,690 124,389 118,472
Operating income 344 284 1,207 1,194
Other income, net 1,620 1,921 2,665 2,829
Income before income taxes 1,964 2,205 3,872 4,023
Provision for income taxes 512 471 1,084 925
Net income $ 1,452 $ 1,734 $ 2,788 $ 3,098
Earnings per share:
Basic $ 0.04 $ 0.05 $ 0.08 $ 0.09
Diluted $ 0.04 $ 0.05 $ 0.08 $ 0.08
Weighted-average shares outstanding:
Basic 36,173 35,543 36,057 35,452
Diluted 37,296 36,741 36,960 36,983
See accompanying notes to unaudited condensed consolidated financial statements.
4
FILENET CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30, .
2003 2002 2003 2002
Net income $ 1,452 $ 1,734 $ 2,788 $ 3,098
Other comprehensive income:
Foreign currency translation adjustments 3,363 5,401 5,360 4,991
Unrealized gains on securities:
Unrealized holding gains (28) 89 (38) 14
Total other comprehensive income 3,335 5,490 5,322 5,005
Comprehensive income $ 4,787 $ 7,224 $ 8,110 $ 8,103
See accompanying notes to unaudited condensed consolidated financial statements.
5
FILENET CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six Months Ended
June 30,
2003 2002
Cash flows from operating activities:
Net income $ 2,788 $ 3,098
Adjustments to reconcile net income to net cash
provided by operating activities:
Purchased in-process research and development - 400
Depreciation and amortization 9,937 10,724
Loss on sale of fixed assets 28 10
Provision for doubtful accounts 26 612
Deferred income taxes 1,731 9
Changes in operating assets and liabilities, net of
the effects of acquisition:
Accounts receivable 8,918 15,403)
Inventories 698 458
Prepaid expenses and other current assets 514 (3,969)
Accounts payable (1,188) 2,630
Accrued compensation and benefits 1,633 2,438
Customer deposits and advances (3,363) (983)
Unearned maintenance revenue 9,965 9,845
Income taxes payable (808) 886
Other (2,628) (5,015)
Net cash provided by operating activities 28,251 5,740
Cash flows from investing activities:
Capital expenditures (5,030) (6,506)
Proceeds from sale of property 66 40
Note receivable from officer - (1,900)
Cash paid for acquisition (8,073) (9,359)
Purchases of marketable securities (60,199) (73,497)
Proceeds from sales and maturities of marketable securities 64,305 55,100
Net cash used in investing activities (8,931) (36,122)
Cash flows from financing activities:
Proceeds from issuance of common stock 4,187 3,603
Principal payments on capital lease obligations - (854)
Net cash provided by financing activities 4,187 2,749
Effect of exchange rate changes on cash and cash equivalents 3,669 4,421
Net increase in cash and cash equivalents 27,176 (23,212)
Cash and cash equivalents, beginning of year 130,154 107,502
Cash and cash equivalents, end of period 157,330 84,290
Supplemental cash flow information:
Interest paid 32 51
Income taxes paid $ 2,638 $ 120
See accompanying notes to unaudited 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" or "FileNet") reflect all
adjustments (consisting of normal recurring adjustments) necessary to
present fairly the financial position of the Company at June 30, 2003, the
results of its operations, and its comprehensive operations for the three
and six months ended June 30, 2003 and 2002, and its cash flows for the six
months ended June 30, 2003 and 2002. 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 (the "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, contained in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002 filed with
the SEC on March 28, 2003. The results of operations for the interim
periods are not necessarily indicative of the operating results for the
year, or any other future period.
2. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 acquisition
of certain assets and certain liabilities of eGrail, Inc. in April 2002,
and the acquisition of Shana Corporation in April 2003 were 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 does not amortize 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.
On the first day of July of each year, goodwill will be tested for
impairment by determining if the carrying value of each reporting unit
exceeds its fair value. As of June 30, 2003, no impairment of goodwill has
been recognized. If estimates change, a materially different impairment
conclusion could result. The Company is currently testing for impairment
with results expected by late August 2003.
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
consolidated financial position and results of operations.
7
In July 2002, the FASB issued SFAS No. 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 Emerging Issues Task Force ("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 No. 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 No. 146 also
establishes that the liability should initially be measured and recorded at
fair value. The Company adopted the provisions of SFAS No. 146 for exit or
disposal activities initiated after December 31, 2002. The adoption of the
provisions of SFAS No. 146 in the three and six months ended June 30, 2003
did not have a material impact on the Company's consolidated results of
operations or financial position.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees and Indebtedness of Others," an
interpretation of FASB Statement Nos. 5, 57 and 107, and rescission of FIN
34, "Disclosure of Indirect Guarantees of Indebtedness of Others." FIN 45
elaborates on the disclosures to be made by the guarantor in its interim
and annual financial statements about its obligations under certain
guarantees that it has issued. It also requires that a guarantor recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The provisions related to
recognizing a liability at inception of the guarantee for the fair value of
the guarantor's obligations does not apply to product warranties or to
guarantees accounted for as derivatives. The initial recognition and
measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
while the disclosure requirements are effective for financial statements
for interim or annual periods ending after December 15, 2002. The adoption
of the recognition provisions of FIN 45 in the three and six months ended
June 30, 2003 did not have a material impact on the Company's consolidated
results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation Transition and Disclosure." This statement amends SFAS No.
123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The transition guidance and
annual disclosure provisions of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are
effective for financial reports containing financial statements for interim
periods beginning after December 15, 2002. The adoption of SFAS No. 148 did
not have a material impact on the Company's consolidated results of
operations or financial position.
8
The following table summarizes the Company's net income (loss) and net income
(loss) per share on a pro forma basis had compensation cost for the Company's
stock-based compensation plans been determined based on the provisions of SFAS
No. 123, for the three and six months ended June 30, 2003 and 2002:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share amounts) 2003 2002 2003 2002
Net income, as reported $ 1,452 $ 1,734 $ 2,788 $ 3,098
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects (2,062) (2,075) (4,101) (4,537)
Pro forma net loss (610) (341) (1,313) (1,439)
Earnings per share:
Basic earnings per share - as reported $ .04 $ .05 $ .08 $ .09
Basic earnings (loss) per share - pro forma (.02) (.01) (.04) (.04)
Diluted earnings per share - as reported .04 .05 .08 .08
Diluted earnings (loss) per share - pro forma $ (.02) $ (.01) $ (.04) $ (.04)
Pro forma compensation cost of shares issued under the Employee Qualified Stock
Purchase Plan is measured based on the discount from market value on the date of
purchase in accordance with SFAS No. 123. For purposes of computing pro forma
net income, we estimate the fair value of each option grant and employee stock
purchase plan right on the date of grant using the Black-Scholes option-pricing
model. The Black-Scholes option-pricing model was developed for use in
estimating the value of traded options that have no vesting restrictions and are
fully transferable, while the options issued by the Company are subject to both
vesting and restrictions on transfer. In addition, option-pricing models require
input of highly subjective assumptions including the expected stock price
volatility. The Company uses projected data for expected volatility and expected
life of its stock options based upon historical data.
The assumptions used to value the option grants and the purchase rights are
stated as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Expected life (in years) 2 to 5 2 to 5 2 to 5 2 to 5
Expected volatility 64% 78% 64 - 66% 75 - 78%
Risk free interest rates 1.63 to 4.36% 3.58 to 5.28% 1.63 to 4.76% 2.16 to 5.28%
Expected dividend 0% 0% 0% 0%
9
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." In general, a variable interest entity is a corporation, partnership,
trust, or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to support its
activities. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company
does not have any variable interest entities as of June 30, 2003. The adoption
of FIN 46 did not have a material impact on the Company's consolidated results
of operations or its financial position.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 (1) clarifies under
what circumstances a contract with an initial net investment meets the
characteristic of a derivative discussed in paragraph 6(b) of Statement 133, (2)
clarifies when a derivative contains a financing component, (3) amends the
definition of an underlying derivative to conform it to language used in FIN 45,
and (4) amends certain other existing pronouncements, which will collectively
result in more consistent reporting of contracts as either derivatives or hybrid
instruments. SFAS No. 149 is effective for contracts and hedging relationships
entered into or modified after June 30, 2003. The Company does not believe that
the adoption of SFAS No. 149 will have a material impact on its consolidated
financial statements.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both debt and equity and requires
an issuer to classify the following instruments as liabilities in its balance
sheet:
o a financial instrument issued in the form of shares that is
mandatorily redeemable and embodies an unconditional obligation that
requires the issuer to redeem it by transferring its assets at a
specified or determinable date or upon an event that is certain to
occur;
o a financial instrument, other than an outstanding share, that embodies
an obligation to repurchase the issuer's equity shares, or is indexed
to such an obligation, and requires the issuer to settle the
obligation by transferring assets; and
o a financial instrument that embodies an unconditional obligation that
the issuer must settle by issuing a variable number of its equity
shares if the monetary value of the obligation is based solely or
predominantly on (1) a fixed monetary amount, (2) variations in
something other than the fair value of the issuer's equity shares, or
(3) variations inversely related to changes in the fair value of the
issuer's equity shares.
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003 and is effective for all other financial instruments as of
the first interim period beginning after June 15, 2003. SFAS No. 150 is to be
implemented by reporting the cumulative effect of a change in accounting
principle. The Company does not expect the adoption of SFAS No. 150 to have a
material impact on its consolidated financial statements
Reclassifications. Certain reclassifications have been made to prior-years'
balances to conform to the current-year's presentation.
10
3. ACQUISITIONS
On April 2, 2002, the Company acquired certain assets and assumed certain
liabilities of eGrail, Inc. ("eGrail"), a Web content management company.
This strategic acquisition provides additional Web Content Management
("WCM") software application capabilities that expand the Company's
position in the Enterprise Content Management ("ECM") market, which
contributed to the purchase price that resulted in goodwill. The purchase
price for the acquisition consisted of $9.0 million in cash consideration
and direct acquisition costs of $359,000.
On April 2, 2003, the Company completed a stock purchase acquisition of
Shana Corporation ("Shana"), an electronic forms management company. This
strategic acquisition provides technology and experience to expand the
Company's ECM offering with Enterprise Forms Management capability, which
contributed to the purchase price and resulted in goodwill. The purchase
price for the acquisition consisted of $8.55 million in cash, less $938,000
of acquired cash consideration, plus $184,000 in acquisition expenses and
$277,000 paid for Non-Compete Agreements.
In accordance with SFAS No. 141, "Business Combinations," these
acquisitions were accounted for under the purchase method of accounting.
The purchase price was allocated as follows:
eGrail, Inc. Shana Corp.
April 2, 2002 April 2, 2003
(In thousands)
Net tangible assets $ 581 $ 2,725
Patents 24 -
Acquired technology 3,300 4,000
Technical manuals and design documents - 600
Customer maintenance relationships - 800
In-process research and development 400 -
Non-Compete Agreements - 277
Liabilities assumed (739) (2,494)
Goodwill 5,793 3,103
Total purchase price $ 9,359 $ 9,011
Less cash acquired - (938)
Net cash paid $ 9,359 $ 8,073
The Company allocated the purchase price of these acquisitions based on
fair value. Statement of Financial Accounting Concepts No. 7 defines fair
value as the amount at which an asset (or liability) could be bought or
sold in a current transaction between willing parties, that is, other than
in a forced or liquidation sale.
The valuation of the eGrail assets included $400,000 of in-process research
and development, which 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 WCM 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 12-month period. As of March 31,
2003 the project was complete and the Company incurred approximately $4.8
million 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. The remaining purchase price of $6.0 million was primarily
allocated to tangible assets and goodwill. Goodwill is tax deductible for
this asset purchase.
11
The valuation of Shana resulted in acquired technology, technical manuals
and design documents, and customer maintenance relationships. Since Shana
had recently completed Version 4.1 of its eForms product, there was no in-
process research and development underway at the time of the acquisition.
Shana's technology manuals and design documents are the "roadmaps" for the
eForms technology and will be used by FileNet product development.
Recurring maintenance revenues are expected and estimable for Shana's
customers based on the older and newer versions of eForms technology. The
acquired technology of $4.0 million, the technical manuals and design
documents of $600,000, and the customer maintenance relationships of
$800,000 were assigned a useful life of five years. The remaining purchase
price of $3.6 million was allocated primarily to goodwill. In accordance
with SFAS No. 142, goodwill for both acquisitions will not be amortized but
will be reviewed for impairment on an annual basis in July. (This
evaluation is currently underway with an estimated completion date in late
August.) Although the goodwill stemming from the Shana stock purchase is
non-deductible for Canadian tax purposes, a Section 338(g) election will
result in the reduction of taxable income for U.S. tax purposes on this
transaction.
Actual results of operations of the acquired eGrail business, as well as
assets and liabilities of the acquired eGrail business, are included in the
unaudited condensed consolidated financial statements from the date of
acquisition. The pro forma results of operations data for the six-month
period ended June 30, 2003 and 2002 presented below assumes that the eGrail
acquisition had been made at the beginning of fiscal 2002. 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 acquisition taken place at the
beginning of fiscal 2002. No pro forma information has been presented for
the Shana acquisition, as the result did not have a material impact on the
financial statements of the company during the reporting period.
Six Months Ended
June 30,
2003 Actual 2002 Pro Forma
(in thousands)
Revenue $ 174,166 $ 175,220
Net income 2,788 1,245
Earnings per share:
Basic $ .08 $ .04
Diluted $ .08 $ .03
4. GOODWILL AND PURCHASED INTANGIBLE ASSETS
In acquisitions accounted for using the purchase method, goodwill is
recorded for 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. SFAS No. 142 requires a periodic
review of goodwill and indefinite life intangibles for possible impairment.
Intangible assets with definite lives must be amortized over their
estimated useful lives. Shana goodwill and intangible assets were recorded
on our Canadian subsidiary and a portion of the goodwill and intangible
assets for previous acquisitions was allocated to our Ireland subsidiary.
This results in foreign exchange translation fluctuation. The following
table represents the balance of goodwill as of December 31, 2002 and the
changes in goodwill for the six months ended June 30, 2003:
12
Goodwill (in thousands)
Balance as of December 31, 2002 $ 16,907
Goodwill acquired during the period 3,103
Adjustments 3,498
Foreign currency gain 972
Balance as of June 30, 2003 $ 24,480
Other adjustments to goodwill included $1.7 million for the write-off of a
prepaid royalty and the recognition of a $1.7 million deferred tax asset.
Prior to the Shana acquisition, FileNet licensed the eForms technology from
Shana under an agreement that resulted in a prepaid royalty. The remaining
balance of this prepaid royalty fee was considered additional investment in
Shana and was allocated to goodwill. A deferred tax asset was recorded
under purchase accounting for the estimated future tax effects of the
identified intangibles with a corresponding entry to goodwill of $1.7
million.
Acquired technology, technical manuals and design documents, customer
maintenance relationships, non-compete agreements and patents are the
Company's only intangible assets subject to amortization under SFAS No.
142. These assets were recorded in connection with the acquisition of
asstes of eGrail in April 2002 and the acquisition of Shana in April 2003,
and are comprised of the following as of December 31, 2002 and June 30,
2003:
Intangible Assets Subject to Amortization
Foreign
Balance as of December 31, 2002 Accumulated Currency
(in thousands) Gross Amortization Fluctuation Net
Acquired technology and Other Intangibles $ 3,468 $ (532) $ 79 $ 3,015
Non-compete agreements - - - -
Patents 25 (12) 1 14
Total $ 3,493 $ (544) $ 80 $ 3,029
Intangible Assets Subject to Amortization
Foreign
Balance as of June 30, 2003 Accumulated Currency
(in thousands) Gross Amortization Fluctuation Net
Acquired technology and Other Intangibles $ 8,868 $ (1213) $ 673 $ 8,328
Non-compete agreements 277 (29) 24 272
Patents 25 (21) 2 6
Total $ 9,170 $ (1,263) $ 699 $ 8,606
13
Acquired technology, technical manuals and design documents, and customer
maintenance relationships are being amortized over a useful life of five
years, patents are being amortized over a useful life of two years, and the
non-compete agreements are being amortized between two and three years.
Amortization expense for amortizing intangible assets was $494,000 and
$677,000 for the three and six months ended June 30, 2003, and $168,000 for
the three and six months ended June 30, 2002. Estimated future amortization
expense (excluding foreign exchange effect) of purchased intangible assets
as of June 30, 2003 is as follows (in thousands):
Fiscal Year Amount
2003 (remaining 6 months) $ 1,017
2004 2,024
2005 1,990
2006 1,926
2007 1,356
2008 293
Total Amortization Expense $ 8,606
5. EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income 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 number of dilutive
options excluded from the basic EPS calculation for the three and six
months ended June 30, 2003 were 1,123,000 and 903,000 shares, compared to
1,198,000 and 1,531,000 for the comparable periods in 2002. The following
table sets forth the computation of basic and diluted earnings per share
for the three and six months ended June 30, 2003 and 2002:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(in thousands, except per share amounts)
Net Income $ 1,452 $ 1,734 $ 2,788 $ 3,098
Shares used in computing 36,173 35,543 36,057 35,452
basic earnings per share
Dilutive effect of stock plans 1,123 1,198 903 1,531
Shares used in computing
diluted earnings per share 37,296 36,741 36,960 36,983
Earnings per basic share $ 0.04 $ 0.05 $ 0.08 $ 0.09
Earnings per diluted share $ 0.04 $ 0.05 $ 0.08 $ 0.08
14
6. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss for the six months ended June 30, 2003
is comprised of the following:
Foreign Unrealized Accumulated
Currency Holding Other
Translation Gain Comprehensive
Adjustment (Loss) (Loss)
(in thousands)
Balance, December 31, 2002 (6,448) 66 (6,382)
Six month period changes 5,360 (38) 5,322
Balance, June 30, 2003 (1,088) 28 (1,060)
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,
Business Process and Forms Management software products. The Customer
Support segment provides after-sale support for software, as well as
providing software upgrades when and if available 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 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 is not
the same as generally accepted accounting principles 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.
15
Operating segments data for the three and six months ended June 30, 2003
and 2002 are as follows:
Three months ended Six months ended
June 30, June 30,
(in thousands) 2003 2002 2003 2002
Software
Revenue $ 33,555 $ 34,350 $ 69,077 $ 65,590
Operating loss (16,220) (11,307) (29,221) (22,027)
Customer Support
Revenue $ 41,164 $ 37,281 $ 79,862 $ 73,844
Operating income 17,792 12,710 32,961 24,527
Professional Services and Education
Revenue $ 11,802 $ 14,491 $ 23,933 $ 30,327
Operating loss (566) (1,167) (1,488) (1,500)
Hardware
Revenue $ 596 $ 2,105 $ 1,294 $ 4,707
Operating income (loss) (662) 48 (1,045) 194
Total
Revenue $ 87,117 $ 88,227 $ 174,166 $ 174,468
Operating income 344 284 1,207 1,194
8. STOCK OPTIONS
The following is a summary of stock option transactions regarding all stock
option plans for the three months ended June 30, 2003:
Weighted-Average
Number of Exercise
Options Price
Balance, March 31, 2003 8,735,984 $ 15.10
Granted (weighted-average fair value of $6.95) 128,650 14.61
Exercised (217,710) 9.43
Canceled (59,461) 17.48
Balance, June 30, 2003 8,587,463 $ 15.22
16
The following table summarizes information concerning outstanding and
exercisable stock options at June 30, 2003:
Options Outstanding Options Exercisable
Weighted-Average
Remaining Weighted-Average Weighted-Average
Range of Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Exercisible Price
1.39 - 9.00 1,585,576 4.39 $ 8.00 1,585,076 $ 8.00
9.17 - 12.86 1,795,037 7.77 11.91 581,627 10.66
12.97 - 14.19 1,687,022 7.85 13.48 735,289 13.61
14.39 - 18.45 1,566,425 7.62 16.69 799,737 16.60
19.53 - 25.28 1,444,781 6.87 22.89 1,137,067 23.02
26.09 - 41.84 508,622 6.02 28.89 432,906 28.97
1.39 - 41.84 8,587,463 6.52 $ 13.51 5,271,702 $ 12.96
Reference Note No. 2 regarding SFAS No. 148, "Accounting for Stock-Based
Compensation Transition and Disclosure."
9. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its corporate offices, sales offices, development and
manufacturing facilities, and other equipment under non-cancelable
operating leases, some of which have renewal options and generally provide
for escalation of the annual rental amount. Amounts related to deferred
rent are recorded in other accrued liabilities on the consolidated balance
sheet. Future annual minimum lease payments under all non-cancelable
operating leases with an initial term in excess of one year as of June 30,
2003 were as follows:
(in thousands)
2003 (remaining 6 months) $ 5,407
2004 12,553
2005 10,871
2006 10,004
2007 9,101
2008 7,370
Thereafter 6,732
Total $ 62,038
Product Warranties
The Company provides a 90-day warranty for its hardware products against
defects in materials and workmanship and for its software products against
substantial nonconformance to the published documentation at time of
delivery. For hardware products the Company accrues warranty costs based on
historical trends in product return rates and the expected material and
labor costs to provide warranty services. For software products, the
Company records the estimated cost of technical support during the warranty
period. A provision for these estimated warranty costs is recorded at the
17
time of sale or license. If the Company were to experience an increase in
warranty claims compared with historical experience, or costs of servicing
warranty claims were greater than the expectations on which the accrual had
been based, gross margins could be adversely affected.
The following table represents the warranty activity and balance for the
six months ended June 30, 2003 and 2002:
(in thousands) 2003 2002
Beginning balance at January 1 $ 728 $ 772
Additions 396 543
Deductions (636) (647)
Ending balance at June 30 $ 488 $ 668
Guarantees and Indemnities
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." The initial recognition and initial measurement
provisions apply on a prospective basis to guarantees issued or modified
after December 15, 2002. The disclosure requirements are effective for
financial statements of interim and annual periods ending after December
15, 2002.
The Company has made guarantees and indemnifications, under which it may be
required to make payments to a guaranteed or indemnified party, in relation
to certain transactions. In connection with the sales of its products, the
Company provides intellectual property indemnities to its customers.
Guarantees and indemnities to customers in connection with product sales
and service generally are subject to limits based upon the amount of the
related product sales or service. Payment by the Company is conditioned
upon the other party filing a claim pursuant to the terms and conditions of
the agreement. The Company may challenge this claim and may also have
recourse against third parties for certain payments made by the Company.
Predicting the maximum potential future payment under these agreements is
not possible due to the unique facts and circumstances involved with each
agreement. Historically, the Company has made no payments under these
agreements. The fair value of guarantees issued during the six months ended
June 30, 2003 is insignificant.
In connection with certain facility leases and other performance
guarantees, the Company has guaranteed payments on behalf of some of its
subsidiaries. To provide subsidiary guarantees, the Company obtains
unsecured bank guarantees from local banks. These bank guarantees totaled
an equivalent of approximately $1.3 million issued in local currency in
Europe and Asia as of June 30, 2003. Approximately $0.4 million of the $1.3
million is secured by cash deposit.
The Company indemnifies its directors and officers to the maximum extent
permitted under the laws of the State of Delaware.
There have been no modifications or new guarantees issued during the first
half of fiscal year 2003. The Company has not recorded a liability for the
guarantees and indemnities described above in the accompanying consolidated
balance sheet and the maximum amount of potential future payments under
such guarantees and indemnities is not determinable, other than as
described above. The Company's product warranty liability as of June 30,
2003 is disclosed in this item under the heading "Product Warranties."
18
10. LEGAL PROCEEDINGS
In the normal course of business, the Company is subject to ordinary
routine litigation and claims incidental to business. While the results of
litigation and claims cannot be predicted with certainty, management
believes that the final outcome of these matters will not have a materially
adverse effect on the Company's consolidated results of operations or
financial condition.
11. FOREIGN CURRENCY TRANSACTIONS
As of June 30, 2003, the Company had forward foreign exchange contracts
outstanding totaling approximately $ 2.1 million in 10 currencies. These
contracts were 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, 2003.
12. RELATED-PARTY TRANSACTIONS
In July 2001, the Compensation Committee of the Company's Board of
Directors (the "Board") 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. As of June 30, 2003, FileNet has 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 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. Accrued interest
as of June 30, 2003 was approximately $21,000. 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. Imputed interest for the
difference between the stated interest rate of the note and a fair value
interest rate of 7% was recorded as compensation expense and a discount
that is being amortized over the term of the note to interest income using
the effective interest method. The loan to Mr. Roberts is permitted under
Section 13 of the Securities Exchange Act of 1934, as amended by Section
402 of the Sarbanes-Oxley Act on July 30, 2002, because it was outstanding
on that date. However, its terms cannot be renewed or materially modified
in the future.
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, who acted as financial advisor to eGrail in connection with our
acquisition of assets from eGrail and was paid approximately $500,000 by
eGrail. Accordingly, John Savage recused himself from all discussions
related to the acquisition between FileNet and eGrail and abstained from
voting on the transaction.
19
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 and 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. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates," "may," "will" and variations of these words or
similar expressions are intended to identify forward-looking statements. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances, including any underlying
assumptions, are forward-looking statements. These statements are not guarantees
of future performance and are subject to risks, uncertainties and assumptions
that are difficult to predict. Therefore, our actual results could differ
materially and adversely from those expressed in any forward-looking statements
as a result of various factors. 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 under the
heading "Risk Factors That May Affect Future Results" 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, 2002. Our
filings with the Securities and Exchange Commission, including our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K and amendments to those filings, pursuant to Sections 13(a) and 15(d) of the
Securities Exchange Act of 1934, are available free of charge at
www.filenet.com, when such reports are available at the Securities and Exchange
Commission Web site.
Overview
FileNet Corporation develops, markets, sells and supports Enterprise Content
Management ("ECM") software to enable organizations to improve operational
efficiency and leverage their content, process and connectivity resources to
make decisions faster. In the first quarter of 2003, we introduced FileNet P8,
our new architecture that provides a unified platform and framework for ECM. The
FileNet P8 architecture is designed to provide an integrated solution for our
customers to easily configure, design, build and deploy a variety of
enterprise-wide ECM applications to meet a broad range of content management
needs within a single scalable framework. 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.
Critical Accounting Policies and Estimates
The consolidated financial statements of FileNet are prepared 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 revenue and expenses during the reporting period. Actual
amounts could differ from estimates. The significant accounting policies we
believe are most critical to aid in fully understanding and evaluating our
reported financial results include the following:
20
Revenue Recognition. FileNet accounts for the licensing of software in
accordance with the American Institute of Certified Accountants ("AICPA")
Statement of Position ("SOP") 97-2, "Software Revenue Recognition." We enter
into contracts for the sale of our products and services. The majority of these
contracts relate to single elements and contain standard terms and conditions.
However, there are agreements that contain multiple elements or non-standard
terms and conditions. Contract interpretation is sometimes required to determine
the appropriate accounting, including how the price should be allocated among
the deliverable elements and when to recognize revenue.
Software license revenue generated from sales through direct and indirect
channels, which do not contain multiple elements, are recognized upon shipment
and passage of title of the related product, if the requirements of SOP 97-2,
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 these elements are known or resolved. Fees are deemed to be
fixed and determinable for transactions with a set price that is not subject to
refund or adjustment and payment is due within 90 days from the invoice date.
Software license revenue from channel partners is recognized when the product is
shipped and sale by the channel partner to a specified end user is confirmed.
For arrangements with multiple elements, we allocate revenue to each element of
a transaction based upon its fair value as determined in reliance on vendor
specific objective evidence. This evidence of fair value for all elements of an
arrangement is based on the normal pricing and discounting practices for those
products and services when sold separately. If fair value of any undelivered
element cannot be determined objectively, we defer the revenue until all
elements are delivered, services have been performed or until fair value can
objectively be determined.
Customer support contracts are renewable on an annual basis and provide
after-sale support for our software, as well as software upgrades under the
Company's right to new versions program, on a when-and-if-available basis.
Revenue from post-contract customer support is recognized ratably over the term
of the arrangement, which is typically 12 months.
Professional services revenue consists of consulting and implementation services
provided to end users of our software products and technical consulting services
provided to our resellers. Consulting engagements average from one to three
months. We do not make changes to the standard software code in the field.
Revenue from these services and from training classes is recognized as such
services are delivered and accepted by the customer. Revenue and cost is
recognized using the percentage-of-completion method for fixed-price consulting
contracts. However, revenue and profit are subject to revision as the contract
progresses and anticipated losses on fixed-price professional services contracts
are recognized in the period when they become known.
Allowance for Doubtful Accounts and Sales Returns. 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 constantly
monitor collections from our customers and maintain an allowance for estimated
credit losses that is based on historical experience and on specific customer
collection issues. While credit losses have historically been within our
expectations and the provisions established in our financial statements, 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
consolidated financial position. Based on historical experience, we also
maintain a sales return allowance for the estimated amount of potential returns.
21
While product returns have historically been minimal and within our expectations
and the allowances established by us, we cannot guarantee that we will continue
to experience the same return rates that we have in the past.
Goodwill and Other Intangible Assets. Goodwill is recorded at cost and is not
amortized. 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. On the first day of July of each year, goodwill will be
tested for impairment by determining if the carrying value of each reporting
unit exceeds its fair value. We also periodically evaluate whether events and
circumstances have occurred which indicate that the carrying value of goodwill
may not be recoverable. As of June 30, 2003, no impairment of goodwill has been
recognized. If estimates change, a materially different impairment conclusion
could result.
Long-Lived Assets. Property, plant and equipment, intangible assets, and
capitalized software costs are recorded at cost less accumulated depreciation or
amortization. They are amortized using the straight-line method over estimated
useful lives of generally three to six years. The determination of useful lives
and whether or not these assets are impaired involves judgment and are reviewed
for impairment whenever events or circumstances indicate that the carrying
amount of such assets may not be recoverable. We evaluate the carrying value of
long-lived assets and certain identifiable intangible assets for impairment of
value based on undiscounted future cash flows resulting from the use of the
asset and its eventual disposition. While we have not experienced impairment of
intangible assets in prior periods, we cannot guarantee that there will not be
impairment in the future.
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. Conversely, if the Company continues to generate profits and
ultimately determines that it is more likely than not that all or a portion of
the remaining deferred tax assets will be utilized to offset future taxable
income, the valuation allowance could be decreased or eliminated all together,
thereby resulting in a substantial decrease to our effective tax rate and an
increase to additional paid in capital.
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.
22
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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Revenue:
Software 38.5% 38.9% 39.7% 37.6%
Customer support 47.3 42.3 45.9 42.3
Professional services and education 13.5 16.4 13.7 17.4
Hardware .7 2.4 .7 2.7
Total Revenue 100.0 100.0 100.0 100.0
Cost of revenue:
Software 4.1 3.0 3.8 2.7
Customer support 10.0 11.1 10.6 11.4
Professional services and education 11.9 15.0 12.3 15.3
Hardware 1.4 1.8 1.2 2.0
Total cost of revenue 27.4 30.9 27.9 31.4
Gross Profit 72.6 69.1 72.1 68.6
Operating expenses:
Sales and marketing 40.0 37.1 39.8 37.3
Research and development 22.6 21.4 22.4 20.8
In-process research and development - .5 - .2
General and administrative 9.6 9.8 9.2 9.6
Total operating expenses 72.2 68.8 71.4 67.9
Operating income .4 .3 .7 .7
Other income, net 1.9 2.2 1.5 1.6
Income before income tax 2.3% 2.5% 2.2% 2.3%
23
Revenue
Total revenue for the three months ended June 30, 2003 was $87.1 million
compared to $88.2 million for the three months ended June 30, 2002, a decrease
of $1.1 million, or 1%. Total revenue for the six months ended June 30, 2003 was
$174.2 million compared to $174.5 million for the six months ended June 30,
2002, a decrease of $0.3 million or less than 1%. International revenue for the
three and six months ended June 30, 2003 was 34% and 33% of total revenue,
compared to 27% and 28% for the three and six months ended June 30, 2002. As
more fully discussed and explained below, total revenue remained essentially the
same between comparable six-month periods as increases in software and customer
support revenue were offset by decreases in professional services and hardware
revenue. The unchanged revenue level during the first half of 2003, as compared
to the same period in 2002, is indicative of the continuing difficult
information technology-spending environment.
Software: Software revenue consists of fees earned from the licensing of our
software products to customers. Software revenue decreased $0.8 million, or 2%,
to $33.6 million for the three months ended June 30, 2003, from $34.4 million
for the three months ended June 30, 2002. Software revenue increased $3.5
million, or 5%, to $69.1 million for the six months ended June 30, 2003, from
$65.6 million for the three months ended June 30, 2002. Software revenue
represented 39% of total revenue for the three months ended June 30, 2003 and
for the comparable period of 2002. Software revenue represented 40% of total
revenue for the six months ended June 30, 2003 compared to 38% for the
comparable period of 2002.
Software revenue for the three months ended June 30, 2003 was comparable to the
same period in 2002 and software revenue for the six months ended June 30, 2003
increased 5% compared to the six months ended June 30, 2002. Some of the factors
contributing to this increase include a slight increase in our average selling
price and further penetration of our existing customer base. We believe that
enterprise content management will continue to be a corporate priority over the
immediate term. The current economic environment is still very uncertain
however, and any reduction in information technology spending could have a
negative effect on our software revenue growth.
Customer Support: Customer support revenue consists of revenue from software
maintenance contracts, "fee for service" revenue and the sale of spare parts and
supplies. Customer support revenue increased $3.9 million, or 10%, to $41.2
million for the three months ended June 30, 2003 from $37.3 million for the
three months ended June 30, 2002. Customer support revenue increased $6.1
million, or 8%, to $79.9 million for the six months ended June 30, 2003 from
$73.8 million for the six months ended June 30, 2002. Customer support revenue
represented 47% of total revenue for the three months ended June 30, 2003
compared to 42% for the comparable period of 2002. Customer support revenue
represented 46% of total revenue for the six months ended June 30, 2003 compared
to 42% for the comparable period of 2002.
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 and add-on
customer software sales made during the reporting period. Additionally, the
Company has experienced a high rate of renewal on maintenance contracts from its
customer base. However, over time the growth rate for customer support revenue
is dependent on the Company's success in achieving software revenue growth. The
occurrence of a prolonged economic slowdown, or other factors that negatively
impact software revenue growth, would result in a reduced future growth rate for
customer support revenue.
Professional Services and Education: 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.
24
Professional services are performed on a time and material basis or fixed price
contract. Professional services and education revenue decreased $2.7 million, or
19%, to $11.8 million for the three months ended June 30, 2003 from $14.5
million for the three months ended June 30, 2002. Professional services and
education revenue decreased $6.4 million, or 21%, to $23.9 million for the six
months ended June 30, 2003 from $30.3 million for the six months ended June 30,
2002. Professional services and education revenue represented 14% of total
revenue for the three months ended June 30, 2003 compared to 16% for the
comparable period in 2002. Professional services and education revenue
represented 14% of total revenue for the six months ended June 30, 2003 compared
to 17% for the comparable period in 2002.
Professional services revenue is dependent on the level and the nature of
software sales over time. Generally, software sales for new system
implementations will generate larger professional service consulting engagements
than sales of additional licenses to existing customer installations. In recent
quarters, we have experienced relatively level software revenue characterized by
repeat purchases for additional software licenses with fewer large-scale
software installations. These factors have adversely impacted professional
services revenue resulting in fewer and smaller consulting engagements. The
aforementioned, coupled with pricing pressures, have reduced professional
services and education revenue, and we do not expect a significant improvement
in the near future.
Hardware: Hardware revenue is generated primarily from the sale of 12-inch
Optical Storage And Retrieval ("OSAR") libraries. Hardware revenue decreased
$1.5 million, or 72%, to $0.6 million for the three months ended June 30, 2003
from $2.1 million for the three months ended June 30, 2002. Hardware revenue
decreased $3.4 million, or 73%, to $1.3 million for the six months ended June
30, 2003 from $4.7 million for the six months ended June 30, 2002. Hardware
revenue represented slightly less than 1% of total revenue for the three months
ended June 30, 2003, compared to 2% for the comparable period of 2002. Hardware
revenue represented less than 1% of total revenue for the six months ended June
30, 2003, compared to 3% for the comparable period of 2002. The decline in
hardware revenue reflects that hardware is not a strategic focus for us, and we
expect hardware revenue to continue to decrease in the future.
Cost of Revenue
Total cost of revenue decreased $3.4 million, or 12%, to $23.9 million for the
three months ended June 30, 2003, from $27.3 million for the comparable period
in 2002. Total cost of revenue decreased $6.2 million, or 11%, to $48.6 million
for the six months ended June 30, 2003, from $54.8 million for the comparable
period in 2002. The decrease for the three and six month comparisons is
primarily due to the decrease in the cost of professional services and education
revenue and hardware revenue as more fully discussed below.
Software: Cost of software revenue includes royalties paid to third parties,
amortization expense for acquired technology and other intangible assets,
partner commissions, software media costs, and the cost to manufacture and
distribute software. The cost of software revenue increased $0.9 million, or
35%, to $3.6 million for the three months ended June 30, 2003 from $2.7 million
for the three months ended June 30, 2002. The cost of software revenue increased
$1.8 million, or 39%, to $6.6 million for the six months ended June 30, 2003
from $4.8 million for the six months ended June 30, 2002. The costs of software
revenue represented 11% and 8% of the related software revenue for the three
months ended June 30, 2003 and June 30, 2002, respectively. The costs of
software revenue represented 10% and 7% of the related software revenue for the
six months ended June 30, 2003 and June 30, 2002, respectively.
The increase in software cost of revenue for the three and six-month periods of
2003, as compared to the same periods in 2002, is due primarily to higher
partner commission expense and the additional amortization expense of acquired
25
technology and other intangible assets associated with the acquisition of assets
from eGrail in April 2002 and the stock of Shana in April 2003. We anticipate cost
of software revenue as a percentage of software revenue to remain comparable to
historical levels in future periods, however additional technology acquisitions
or unexpected increases in third party royalty costs could increase software
cost of revenue in the future.
Customer Support: 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 $1.1
million, or 11%, to $8.7 million for the three months ended June 30, 2003 from
$9.8 million for the three months ended June 30, 2002. The cost of customer
support revenue decreased $1.4 million, or 7%, to $18.5 million for the six
months ended June 30, 2003 from $19.9 million for the six months ended June 30,
2002. These costs represented 21% and 26% of the related customer support
revenue for the three months ended June 30, 2003 and 2002, respectively. These
costs represented 23% and 27% of the related customer support revenue for the
six months ended June 30, 2003 and 2002, respectively.
The decrease in cost of customer support revenue for the three and six months
ended June 30, 2003 compared to the same period in 2002 is primarily
attributable to lower variable compensation expense and lower supplies cost. The
decrease in cost of customer support revenue as a percentage of customer support
revenue was primarily due to automation and process improvements that allowed
growth in the customer and revenue base without a proportional increase in
support personnel and cost. Going forward, we expect customer support cost of
revenue to remain relatively stable in the near term.
Professional Services and Education: 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 $2.9 million, or 22%, to $10.3 million
for the three months ended June 30, 2003 from $13.2 million for the three months
ended June 30, 2002. The cost of professional services and education revenue
decreased $5.2 million, or 20%, to $21.4 million for the six months ended June
30, 2003 from $26.6 million for the six months ended June 30, 2002. These costs
represented 88% and 91% of the related professional services and education
revenue for the three months ended June 30, 2003 and 2002, respectively. These
costs represented 89% and 88% of the related professional services and education
revenue for the six months ended June 30, 2003 and 2002, respectively.
The decrease in cost of professional services and education revenue in 2003
compared to 2002 was primarily attributable to a reduction in the use of
third-party independent consultants, as well as lower variable compensation
expense; all directly related to the decrease in professional services and
education revenue. 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 the use of internal resources and third-party independent consultants.
Hardware: 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 $0.3
million, or 21%, to $1.3 million for the three months ended June 30, 2003 from
$1.6 million for the three months ended June 30, 2002. The cost of hardware
revenue decreased $1.4 million, or 41%, to $2.1 million for the six months ended
June 30, 2003 from $3.5 million for the six months ended June 30, 2002. These
costs represented 210% and 75% of the related hardware revenue for the three
months ended June 30, 2003 and 2002, respectively. These costs represented 159%
and 75% of the related hardware revenue for the six months ended June 30, 2003
and 2002, respectively.
The decrease in costs of revenue is directly related to the decrease in sales of
OSAR library products. The increase in costs as a percentage of sales reflects
the fixed operating costs relative to reduced sales volume. As we have discussed
previously, this operating segment is not a strategic focus for us.
26
Operating Expenses
Research and Development: Research and development expense primarily consists of
costs of personnel to support product development. Research and development
expense increased $0.8 million to $19.7 million, or 4%, for the three months
ended June 30, 2003 from $18.9 million for the three months ended June 30, 2002,
and represented 23% and 21% of total revenue for these respective periods.
Research and development expense increased $2.7 million to $39.0 million, or 8%,
for the six months ended June 30, 2003 from $36.3 million for the six months
ended June 30, 2002, and represented 22% and 21% of total revenue for these
respective periods. The increase year over year in the first half of 2003 is
primarily the result of increased headcount resulting in higher compensation,
benefits and relocation costs related to the eGrail and Shana acquisitions in
April of 2002 and 2003, respectively. This increase was partially offset by a
decrease in variable compensation expense. Research and development headcount
for the three and six month periods ending June 2003 was 455 and 472, compared
to 430 and 461 for the same periods in 2002, respectively. We expect research
and development expense to be at approximately 22% of revenue in the near-term
due to the continuing enhancement of ECM capabilities.
Our research and development efforts are focused on enhancing our ECM
capabilities within the FileNet P8 product line and maintaining legacy products.
These efforts will focus on enhancements to our FileNet P8 platform, Business
Process Management, Web Content Management and the development of integrated
records management and other capabilities. We intend to complement internal
development with third-party software through OEM agreements and may execute
additional technology acquisitions. We expect that competition for qualified
technical personnel will remain intense 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 higher than normal percentage of total revenue, as
compared to our competitors, in the near term.
Sales and Marketing: Sales and marketing expense consists primarily of salaries
and benefits, sales commissions and other expenses related to the direct and
indirect sales force, various marketing expenses and the cost of other market
development programs. Sales and marketing expense increased $2.1 million to
$34.9 million, or 6%, for the three months ended June 30, 2003 from $32.8
million for the three months ended June 30, 2002, and represented 40% and 37% of
total revenue for these respective periods. Sales and marketing expense
increased $4.2 million to $ 69.3 million, or 6%, for the six months ended June
27
30, 2003 from $65.1 million for the six months ended June 30, 2002, and
represented 40% and 37% of total revenue for these respective periods.
The increase in 2003 was primarily due to investment in our sales and marketing
capabilities that include targeted contact and campaign management for specific
industries, and channel partner development expenses associated with the launch
of our FileNet P8 ECM product that occurred in the first half of 2003. This
increase was partially offset by reduced commissions and variable compensation
expense. We expect marketing and sales expense to be at approximately 39% of
revenue in the near-term due to the continuing investment in demand generation
capabilities for targeted customers through our direct and indirect sales
channels.
General and Administrative: General and administrative expense consists
primarily of personnel costs for finance, information technology, legal, human
resources and general management, and the cost of outside professional services.
General and administrative expense decreased $0.3 million to $8.3 million, or
3%, for the three months ended June 30, 2003 from $8.6 million for the three
months ended June 30, 2002, and represented 10% of total revenue for these
respective periods. General and administrative expense decreased $0.6 million to
$16.2 million, or 4%, for the six months ended June 30, 2003 from $16.8 million
for the six months ended June 30, 2002, and represented 10% of total revenue for
these respective periods.
The decrease in the first six months of 2003 compared to first six months of
2002 was primarily due to on-going cost containment efforts and reduced variable
compensation expense. We expect general and administrative expenses to remain at
approximately 10% of revenue for the near term.
Amortization of Purchased Intangible Assets
The April 2002 purchase of eGrail assets resulted in intangible assets comprised
of acquired technology of $3.3 million and patents of $24,000 with assigned
useful lives of five years and two years, respectively. The April 2003 purchase
of Shana resulted in $5.7 million of intangible assets; comprised of acquired
technology of $4.0 million, customer maintenance relationships of $800,000 and
technology manuals and design documents of $600,000. All intangible assets for
this acquisition were assigned a useful life of five years. Non-compete
agreements with former executives of Shana were valued at $277,000 and were
assigned a useful life of between two and three years.
Amortization of acquired technology, and technical manuals and design documents
are recorded on a straight-line basis as a cost of software revenue. Customer
maintenance relationships are amortized on a straight-line basis as cost of
customer support revenue. Amortization of patents and Covenants Not to Compete
are recorded on a straight-line basis as an operating expense. Amortization
expense was approximately $494,000 and $ 677,000 for the three and six months
ended June 30, 2003, respectively, for all intangible assets. Amortization
expense was approximately $168,000 for the three and six months ended June 30,
2002, respectively, for all intangible assets. We determined that these assets
were not impaired at June 30, 2003.
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 $1.6 million for the three months ended
June 30, 2003 compared to other income, net of $1.9 million for the three months
ended June 30, 2002. Other income, net was $2.7 million for the six months ended
June 30, 2003 compared to other income, net of $2.8 million for the six months
ended June 30, 2002. Other income was essentially unchanged between comparable
periods as foreign exchange gains were offset with reduced investment earnings.
Income Taxes
Our combined federal, state and foreign annual effective tax rate for the three
months ended June 30, 2003, is 26% compared to 21% for the comparable period in
2002. The combined federal, state and foreign annual effective tax rate for the
six months ended June 30, 2003, is 28% compared to 23% for the comparable period
in 2002. The increased tax rate in 2003 was primarily due to the mix of income
earned by the domestic group versus the foreign subsidiaries. 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 both additional paid in capital and the effective tax rate in subsequent
quarters.
28
Liquidity and Capital Resources
At June 30, 2003, combined cash, cash equivalents and investments totaled $205.8
million, an increase of $20.6 million from December 31, 2002.
Cash provided by operating activities during the six months ended June 30, 2003
totaled $28.3 million and resulted primarily from: an increase in unearned
maintenance revenue related to prepaid maintenance contracts of $10.0 million,
additions to net income for depreciation and amortization expense of $9.9
million, net income of $2.8 million, and a decrease in accounts receivable of
$8.9 million, partially offset by a decrease of $3.4 million in customer
deposits and advances. The increase in unearned maintenance revenue is primarily
the result of the growth in our base of annual support contracts resulting from
new customer sales and sales of additional products to the existing base.
Additionally, a significant number of maintenance contracts renew early in the
year and are amortized ratably throughout the year resulting in a lower balance
in unearned maintenance by December 31.
For the six months ended June 30, 2003 cash used for investing activities
totaled $8.9 million and included: capital expenditures of $5.0 million, and
$8.1 million for the acquisition of Shana, offset by net proceeds of the sales
of marketable securities of $4.1 million.
Cash provided by financing activities totaled $4.2 million and was a result of
proceeds received from the exercise of employee stock options and stock
purchases under the employee stock purchase plan.
We had a $5.0 million multi-currency revolving line of credit. On June 27, 2003,
this credit facility expired in accordance with its terms and was not renewed
because the cost of carrying the line did not justify the level of usage. We
will be able to meet our bank guarantee needs through our existing bank
relationships in the United States and internationally.
Contractual cash obligations of significance include operating leases for our
corporate offices, sales offices, development and manufacturing facilities, and
other equipment under non-cancelable operating leases, some of which have
renewal options and generally provide for escalation of the annual rental
amount. (See Note 9 to the Notes to Unaudited Condensed Consolidated Financial
Statements for additional details.)
We believe 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 12 months.
Other Financial Instruments
We conduct business on a global basis in several currencies. Accordingly, we are
exposed to movements in foreign currency exchange rates. We enter into forward
foreign exchange contracts to minimize the short-term impact of currency
fluctuations on monetary assets and liabilities denominated in currencies other
than the functional currency of the relevant entity. We do not enter into
foreign exchange forward contracts for trading purposes. 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 as
other income in the consolidated statements of operations. 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.
29
Recently Adopted Accounting Pronouncements
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 and certain liabilities of eGrail, Inc.
and our April 2003 acquisition of Shana Corporation were 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 lives, unless these lives are determined to be
indefinite. In accordance with this standard, we do not 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.
On the first day of July of each year, goodwill will be tested for impairment by
determining if the carrying value of each reporting unit exceeds its fair value.
As of June 30, 2003, no impairment of goodwill has been recognized. 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 did not have a material impact
on our consolidated financial position and results of operations.
In July 2002, the FASB issued SFAS No. 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 No. 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 No. 146 also establishes that
the liability should initially be measured and recorded at fair value. We
adopted the provisions of SFAS No. 146 for exit or disposal activities initiated
after December 31, 2002. The adoption of this standard did not have a material
impact on our consolidated financial position and results of operations.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of
Others," an interpretation of FASB Statement Nos. 5, 57 and 107, and rescission
of FIN 34, "Disclosure of Indirect Guarantees of Indebtedness of Others." FIN 45
elaborates on the disclosures to be made by the guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also requires that a guarantor recognize, at the inception of
a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The provisions related to recognizing a liability at
inception of the guarantee for the fair value of the guarantor's obligations
does not apply to product warranties or to guarantees accounted for as
derivatives. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, while the disclosure requirements are
effective for financial statements for interim or annual periods ending after
December 15, 2002. The adoption of the recognition of provisions of FIN 45 in
30
the three and six months ended June 30, 2003 did not have a material impact on
our consolidated results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation Transition and Disclosure," an amendment of SFAS No. 123. This
statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The transition guidance and
annual disclosure provisions of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are effective
for financial reports containing financial statements for interim periods
beginning after December 15, 2002. The adoption of SFAS No. 148 did not have a
material impact on our consolidated results of operations or financial position.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." In general, a variable interest entity is a corporation, partnership,
trust, or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to support its
activities. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. We do not have
any variable interest entities as of June 30, 2003. The adoption of FIN 46 did
not have a material impact on our consolidated results of operations or our
financial position.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 (1) clarifies under
what circumstances a contract with an initial net investment meets the
characteristic of a derivative discussed in paragraph 6(b) of Statement No. 133,
(2) clarifies when a derivative contains a financing component, (3) amends the
definition of an underlying derivative to conform it to language used in FIN 45,
and (4) amends certain other existing pronouncements, which will collectively
result in more consistent reporting of contracts as either derivatives or hybrid
instruments. SFAS No. 149 is effective for contracts and hedging relationships
entered into or modified after June 30, 2003. We do not believe that the
adoption of SFAS No. 149 will have a material impact on our consolidated
financial statements.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both debt and equity and requires
an issuer to classify the following instruments as liabilities in its balance
sheet:
o a financial instrument issued in the form of shares that is
mandatorily redeemable and embodies an unconditional obligation that
requires the issuer to redeem it by transferring its assets at a
specified or determinable date or upon an event that is certain to
occur;
o a financial instrument, other than an outstanding share, that embodies
an obligation to repurchase the issuer's equity shares, or is indexed
to such an obligation, and requires the issuer to settle the
obligation by transferring assets; and
31
o a financial instrument that embodies an unconditional obligation that
the issuer must settle by issuing a variable number of its equity
shares if the monetary value of the obligation is based solely or
predominantly on (1) a fixed monetary amount, (2) variations in
something other than the fair value of the issuer's equity shares, or
(3) variations inversely related to changes in the fair value of the
issuer's equity shares.
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003 and is effective for all other financial instruments as of
the first interim period beginning after June 15, 2003. SFAS No. 150 is to be
implemented by reporting the cumulative effect of a change in accounting
principle. We do not expect the adoption of SFAS No. 150 to have a material
impact on our consolidated financial statements
Other Matters
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.
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 operating
results should not necessarily be considered indicative of future 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 size, complexity and timing of individual transactions;
o changes in foreign currency exchange rates;
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; or
o the level of international sales.
32
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, revenue 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 can
change rapidly. We have multiple competitors and there may be future
competitors, some of which have or may have substantially greater sales,
marketing, development and financial resources. As a consequence, 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. We
cannot predict new competitors entering our market through acquisitions or other
alliances. 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
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 that could result in reduced revenue.
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 delivering a unified platform and
framework for Enterprise Content Management. This strategy requires us to make
long-term investments and commit significant resources based on our prediction
of new products and services that the market needs and will accept. Our strategy
also requires 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 our prediction
of market acceptance when released, our business operating results and financial
condition could be materially harmed. In the past, we have experienced delays in
33
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 sales.
We must effectively manage our new product and services transitions or our
revenue may suffer. If we do not make an effective transition from existing
products and services to our FileNet P8 architecture, our revenue may be
seriously harmed. Among the factors that make a smooth transition difficult are
delays in development, variations in pricing, delays in customer purchases in
anticipation of new introductions and customer demand for the new offerings. If
we incur delays in customer purchases or do not accurately estimate the market
effects of new introductions, future demand for our products and services and
our revenue may be seriously harmed.
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. Any inability to protect our intellectual
property may harm our business and competitive position.
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 could result in significant costs or reduce our ability to
market any affected products.
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 Systems Inc., EMC Corporation, ILOG Corporation,
Arbortext, Inc., Venetica Corporation and Verity, Inc. Certain of these
agreements have minimum purchase requirements and/or require prepayments which
usage is limited to a specific timeframe, while others 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.
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
34
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. In addition, it is possible that as a consequence of a merger or
acquisition transaction involving one of these third parties, certain
restrictions could be imposed on our business that had not been imposed prior to
the transaction. This could adversely affect our sales.
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 do not have employment agreements with any
of the members of our United States-based senior management. We do have
employment contracts with members or our international management that commit
them to a notification period. We 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 services consultants and other technical personnel. 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 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 political and economic instability;
o tariffs and trade barriers;
o varying technical standards;
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 accounts receivable cycles and financial instability among
customers.
Any of these factors could reduce the amount of revenue we realize from our
international operations in the future.
If our products contain errors, we could incur unplanned expenses and
delays that could result in reduced revenue, lower profits, and harmful
publicity. Software, services and products, as complex as those we sell, are
susceptible to errors or failures, especially when first introduced or deployed.
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. 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.
35
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;
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 accounting regulations;
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 we recently completed the
acquisitions of eGrail and Shana. 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;
o valuations of acquired assets or businesses that are less than expected; 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.
36
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. Average maturity of our investment portfolio is 4.2
months; therefore, the movement of interest rates should not have a material
impact on our balance sheet or income statement.
At any time, a significant increase/decrease in interest rates will have an
impact on the fair market value and interest earnings of our investment
portfolio. We do not currently hedge this interest rate exposure. We have
performed a sensitivity analysis as of June 30, 2003 and 2002, using a modeling
technique that measures the change in the fair values arising from a
hypothetical 50 basis points and 100 basis points adverse movement in the levels
of interest rates across the entire yield curve, which are representative of
historical movements in the Federal Funds Rate with all other variables held
constant. The analysis covers our investment and is based on the weighted-
average maturity of our investments as of June 30, 2003 and 2002. The
sensitivity analysis indicated that a hypothetical 50 basis points adverse
movement in interest rates would result in a loss in the fair values of our
investment instruments of approximately $249,000 at June 30, 2003 and
approximately $280,000 at June 30, 2002. Similarly a hypothetical 100 basis
points adverse movement in interest rates would result in a loss in the fair
values of our investments of approximately $498,000 at June 30, 2003 and
approximately $559,000 at June 30, 2002.
The following table provides information about our cash and cash equivalents and
our investment portfolio at June 30, 2003 (dollars in thousands):
Estimated Fair
(in thousands) Cost Value
Debt Securities
Due in one year or less:
Short-term munis-taxable $ 5,997 $ 6,010
Corporate 10,664 10,681
Governments/Agencies 9,000 9,003
Total due in one year 25,661 25,694
Due in one to three years:
Taxable munis 1,047 1,057
Corporate 2,255 2,243
Government/Agencies 19,500 19,514
Total due in three years 22,802 22,814
Grand total $ 48,463 $ 48,507
Actual maturities may differ from contractual maturities because the issuer of
the securities may have the right to repurchase such securities. The Company
classifies short-term investments in current assets, as all such investments are
available for current operations.
37
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 our revenue and operating expenses. We have
entered into forward foreign exchange contracts primarily to hedge amounts due
from and the net assets of selected subsidiaries denominated in foreign
currencies (mainly in Europe and Asia Pacific) against fluctuations in exchange
rates. We have not entered into forward foreign exchange contracts for
speculative or trading purposes. Our accounting policies for these contracts are
based on our designation of the contracts as hedging transactions. The criteria
we use for designating a contract as a hedge include the contract's
effectiveness in risk reduction and one-to-one matching of derivative
instruments to underlying transactions. Gains and losses on foreign exchange
contracts are recognized in income in the same period as gains and losses on the
underlying transactions. If an underlying hedged transaction were terminated
earlier than initially anticipated, the offsetting gain or loss on the related
forward foreign exchange contract would be recognized in income in the same
period. In addition, since we enter into forward contracts only as a hedge, any
change in currency rates would not result in any material net gain or loss, as
any gain or loss on the underlying foreign currency denominated balance would be
offset by the gain or loss on the forward contract. Our forward contracts
generally have an original maturity of three months. As of June 30, 2003, we had
forward foreign exchange contracts outstanding totaling approximately $2.1
million in ten currencies. These contracts were opened on the last business day
of the quarter and mature within three months.
Cumulative other comprehensive loss decreased by $5.0 million for the six months
ended June 30, 2003 due to unrealized foreign currency translation gains
resulting from the strengthening of the Euro against the U.S. dollar during the
first half of 2003.
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 six months ended June 30, 2003.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms and that
such information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As of June 30, 2003, the end of the quarter covered by this report, an
evaluation was carried out under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
the Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as required by SEC
Rule 13a - 15(b). Based on the foregoing, the Company's Chief Executive Officer
and Chief Financial Officer concluded that, the Company's disclosure controls
and procedures were effective at the reasonable assurance level.
There has been no change in the Company's internal controls over financial
reporting during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.
38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 10 to Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote
(a) The 2003 Annual Meeting of Stockholders of the Company was held at
9:00 a.m. on May 7, 2003, 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 31,665,441 2,050,045
William P. Lyons 30,694,550 3,020,936
Lee D. Roberts 32,210,595 1,504,891
John C. Savage 31,273,510 2,441,976
Roger S. Siboni 32,143,365 1,572,121
Theodore J. Smith 24,592,546 9,122,940
(c) The Company's stockholders were asked to approve an amendment to the
Company's 2002 Incentive Award Plan to increase the number of shares
of Common Stock available for issuance there under by an additional
1,400,000 shares. This proposal was approved in accordance with the
following vote of stockholders:
Votes For Votes Against Abstentions
24,532,286 9,134,985 48,215
(d) 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, 2003. This
proposal was approved in accordance with the following vote of
stockholders:
Votes For Votes Against Abstentions
33,332,939 328,069 54,478
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
No reports on Form 8-K were filed in the quarter ended June 30, 2003.
39
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FILENET CORPORATION
August 13, 2003
Date
By: /s/ Sam M. Auriemma
Sam M. Auriemma, Senior Vice President
(Principal Financial and Accounting Officer,
Authorized Signatory and Chief Financial Officer)
40
Index to Exhibits
The following exhibits are filed herewith or incorporated by reference:
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, 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, 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 registration statement on Form 10-Q
for the quarter ended September 30, 1998).
4.4* Amendment Three dated November 30, 2002 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, 2002).
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, 2002 and
by a letter amendment dated as of April 5, 2002.
10.1.1* 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 (filed as Exhibit
10.1.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
10.1.2* Waiver and First Amendment to Credit Agreement (Multi-currency) by and among the Registrant and Bank
of America, N.A., formerly known as Bank of America National Trust and Savings Association, dated
June 29, 2002, effective June 29, 2002 (filed as Exhibit 10/1 to Registrant's Annual Report on Form
10-K filed for the year ended December 31, 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, 2002; Registration No. 333-71598).
10.2.1+ Amendment to the 1995 Stock Option Plan approved by Registrant's Board of Directors May 7, 2003.
10.2.2+ Amended Form of 1995 Executive Officer Stock Option Agreement.
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,
Registration No. 33-48499), the first Amendment thereto (filed as Exhibit 4(d) to the Registrant's
registration statement on Form S-8, Registration No. 33-69920), and the Second Amendment thereto
(filed as Appendix A to the Registrant's Proxy Statement for the Registrant's 1994 Annual Meeting of
Stockholders, filed on April 29, 1994).
10.4*+ 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).
41
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).
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 registration statement 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 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) 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, 2002; 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 (filed as
Exhibit 10.12 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 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 (filed as Exhibit 10.13 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
10.14*+ The 2002 Incentive Award Plan, as approved by stockholders at the Registrant's Annual Meeting on May
22, 2002, (filed as Exhibit 10.14 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002).
10.14.1*+ Form of 2002 Incentive Award Plan Incentive Option Agreement with Notice of Grant of Stock Option
(filed as Exhibit 10.14.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002).
10.14.2*+ Form of 2002 Incentive Award Plan Non-Qualified Stock Option Agreement for Independent Directors
with Notice of Grant of Stock Option (filed as Exhibit 10.14.2 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002).
10.14.3+ Amendment to the 2002 Incentive Award Plan dated May 7, 2003.
10.15 Stock Purchase Agreement dated April 2, 2003 by and among Registrant, FileNet Nova Scotia
Corporation, Shana Corporation and certain Sellers.
10.15.1 Escrow Agreement dated April 2, 2003 by and among FileNet Nova Scotia Corporation, certain Sellers
and Bennett Jones LLP.
10.16+ Amended and Restated Letter Agreement dated May 15, 2003 by and between Registrant and Lee D.
Roberts, Chief Executive Officer.
10.17+ Form of Amended and Restated Letter Agreement, dated May 15, 2003, by and between Registrant and the
Chief Financial Officer and President(1).
10.18+ Form of Amended and Restated Letter Agreement by and among Registrant and certain Executive Officers(2).
10.19+ CEO Severance Agreement together with Addendum II to Stock Option Agreement between Registrant and
Mr. Lee D. Roberts.
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer
32.2 Certification of Chief Financial Officer
.
* Incorporated herein by reference + Management contract, compensatory plan or arrangement
(1) Amended and Restated Letter Agreement, dated May 15, 2003 was entered into by and between Registrant
and Messrs. Sam Auriemma, Chief Financial Officer and Ron L. Ercanbrack, President.
(2) Amended and Restated Letter Agreement, dated May 15, 2003 was entered into by and between Registrant
and Messrs. Martyn D. Christian, David D. Despard, Frederick P. Dillon, Karl J. Doyle, Michael W.
Harris, William J. Kreidler, Chas W. Kunkelmann, Philip Rugani, Daniel S. Whelan, Franz X. Zihlmann
and Ms.Katharina M. Mueller.
42
EXHIBIT 10.2.1
AMENDMENT TO THE
FILENET CORPORATION 1995 STOCK OPTION PLAN
This Amendment ("Amendment") to the FileNet Corporation 1995 Stock Option
Plan, as amended and restated effective March 28, 2001 (the "1995 Plan") is
adopted by FileNet Corporation, a Delaware corporation (the "Company"),
effective as of May 7, 2003.
RECITALS
WHEREAS, the 1995 Plan was initially approved by the Company's Board of
Directors (the "Board") and its stockholders in 1995, and has been subsequently
amended and restated;
WHEREAS, Section V of Article VII of the 1995 Plan provides that the 1995
Plan may be amended by the Board;
WHEREAS, the 1995 Plan is silent on the Company's ability to reprice
outstanding options under the 1995 Plan;
WHEREAS, on May 7, 2003 the Board approved an amendment to the 1995 Plan
prohibiting, without prior stockholder approval, the repricing, replacement or
regranting through cancellation or lowering the option exercise price of
previously granted awards issued under any of the Company's option plans;
NOW, THEREFORE, in order to give effect to the Board action, the following
amendment to the 1995 Plan is adopted by the Company.
AMENDMENT
Article Seven "Miscellaneous" of the Plan is hereby amended to add the following
as Section VIII:
"VIII. NO REPRICING WITHOUT STOCKHOLDER APPROVAL
Effective as of May 7, 2003, without prior approval by the
Corporation's stockholders, the Plan Administrator shall not reprice,
replace or regrant though cancellation or lowering of the option exercise
price any outstanding options granted under the Plan."
* * * * *
The undersigned, Katharina M. Mueller, Vice President, General Counsel and
Secretary of the Company, hereby certifies that the Board adopted the foregoing
Amendment on May 7, 2003. Executed at Costa Mesa, California this 26th day of
June 2003.
FileNet Corporation,
a Delaware corporation
By: /s/ Kathrina M. Mueller .
Katharina M. Mueller
Vice President, General Counsel and
Secretary
Exhibit 10.2.2
EXECUTIVE OFFICER GRANT
FILENET CORPORATION
STOCK OPTION AGREEMENT
RECITALS
A. 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).
B. 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.
C. 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, in connection with the Optionee's estate plan, be assigned in whole or
in part during Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established for the exclusive benefit of one
or more such family members. The assigned portion shall be exercisable only
by the person or persons who acquire a proprietary interest in the option
pursuant to such assignment. 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 successive annual 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:
(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 holding this option, 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 anytime 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.
(vi) Should the Optionee's Service terminate by reason of an
Involuntary Termination within twelve (12) months after the
2
effective date of a Corporate Transaction or Change in Control,
and then the provisions of Paragraph 6 shall govern the
post-Service exercise period for this option and shall supersede
any provisions to the contrary in this Paragraph 5.
6. Special 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: (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 at the time of the Corporate
Transaction on any Option Shares for which this option is not
otherwise at that time exercisable(the excess of the Fair Market
Value of those Option Shares over the aggregate Exercise Price
payable for such shares) and provides for subsequent pay-out in
accordance with the option exercise/vesting 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.
(b) 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.
(c) 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.
(d) Should there occur an Involuntary Termination of Optionee's
Service within twelve (12) months following a Corporate
Transaction in which this option is assumed or replaced, then
this option (or replacement grant), to the extent outstanding at
the time but not otherwise fully exercisable, shall automatically
accelerate so that the option shall immediately become
exercisable for all the Option Shares at the time subject to the
option and may be exercised for any or all of those Option Shares
as fully vested shares of Common Stock. This option shall remain
so exercisable until the earlier of (i) the Expiration Date of
the option term or (ii) the expiration of the one (1)-year period
measured from the date of such Involuntary Termination.
3
(e) Should there occur an Involuntary Termination of Optionee's
Service within twelve (12) months following a Change in Control,
then this option, to the extent outstanding at the time but not
otherwise filly exercisable. shall automatically accelerate so
that this option shall immediately become exercisable for all the
Option Shares at the time subject to the option and may be
exercised for any or all of those Option Shares as fully vested
shares of Common Stock. This option shall remain so exercisable
until the earlier of (i) the Expiration Date of the option termor
(ii) the expiration of the one (I)-year period measured from the
date of such Involuntary Termination.
(f) 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 here under.
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.
(a) 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:
(i) Execute and deliver to the Corporation a Notice of Exercise
for the number of Option Shares for which the option is
exercised.
(ii) 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;
4
(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
Corporations 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 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.
(iii)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.
(iv) 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.
(b) 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.
(c) In no event may this option be exercised for any fractional
shares.
10. Compliance with Laws and Regulations.
(a) 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
5
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.
(b) 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.
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.
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.
6
17. Additional Terms Applicable to an Incentive Option. In the event
this option is designated an Incentive Option in the Grant Notice, the
following terms and conditions shall also apply to the grant:
(i) This option shall cease to qualify for favorable tax treatment as
an Incentive Option if (and to the extent) this option is
exercised for one or more Option Shares: (i) more than three (3)
months after the date Optionee ceases to be an Employee for any
reason other than death or Permanent Disability or (ii) more than
twelve (12) months after the date Optionee ceases to be an
Employee by reason of Permanent Disability.
(ii) No installment under this option shall qualify for favorable tax
treatment as an Incentive Option if (and to the extent) the
aggregate Fair Market Value (determined at the Grant Date) of the
Common Stock for which such installment first becomes exercisable
hereunder would, when added to the aggregate value (determined as
of the respective date or dates of grant) of the Common Stock or
other securities for which this option or any other Incentive
Options granted to Optionee prior to the Grant Date (whether
under the Plan or any other option plan of the Corporation or any
Parent or Subsidiary) first become exercisable during the same
calendar year, exceed One Hundred Thousand Dollars (S100.000) in
the aggregate. Should such One Hundred Thousand Dollar (S
100.000) limitation be exceeded in any calendar year, this option
shall nevertheless become exercisable for the excess shares in
such calendar year as a Non-Qualified Option.
(iii)Should the exercisability of this option be accelerated upon a
Corporate Transaction or an Involuntary Termination following a
Corporate Transaction or Change in Control, then this option
shall qualify for favorable tax treatment as an Incentive Option
only to the extent the aggregate Fair Market Value (determined at
the Grant Date) of the Common Stock for which this option first
becomes exercisable in the calendar year in which the Corporate
Transaction or Involuntary Termination occurs does not, when
added to the aggregate value (determined as of the respective
date or dates of grant) of the Common Stock or other securities
for which this option or one or more other Incentive Options
granted to Optionee prior to the Grant Date (whether under the
Plan or any other option plan of the Corporation or any Parent or
Subsidiary) first become exercisable during the same calendar
year, exceed One Hundred Thousand Dollars ($100,000) in the
aggregate. Should the applicable One Hundred Thousand Dollar
($100,000) limitation be exceeded in the calendar year of such
Corporate Transaction or Involuntary Termination, the option may
nevertheless be exercised for the excess shares in such calendar
year as a Non-Qualified Option.
(iv) Should Optionee hold, in addition to this option, one or more
other options to purchase Common Stock which become exercisable
for the first time in the same calendar year as this option, then
the foregoing limitations on the exercisability of such options
as Incentive Options shall be applied on the basis of the order
in which such options are granted.
7
18. 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 period, 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:
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.
8
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. Change in Control shall mean a change in ownership or control of
the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly, by any person or related
group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the Securities Exchange Act
of 1934, as amended) of securities possessing more than fifty
percent (50%) of the total combined voting power of the
.Corporation's outstanding securities pursuant to a tender or
exchange offer made directly to the Corporation's stockholders,
or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority
of the Board members ceases by reason of one or more contested
elections for Board membership, to be comprised of individuals
who either (A) have been Board. members continuously since the
beginning of such period or (B) 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 (A) who were
still in office at the time such election or nomination was
approved by the Board.
D. Code shall mean the Internal Revenue Code of 1986, as amended.
E. Common Stock shall mean the Corporation's common stock.
F. 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.
9
G. Corporation shall mean FileNet Corporation, a Delaware corporation.
H. Employee shall mean an individual who is in the employ of the
Corporation (or any Parentor 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:
(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.
(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.
10
O. Incentive Option shall mean an option which satisfies the
requirements of Code Section 422.
P. Involuntary Termination shall mean the termination of Optionee's
Service by reason of:
(i) Optionee's involuntary dismissal or discharge by the Corporation
for reasons other than Misconduct, or
(ii) Optionee's voluntary resignation following (A) a change in
Optionee's position with the Corporation (or Parent or Subsidiary
employing Optionee) which materially reduces Optionee's level of
responsibility, (B) a reduction in Optionee's level of
compensation (including base salary, fringe benefits and
participation in any corporate-performance based bonus or
incentive programs) by more than fifteen percent (15%) or (C) a
relocation of Optionee's place of employment by more than fifty
(50) miles, provided and only if such change, reduction or
relocation is effected by the Corporation without Optionee's
consent.
Q. 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).
R. Non-Qualified Option shall mean an option not intended to satisfy
the requirements of Code Section 422.
S. Notice of Exercise shall mean the written notice of the option
exercise on the form provided by the Corporation for such purpose.
T. Option Shares shall mean the number of shares of Common Stock
subject to the option as specified in the Grant Notice.
U. Optionee shall mean the person to whom the option is granted as
specified in the Grant Notice.
V. 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.
11
W. 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.
X. Plan shall mean the Corporation's 1995 Stock Option Plan.
Y. 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.
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.
12
EXHIBIT 10.14.3
AMENDMENT TO THE
2002 INCENTIVE AWARD PLAN
OF
FILENET CORPORATION
This Amendment ("Amendment") to the 2002 Incentive Award Plan of FileNet
Corporation (the "Plan") is adopted by FileNet Corporation, a Delaware
corporation (the "Company"), effective as of May 7, 2003.
RECITALS
WHEREAS, the Plan was approved by the Board of Directors (the "Board") on
March 28, 2002 and by the stockholders on May 22, 2002;
WHEREAS, Section 11.2 of the Plan provides that the Plan may be amended
from time to time by the Board;
WHEREAS, the Company's Plan is silent on the Company's ability to reprice
options under the Plan;
WHEREAS, on May 7, 2003, the Board approved an amendment to the Plan
prohibiting, without prior stockholder approval, the repricing, replacement or
regranting through cancellation or lowering the option exercise price of
previously granted awards issued under any of the Company's option plans;
WHEREAS, on May 7, 2003, the stockholders of the Company approved an
amendment to the Plan increasing the number of shares available for issuance
under the Plan by an additional 1,400,000 shares, from 1,400,000 to 2,800,000
shares;
NOW, THEREFORE, the following amendments to the Plan are adopted by the
Company.
AMENDMENTS
Effective as of May 7, 2003, subsection (a) of Section 2.1 of the Plan is hereby
amended in its entirety as follows:
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
Two Million Eight Hundred Thousand (2,800,000) 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."
Effective as of May 7, 2003, section 3.6 is added to Article III "Granting of
Awards":
"3.6 Prohibition on Repricing. The Administrator shall not, without
prior approval by the Company's stockholders, reprice, replace or regrant
through cancellation or lowering of the Option exercise price any awards
issued under the Plan."
* * * * *
The undersigned, Katharina M. Mueller, Vice President, General Counsel and
Secretary of the Company, hereby certifies that amendment increasing the number
of shares available for issuance under the Plan was adopted by the Board on
February 26, 2003, and approved by the Company's stockholders on May 7, 2003,
and that the Board adopted the amendment prohibiting the repricing of options
under the Plan without prior stockholder approval on May 7, 2003.
Executed at Costa Mesa, California this 26th day of June 2003.
FileNet Corporation,
a Delaware corporation
By: /s/ Katharina M. Mueller .
Katharina M. Mueller
Vice President, General Counsel and
Secretary
EXHIBIT 10.15
EXECUTION COPY
STOCK PURCHASE AGREEMENT
AMONG
FILENET NOVA SCOTIA CORPORATION, as the "Buyer"
AND
FILENET CORPORATION, as the "Parent"
AND
DONALD MURPHY, JOHN MURPHY, TIM SENGER, WAYNE MALKIN, DAVID PERMAN,
DENISE MURPHY, COLLEEN MURPHY, KATHY MALKIN, DONNA PERMAN
as the "Sellers"
AND
SHANA CORPORATION, as the "Target"
April 2, 2003
TABLE OF CONTENTS
ARTICLE I Definitions...................................................................1
1.1 Defined Terms.........................................................1
1.2 Other Defined Terms...................................................6
1.3 Construction..........................................................6
ARTICLE II Purchase and Sale of Target Shares...........................................7
2.1 Basic Transaction.....................................................7
2.2 Purchase Price........................................................7
2.3 Escrow................................................................8
2.4 The Closing...........................................................8
2.5 Deliveries............................................................8
2.6 Post-Closing Adjustment..............................................10
2.7 Clearance Certificates in Respect of Non-Resident Shareholders.......12
2.8 Withholding Rights...................................................14
2.9 Completion of Permitted Transactions.................................14
ARTICLE III Representations and Warranties Concerning the Transaction..................14
3.1 Representations and Warranties of the Sellers........................14
3.2 Representations and Warranties of the Buyer..........................16
ARTICLE IV Representations and Warranties Concerning the Target and Its Subsidiary.....16
4.1 Organization, Qualification, and Corporate Power.....................17
4.2 Capitalization.......................................................17
4.3 Noncontravention.....................................................18
4.4 Brokers' Fees........................................................18
4.5 Title to Assets......................................................18
4.6 Subsidiaries.........................................................18
4.7 Financial Statements.................................................19
4.8 Events Subsequent to Most Recent Fiscal Year End.....................20
4.9 Undisclosed Liabilities..............................................22
4.10 Legal Compliance.....................................................23
4.11 Tax Matters..........................................................23
4.12 Real Property........................................................26
4.13 Intellectual Property................................................27
4.14 Tangible Assets......................................................30
4.15 Inventory............................................................30
4.16 Contracts............................................................30
4.17 Permits..............................................................32
4.18 Notes and Accounts Receivable........................................32
4.19 Powers of Attorney...................................................33
4.20 Insurance............................................................33
4.21 Litigation...........................................................33
4.22 Product Liability....................................................34
-i-
4.23 Employees............................................................34
4.24 Employee Plans.......................................................35
4.25 Guaranties...........................................................37
4.26 Environment, Health, and Safety......................................37
4.27 Certain Business Relationships with the Target and Its Subsidiary....37
4.28 Private Issuer Status................................................38
4.29 Disclosure...........................................................38
ARTICLE V Post-Closing Covenants.......................................................38
5.1 General..............................................................38
5.2 Litigation Support...................................................38
5.3 Transition...........................................................38
5.4 Confidentiality......................................................39
5.5 Covenant Not to Compete..............................................39
ARTICLE VI Conditions to Distribution of Initial Purchase Amount.......................39
ARTICLE VII Remedies for Breaches of This Agreement....................................40
7.1 Survival of Representations and Warranties...........................40
7.2 Indemnification Provisions for Benefit of the Buyer..................40
7.3 Indemnification Provisions for Benefit of the Sellers................41
7.4 Procedure for Claims between Parties.................................42
7.5 Matters Involving Third Parties......................................42
7.6 Determination of Adverse Consequences................................43
7.7 Buyer's Right of Offset..............................................43
7.8 Payment of Indemnity Holdback Amount.................................43
7.9 Manner of Payment....................................................44
7.10 Limitation on Indemnity..............................................44
7.11 Other Indemnification Provisions.....................................44
ARTICLE VIII Tax Matters...............................................................44
8.1 Section 338 Election.................................................44
8.2 Tax Periods Ending on or Before the Closing Date.....................45
8.3 Tax Periods Beginning Before and Ending After the Closing Date.......45
8.4 Third Party Costs of Tax Return Preparation..........................45
8.5 Cooperation on Tax Matters...........................................45
8.6 Contest Provisions...................................................46
8.7 Certain Taxes........................................................46
ARTICLE IX Miscellaneous...............................................................46
9.1 Nature of Obligations................................................46
9.2 Allocation of Purchase Price.........................................46
9.3 Press Releases and Public Announcements..............................47
9.4 No Third-Party Beneficiaries.........................................47
9.5 Entire Agreement.....................................................47
-ii-
9.6 Succession and Assignment............................................47
9.7 Counterparts.........................................................47
9.8 Headings.............................................................47
9.9 Notices..............................................................47
9.10 Sellers' Representatives.............................................48
9.11 Governing Law........................................................49
9.12 Amendments and Waivers...............................................50
9.13 Severability.........................................................50
9.14 Expenses.............................................................50
9.15 Specific Performance.................................................50
9.16 Guaranty of Obligations..............................................50
Exhibit A - Form of Escrow Agreement
Exhibit B - Form of Other Shareholder Representation Statement
Exhibit C - Form of Opinion of Counsel to the Sellers
Exhibit D - Form of Opinion of Counsel to the Buyer
Exhibit E - Permitted Encumbrances
Exhibit F - Permitted Transactions
Exhibit G - Non-competition Payments
Schedule 2.2 - Allocation of Purchase Price
-iii-
STOCK PURCHASE AGREEMENT
Agreement entered into as of April 2, 2003, by and among FileNet Nova
Scotia Corporation, a Nova Scotia unlimited liability corporation (the "Buyer"),
and Donald Murphy, John Murphy, Tim Senger, Wayne Malkin, David Perman, Denise
Murphy, Colleen Murphy, Kathy Malkin and Donna Perman (collectively the
"Sellers"), and Shana Corporation, an Alberta corporation (the "Target"), and
for the purposes of Section 9.16 only, the FileNet Corporation, a Delaware
corporation (the "Parent"). The Buyer, the Sellers and the Target are referred
to collectively herein as the "Parties."
The Sellers in the aggregate own 5,663,635 Class A Common Shares and
5,639,005 Class B Common Shares of the Target.
This Agreement contemplates a transaction in which the Buyer will purchase
from the Sellers and certain other shareholders of the Target (the "Other
Shareholders", and collectively with the Sellers, the "Shareholders"), and the
Shareholders will sell to the Buyer, all of the outstanding capital stock of the
Target in return for cash.
Now, therefore, in consideration of the mutual promises herein made, and in
consideration of the representations, warranties, and covenants herein
contained, the Parties agree as follows.
ARTICLE I
DEFINITIONS.
1.1 Defined Terms. As used herein, the terms below shall have the following
meanings:
"Adverse Consequences" means all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands,
injunctions, judgments, orders, decrees, rulings, damages, dues, penalties,
fines, costs, amounts paid in settlement, Liabilities, obligations, Taxes,
liens, losses, expenses, and fees, including court costs and reasonable
attorneys' fees and expenses and all direct and indirect, consequential and
incidental damages and losses including without limitation all lost profits
and damage to goodwill.
"Affiliate" has the meaning set forth in the Business Corporations Act
(Alberta).
"Affiliated Group" means any affiliated group within the meaning of
Code Section 1504(a) or any similar group defined under a similar provision
of state, local or foreign law.
"Basis" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that forms or could form the basis
for any specified consequence.
"Books and Records" means, with respect to the Target and its
Subsidiary, the Corporate Records and all books, records, lists, ledgers,
financial data, files, reports, product and design manuals, plans,
drawings, technical manuals and operating records of every kind pertaining
to the Target, its Subsidiary or assets or the customers, suppliers,
distributors or personnel of the Target or its Subsidiary, in whatever
form.
"Business Day" means any day other than a Saturday, a Sunday or a day
on which banking institutions in the State of California or the Province of
Alberta are authorized by Law or executive order to remain closed.
"Canadian GAAP" means accounting principles generally accepted in
Canada as established and revised by the Canadian Institute of Chartered
Accountants from time to time.
"Class A Common Shares" means the Class A Common Shares, no par value,
of the Target.
"Class B Common Shares" means the Class B Common Shares, no par value,
of the Target.
"Class C Preferred Shares" means the Class C Preferred Shares, no par
value, of the Target.
"Closing Date" means the date first set forth above.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the
businesses and affairs of the Target and its Subsidiary, including
confidential business information, financial marketing and business data,
pricing and cost information, business and marketing plans, internet domain
names, and customer and supplier lists and information, that is not already
generally available to the public.
"Corporate Records" means the corporate records of the Target and its
Subsidiary, including (i) all Organizational Documents, (ii) all minutes of
meetings that have been kept and resolutions of shareholders and directors
(and any committees), or other body performing a similar function for
entities other than corporations, and (iii) the share certificate books, if
any, all securities registers, registers of transfers and registers of
directors, or the equivalents, if any, for entities other than
corporations.
"Employee Plans" means all of the benefits provided, maintained,
sponsored or funded by the Target or its Subsidiary for or in relation to
the current or former employees, officers or directors of the Target or its
Subsidiary, including any fringe benefit, bonus, incentive compensation,
deferred compensation, profit sharing, severance, termination, supplemental
unemployment benefit, change of control, retention bonus, pension,
retirement, stock option, stock purchase, stock appreciation, savings,
employee loan, prerequisite, indemnity, health, welfare, medical, dental,
disability or life insurance, short term disability, vacation pay, service
or similar plan, program, arrangement, agreement, award or practice,
whether written or oral, funded or unfunded, insured or self-insured,
registered or unregistered.
"Encumbrance" means any lien (statutory or otherwise), judgment,
pledge, escrow, option, charge, easement, restrictive covenant, security
interest, assignment, deed of trust, right of first refusal, mortgage,
2
hypothecation, right-of-way, encroachment, building or use restriction,
restrictive covenant, encumbrance or other right of third parties, whether
voluntarily incurred or arising by operation of law or any other
arrangement or condition which, in substance, secures payment or
performance of an obligation, and includes, without limitation, any
agreement to give any of the foregoing in the future, and any contingent or
conditional sales agreement or other title retention agreement or
arrangement or lease in the nature thereof or the filing of, or agreement
to give any financing statement, under the laws of any jurisdiction.
"Environmental Laws" means any Law concerning pollution or protection
of the environment, public health and safety, or employee health and
safety, including laws relating to emissions, discharges, releases, or
threatened releases of pollutants, contaminants, or chemical, industrial,
hazardous, or toxic materials or wastes into ambient air, surface water,
ground water, or lands or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling of pollutants, contaminants, or chemical, industrial, hazardous,
or toxic materials or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means any entity which is (or at any relevant time
was) a member of a "controlled group of corporations" with, under "common
control" with, or a member of an "affiliated service group" with any
Partnership, as defined in Section 414(b), (c), (m) or (o) of the Code, or
under "common control" with any Partnership within the meaning of Section
4001(b)(1) of ERISA.
"ERISA Plan" means an "employee benefit plan" within the meaning of
Section 3(2) of ERISA.
"Escrow Agent" means the Person acting as Escrow Agent under the
Escrow Agreement, which shall initially be Bennett Jones LLP.
"Extremely Hazardous Substance" has the meaning set forth inss.302 of
the Emergency Planning and Community Right-to-Know Act of 1986, as amended.
"Governmental Entity" means any applicable (i) multinational, federal,
provincial, state, municipal, local or other governmental or public
department, court, judicial authority, regulatory body, commission, board,
bureau, agency or instrumentality, domestic or foreign, (ii) any
subdivision or authority of any of the foregoing and (iii) any
quasi-governmental or private body exercising any regulatory, expropriation
or taxing authority under or for the account of any of the above.
"ICA" means the Investment Canada Act (Canada), as amended.
"Intellectual Property" means all intellectual property in any
jurisdiction, including (i) inventions, patents, patent applications,
patent disclosures, all related continuation-in-part, divisional, reissue,
reexamination, utility model, certificate of invention and design patents,
industrial designs, registrations and applications for registration
thereof, and other industrial property rights acquired or available under
the Laws of any jurisdiction, (ii) trademarks, trade names, trade dress,
logos, corporate names, service marks, certification marks, and other
3
indicia of origin, and registrations and applications for registration
thereof together with related goodwill, (iii) writings and other
copyrightable works of authorship, all copyrights therein and all
registrations and applications for registration thereof, (iv) mask works,
integrated circuit topographies and registrations and applications for
registration thereof, (v) computer software, databases, compilations,
documentation, data processing systems, networks and network systems,
website and other Internet and webcentric systems and properties, domain
names, content contained on any Internet or intranet site, and
descriptions, flowcharts and other work product used to design, plan,
organize, and develop any of the foregoing, and all intellectual property
rights in and registrations and applications to register thereof (vi) trade
secrets and confidential business information, whether patentable or
unpatentable and whether or not reduced to practice, know-how,
manufacturing and product processes and techniques, research and
development information, copyrightable rights, financial, marketing and
business data, pricing and cost information, business and marketing plans
and customer and supplier lists and information and internet domain names,
(vii) other proprietary rights relating to any of the foregoing (including,
without limitation, remedies against infringements thereof and rights of
protection of interest therein under the Laws of all jurisdictions) and
(viii) copies and tangible embodiments thereof (in whatever form or
medium).
"Knowledge" means actual knowledge after reasonable investigation.
"Laws" means (a) all applicable laws, including all statutes, codes,
ordinances, regulations, decrees, rules, municipal by-laws and orders of
every Governmental Entity and (b) any judicial, arbitral, administrative,
ministerial, departmental or regulatory judgment, decision, decree, ruling
or order of any court or governmental or regulatory agency, department,
authority, body or instrumentality relating to the businesses or operations
of the Target or its Subsidiary.
"Liability" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for Taxes.
"Most Recent Balance Sheet" means the balance sheet contained within
the Most Recent Financial Statements.
"Most Recent Fiscal Year End" means July 31, 2002.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including, where applicable, with
respect to quantity and frequency).
"Organizational Documents" means, with reference to a corporation, the
Articles of Incorporation and by-laws or other similar organizational
documents (in each case, as amended to date).
"Permits" shall mean, with respect to the Target and its Subsidiary,
all licenses, permits, franchises, approvals, authorizations, consents or
orders of, or filings with, or notifications to, any Governmental Entity or
any other Person, necessary or desirable for the conduct of, or relating to
the operation of the businesses of or the ownership of the assets of, the
Target and/or its Subsidiary.
4
"Permitted Encumbrances" means the encumbrances identified in Exhibit
E attached hereto.
"Permitted Transactions" means the transactions described in Exhibit F
attached hereto.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an
unincorporated organization, or a governmental entity (or any department,
agency, or political subdivision thereof).
"Requisite Sellers" means Sellers holding a majority of the voting
power of the Target Shares (assuming conversion to Class A Common Shares,
if applicable, and voting together as a single class) as set forth in
Section 4.2 of the Target Disclosure Letter.
"Securities Act" means the Securities Act of 1933, as amended.
"Sellers' Representatives" means the Persons who are appointed as
agents for the Sellers pursuant to Section 9.10, who shall initially be Don
Murphy and Wayne Malkin.
"Software" means the computer software that the Target or its
Subsidiary licenses to third parties, including, without limitation,
Informed Aurora, which consists of the Informed Step Processor, Informed
eRouter, Informed Filler (Web), Informed Filler, Informed Designer and
Informed Quadra.
"Subsidiary" means, with respect to any Person, any corporation or
other business entity, whether or not incorporated, of which at least a
majority of the securities or interests having, by their terms, ordinary
voting power to elect members of the board of directors, or other persons
performing similar functions with respect to such entity, is held, directly
or indirectly, by such Person (or a Subsidiary thereof).
"Target Share" means any share of the capital stock of the Target,
including the Class A Common Shares, the Class B Common Shares, and the
Class C Preferred Shares.
"Tax" means any federal, state, provincial, local, or foreign income,
capital, gross receipts, license, payroll, employment, excise, severance,
stamp, occupation, premium, windfall profits, environmental (including
taxes under Code Section 59A), customs duties, capital stock, franchise,
profits, withholding, social security (or similar), unemployment,
disability, real property, personal property, sales, use, transfer,
registration, stamp, value added, alternative or add-on minimum, estimated,
or other tax of any kind whatsoever, including any interest, penalty, or
addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
"US GAAP" means United States generally accepted accounting principles
in effect from time to time applied on a consistent basis.
5
1.2 Other Defined Terms. In addition to the terms defined in Section 1.1, the
following terms shall have the meanings defined for such terms in the
Sections set forth below:
Term Section
Accountant 2.6(d)
Adjustment Amount 2.6(b)
Buyer Preamble
Buyer Disclosure Letter Section 3.2
Claim Notice 7.2(a)
Closing 2.4
Closing Balance Sheet 2.6(a)
Distribution Date 2.3
Escrow Agreement 2.3
Financial Statement 4.7
Indemnified Party 7.4(a)
Indemnifying Party 7.4(a)
Indemnity Holdback Amount 2.2
Initial Purchase Amount 2.3
Most Recent Financial Statements 4.7
Most Recent Fiscal Month End 4.7
Other Shareholders Preamble
Parent Preamble
Party Preamble
Purchase Price 2.2
Repurchase Amount 2.2
Section 116 Certificate 2.7(a)
Section 338 Election 8.1
Seller Preamble
Seller Disclosure Letter Section 3.1
Shareholders Preamble
Target Preamble
Target Disclosure Letter Article IV
Third Party Claim 7.4(a)
Withheld Amount 2.7(b)
1.3 Construction.
(a) Unless the context of this Agreement otherwise requires, (i) words of
any gender include each other gender; (ii) words using the singular or
plural number also include the plural or singular number,
respectively; (iii) the terms "hereof," "herein," "hereby" and
derivative or similar words refer to this entire Agreement; (iv) the
terms "Article" or "Section" refer to the specified Article or Section
of this Agreement; (v) the word "including" shall mean "including,
without limitation"; and (vi) the word "or" shall be disjunctive but
not exclusive.
(b) References to agreements and other documents shall be deemed to
include all subsequent amendments and other modifications thereto.
6
(c) References to statutes shall include all regulations promulgated
thereunder and references to statutes or regulations shall be
construed as including all statutory and regulatory provisions
consolidating, amending or replacing the statute or regulation.
(d) The language used in this Agreement shall be deemed to be the language
chosen by the parties to express their mutual intent, and no rule of
strict construction shall be applied against either party.
(e) The annexes, schedules and exhibits to this Agreement are a material
part hereof and shall be treated as if fully incorporated into the
body of the Agreement.
(f) Whenever this Agreement refers to a number of days, such number shall
refer to calendar days unless Business Days are specified and shall be
counted from the day immediately following the date from which such
number of days are to be counted.
(g) Except where otherwise specified, all dollar amounts referred to
herein shall be references to United States dollars.
(h) All accounting terms used herein and not expressly defined herein
shall have the meanings given to them under Canadian GAAP with respect
to the Target and its Subsidiary and US GAAP with respect to the
Buyer.
(i) Whenever this Agreement states that a party has "made available"
certain documents to another party, such term shall mean that such
party has either delivered those documents to the other party or
placed those documents in a designated "data room" for inspection by
the other party.
ARTICLE II
PURCHASE AND SALE OF TARGET SHARES.
2.1 Basic Transaction. On and subject to the terms and conditions of this
Agreement, the Buyer agrees to purchase from the Shareholders, and each of
the Sellers agrees to sell to the Buyer, and to cause the Other
Shareholders to sell to the Buyer, all of their respective Target Shares
for the consideration specified below in this Article 2.
2.2 Purchase Price. The Buyer agrees to pay to the Shareholders as
consideration for the purchase of all of the Target Shares the aggregate
amount of $8,550,000, less an amount (the "Repurchase Amount") equal to the
aggregate amount paid by the Target to repurchase, redeem, terminate or
otherwise acquire Target Shares and options or rights to acquire Target
Shares in Permitted Transactions after the Most Recent Fiscal Month End
(the "Purchase Price"), subject to adjustment as provided in Section 2.6
below. At the Closing, the Buyer shall deliver cash in the amount of
$8,550,000 to the Escrow Agent to be held and released in accordance with
Section 2.3 below. The Purchase Price shall be allocated among the
Shareholders based on the percentages set forth in Schedule 2.2 attached
hereto, which schedule shall be updated by the Sellers' Representatives and
delivered to the Buyer on or before the Business Day immediately preceding
the Distribution Date to reflect any changes in ownership of the Target
Shares between the Closing Date and the Distribution Date.
7
2.3 Escrow. Concurrently with the execution of this Agreement, the Buyer, the
Sellers and the Escrow Agent shall execute and deliver an escrow agreement
in the form attached hereto as Exhibit A (the "Escrow Agreement"). The
funds delivered to the Escrow Agent by the Buyer at the Closing shall be
held as follows: (i) $1,026,000 as the "Indemnity Holdback Amount" and (ii)
$7,524,000 as the "Initial Purchase Amount". The Indemnity Holdback Amount
shall be held by the Escrow Agent exclusively for the purpose of securing
Buyer indemnity claims pursuant to Article VII hereof. Subject to Section
2.6 and the terms and conditions of the Escrow Agreement, the Initial
Purchase Amount, less the Repurchase Amount, shall be distributed by the
Escrow Agent to or to the account of the Shareholders pro rata as described
in Section 2.2 as promptly as is reasonably practicable following the
satisfaction, or waiver by the Buyer, of all conditions specified in
Article VI (the date of such distribution, the "Distribution Date"), and
concurrently therewith the Repurchase Amount shall be delivered by the
Escrow Agent to the Buyer. The Indemnity Holdback Amount shall be held by
the Escrow Agent pursuant to the terms and conditions of the Escrow
Agreement and Section 7.8 below.
2.4 The Closing. The closing of the transactions contemplated by this Agreement
(the "Closing") shall take place at the offices of the Target in Edmonton,
Alberta, commencing as of 5:00 a.m. local time on the Closing Date.
2.5 Deliveries.
(a) At the Closing, the Sellers will deliver, or cause to be delivered, to
the Buyer:
(i) stock certificates representing the Target Shares held by the
Sellers, endorsed in blank or accompanied by duly executed
assignment documents;
(ii) copies of this Agreement and the Escrow Agreement executed by
each of the Sellers and, in the case of this Agreement, the
Target;
(iii)an opinion of McCuaig Desrochers LLP, counsel to the Sellers,
dated as of the Closing Date, in form and substance reasonably
satisfactory to Buyer, covering the matters specified in Exhibit
C attached hereto;
(iv) the resignations, effective as of the Closing, of each director
and officer of the Target and its Subsidiary;
(v) a form of notice to the Internal Revenue Service in accordance
with the requirements of Treasury Regulation Section
1.897-2(h)(2) and in form and substance reasonably acceptable to
the Buyer along with written authorization for the Buyer to
deliver such notice form to the Internal Revenue Service on
behalf of the Target upon Closing
(vi) a certificate signed by the Sellers' Representatives setting for
the aggregate amount paid by the Target to repurchase, redeem,
terminate or otherwise acquire Target Shares and options or
rights to acquire Target Shares in Permitted Transactions after
the Most Recent Fiscal Month End and prior to the Closing Date;
and
8
(vii)such other certificates and instruments as shall be reasonably
required to vest in Buyer title in and to the Target Shares held
by the Sellers in accordance with the provisions hereof.
(b) As soon as possible on or after the Closing Date, the Sellers will
deliver, or cause to be delivered, to the Buyer:
(i) stock certificates representing the Target Shares held by the
Other Shareholders, endorsed in blank or accompanied by duly
executed assignment documents;
(ii) Other Shareholder Representation Statements in the form attached
hereto as Exhibit B, duly executed by each of the Other
Shareholders;
(iii)a clearance certificate or similar document(s) that may be
required or reasonably necessary by any taxing authority,
including the Canadian taxing authorities as set out in Section
2.7, in order to relieve the Buyer of any obligation to withhold
any portion of the Purchase Price payable to any Shareholders
that are not residents of Canada, and if the certificate that may
be required or reasonably necessary by the Canadian taxing
authorities as set out in Section 2.7 is not available in respect
of any such Shareholders, the remaining provisions of Section 2.7
dealing with the Buyer's entitlement to withhold the appropriate
portion of the Purchase Price payable to such Shareholders shall
apply pending receipt of such certificate or similar document(s);
(iv) such other certificates and instruments as shall be reasonably
required to vest in Buyer title in and to the Target Shares held
by the Other Shareholders in accordance with the provisions
hereof;
(v) a certificate executed by each of the Sellers stating that: (A)
the Permitted Transactions have been completed; (B) no Target
Shares are outstanding other than Target Shares that have been
legally and validly transferred to the Buyer; and (C) all
outstanding stock options, warrants or other rights to acquire
shares of the capital stock of the Target have been terminated;
and
(vi) an opinion of McCuaig Desrochers LLP, counsel to the Sellers, in
form and substance reasonably satisfactory to Buyer, covering the
matters specified in Exhibit C attached hereto with respect to
the Other Shareholders.
(c) At the Closing, the Sellers will deliver to the Escrow Agent copies of
this Agreement and the Escrow Agreement executed by each of the
Sellers and, in the case of this Agreement, the Target.
(d) At the Closing, the Buyer will deliver to the Escrow Agent:
(i) the cash amount specified in Section 2.2 above; and
(ii) copies of this Agreement and the Escrow Agreement executed by the
Buyer and, in the case of this Agreement, the Parent;
9
(e) At the Closing, the Buyer will deliver to the Sellers:
(i) evidence of the payment to the Escrow Agent of the cash amount
specified in Section 2.2 above;
(ii) copies of this Agreement and the Escrow Agreement executed by the
Buyer and, in the case of this Agreement, the Parent (also
executed by the Escrow Agreement); and
(iii)opinions of Latham and Watkins LLP, Bennett Jones LLP and Stewart
McKelvie Stirling Scales, counsel to the Buyer and the Parent
dated as of the Closing Date, in form and substance reasonably
satisfactory to the Sellers' Representatives covering matters
listed on Exhibit D attached hereto;
(f) On or prior to the Distribution Date, the Buyer will deliver to the
Sellers evidence of payment of the amounts due under Section 5.5.
(g) Form of Instruments. To the extent that a form of any document to be
delivered hereunder is not attached as an exhibit, such documents
shall be in form and substance, and shall be executed and delivered in
a manner, mutually satisfactory to the Sellers' Representatives and
the Buyer.
2.6 Post-Closing Adjustment.
(a) Closing Balance Sheet. Within sixty (60) Business Days after the
Closing Date, the Buyer shall prepare and deliver, or cause to be
prepared and delivered, to the Sellers (i) an unaudited consolidated
balance sheet of the Target and its Subsidiary dated the Closing Date
(the "Closing Balance Sheet"), and (ii) a reasonably detailed
calculation of the Adjustment Amount. The Closing Balance Sheet shall
be prepared by the Buyer's personnel in accordance with Canadian GAAP,
as applied in preparation of the Most Recent Balance Sheet.
(b) Adjustment Amount. The "Adjustment Amount" shall be the amount equal
to the amount by which the sum of (i) the consolidated stockholders'
equity of the Target and its Subsidiary as set forth on the Closing
Balance Sheet, determined in accordance with Canadian GAAP as applied
in preparation of the Most Recent Balance Sheet (including being
prepared on the basis that the Target will continue to operate as a
going concern and unaffected by a change of control) and consistent in
all material respects with the Books and Records, plus (ii) the
amount, if any, reflected on the Closing Balance Sheet as an account
payable in respect of the fee payable to PriceWaterhouseCoopers
Securities Inc. referred to in Section 3.1(d), plus (iii) CAD$80,000
representing the amount of brokers fees paid to PriceWaterhouseCoopers
Securities Inc. in 2002, plus (iv) an amount equal to the aggregate
amount of severance obligations incurred at the direction of and
approved in writing by the Buyer and reflected in the Closing Balance
Sheet, plus (v) an amount equal to such portion of the Repurchase
Amount as is paid by the Target prior to or on the Closing Date or is
reflected as a liability in the Closing Balance Sheet, less (vi)
CAD$950,000, either (A) exceeds CAD$400,000 (if such sum is a positive
number) or (B) is less than (-CAD$400,000) (if such sum is a negative
number). The Purchase Price shall be adjusted by the Adjustment
Amount, which adjustment shall be accomplished as follows:
10
(i) If the Adjustment Amount is a positive number, then the Buyer
shall pay to the Shareholders an aggregate amount equal to the
Adjustment Amount; provided, that if the Adjustment Amount is to
be paid by Buyer prior to the Distribution Date, the Adjustment
Amount shall be deemed to be an increase to the Initial Purchase
Amount, and the Buyer shall deliver the Adjustment Amount to the
Escrow Agent to be held and distributed as part of the Initial
Purchase Amount.
(ii) If the Adjustment Amount is a negative number, then the
Shareholders shall pay to the Buyer an amount equal to the
Adjustment Amount provided, that if the Adjustment Amount is to
be paid by the Shareholders prior to the Distribution Date, the
Buyer shall be entitled to be paid the Adjustment Amount out of
escrow as a reduction of the Initial Purchase Amount held by the
Escrow Agent.
(c) Disputed Adjustment Amount. If the Requisite Sellers shall disagree
with the Adjustment Amount, they shall notify the Sellers'
Representatives of such disagreement, and Sellers' Representatives
shall notify the Buyer of such disagreement in writing specifying in
detail the particulars of such disagreement within twenty (20)
Business Days after the Sellers' receipt of the Closing Balance Sheet.
To the extent that any portion of the Adjustment Amount is not in
dispute, within twenty (20) Business Days after receipt of the Closing
Balance Sheet by the Sellers' Representatives, the Buyer shall pay the
Shareholders or the Shareholders shall pay the Buyer, as the case may
be, that portion of the Adjustment Amount which is not in dispute in
the manner set forth in Section 2.6(b).
(d) Resolution of Disputed Adjustment Amount. The Buyer and the Sellers
shall use their best efforts for a period of thirty (30) calendar days
after the Sellers' Representatives' delivery of such notice (or such
longer period as the Buyer and the Sellers' Representatives shall
mutually agree upon) to resolve any disagreements raised by the
Sellers with respect to the calculation of the Adjustment Amount. If,
at the end of such period, the Buyer and the Sellers' Representatives
are unable to resolve such disagreements, then the issues in dispute
shall be submitted to Ernst and Young, LLP, Chartered Accountants at
their Edmonton office, or such other firm of Chartered Accountants as
the Buyer and the Sellers' Representatives may agree (the
"Accountant"), for resolution. The determination by the Accountants
shall be final, binding and conclusive on the parties. The Buyer and
the Sellers' Representatives shall use their best efforts to cause the
Accountant to make its determination within thirty (30) calendar days
of accepting its selection. Within fifteen (15) calendar days after
the date of such determination by the Accountants, the Buyer shall pay
the Shareholders, or the Shareholders shall pay the Buyers, as the
case may be, the Adjustment Amount in the manner set forth in Section
2.6(b). The fees and expenses of the Accountant shall be borne by the
Buyer and the Sellers equally.
(e) Payment of Adjustment Amount. All payments made by the Buyer or the
Shareholders as part of the Adjustment Amount shall be made by wire
transfer of immediately available funds to an account designated by
the payee. All such payments shall be made in U.S. dollars based on
the closing exchange rate published by the Bank of Canada for the
Closing Date. Any payments to be made to the Shareholders under this
Section 2.6 shall be made to each Shareholder pro-rata according to
the proportion of the Purchase Price to be allocated to such
Shareholder pursuant to Section 2.2. The Sellers as a group shall be
11
jointly and severally liable with the Other Shareholders as a group,
and the Other Shareholders shall be jointly and severally liable as
between themselves, for any amounts to be paid by the Shareholders to
the Buyer under this Section 2.6. The Buyer shall be entitled to
withhold and set off against any and all amounts due to the
Shareholders under this Agreement, including any amounts held by the
Escrow Agent pursuant to the Escrow Agreement, any amounts due to the
Buyer under this Section 2.6.
2.7 Clearance Certificates in Respect of Non-Resident Shareholders.
(a) In respect of any Shareholder which is not a resident of Canada for
the purposes of the Income Tax Act (Canada), such Shareholder shall
take all reasonable steps to deliver or cause to be delivered to the
Buyer at or prior to the Distribution Date a certificate issued by the
Canadian Minister of National Revenue pursuant to subsection 116(2) of
the Income Tax Act (Canada) (a "Section 116 Certificate") in respect
of the sale of the Target Shares by such Shareholder, which
certificate shall fix a "certificate limit" (as defined in subsection
116(2) of the Income Tax Act (Canada)) that is not less than the
amount of the Canadian dollar equivalent of the Purchase Price
allocated to such Target Shares at the time of Closing.
(b) If any such Shareholder does not deliver or cause to be delivered a
Section 116 Certificate containing a certificate limit as required by
Section 2.7(a) to the Buyer on or prior to the earlier to occur of
Distribution Date and the 30th day after the end of the month in which
the Closing occurs, the Buyer shall be entitled to withhold from the
Purchase Price paid by the Buyer on the Distribution Date such portion
of the Initial Purchase Amount as is then necessary to obtain, after
conversion of such portion, Canadian dollars equal to 25% of the
Canadian equivalent of the Purchase Price allocated to the applicable
Target Shares (the "Withheld Amount"). Any Withheld Amount shall be
converted to Canadian dollars as of such date and withheld by the
Escrow Agent from the Initial Purchase Amount pending the delivery to
the Buyer of a Section 116 Certificate with a certificate limit that
is not less than the Canadian dollar equivalent of the Purchase Price
allocated to the applicable Target Shares or a certificate issued by
the Canadian Minister of National Revenue pursuant to subsection
116(4) of the Income Tax Act (Canada), all in accordance with the
following terms and conditions:
(i) the Canadian dollar equivalent of the Purchase Price of the
applicable Target Shares on the Closing Date shall be determined
using the closing exchange rate quoted by the Bank of Canada for
the Closing Date;
(ii) the Withheld Amount shall be held in trust by the Escrow Agent
pursuant to the Escrow Agreement for the benefit of the
applicable Shareholder and the Buyer for payment to such
Shareholder and the Receiver General for Canada, as described
below;
(iii)promptly upon the applicable Shareholder providing a copy to the
Buyer of a Section 116 Certificate or a certificate issued
pursuant to subsection 116(4) of the Income Tax Act (Canada), in
either case satisfactory to the Buyer (acting reasonably), the
full amount of the Withheld Amount held in trust by the Escrow
Agent (including any interest earned on the funds held in trust
less any Canadian withholding tax on such interest) shall be paid
to such Shareholder;
12
(iv) if a Section 116 Certificate or a certificate issued pursuant to
subsection 116(4) of the Income Tax Act (Canada) has not been
provided to the Buyer as set out in paragraph (a) on or before
the 30th day after the end of the month in which the Closing
occurs, the Escrow Agent shall remit the full Withheld Amount to
the Receiver General for Canada in satisfaction of the Buyer's
withholding tax liability in respect of the purchase of the
Target Shares from the applicable Shareholder pursuant to
subsection 116(5) of the Income Tax Act (Canada), unless such
Shareholder provides evidence satisfactory to the Buyer (acting
reasonably) that the Canadian Minister of National Revenue has
instructed that the funds not be remitted at such time, in which
case the funds held by the Escrow Agent shall continue to be held
in trust and the provisions of this Section 2.7(b) shall continue
to apply thereafter as if the reference to the 30th day after the
end of the month in which the Closing occurs were instead a
reference to the new date set by the Canadian Minister of
National Revenue as the date for the remittance or the date
remittance is otherwise required;
(v) any excess funds held by the Escrow Agent following any
remittance under paragraph (v) (which would, in this case,
consist of the interest earned on the funds held in trust less
any Canadian withholding tax on such interest) shall be paid to
the applicable Shareholder;
(vi) if the certificate limit in any Section 116 Certificate provided
to the Buyer is less than the Canadian dollar equivalent of the
Purchase Price of the applicable Target Shares as established
under paragraph (i) or if a certificate issued pursuant to
subsection 116(4) of the Income Tax Act (Canada) has not
otherwise been provided to the Buyer which is satisfactory to the
Buyer (acting reasonably), the Escrow Agent shall remit 25% of
the difference between such excess Purchase Price amount and the
certificate limit shown in the Section 116 Certificate or the
amount shown in the certificate issued pursuant to subsection
116(4) of the Income Tax Act (Canada) to the Receiver General for
Canada, as the case may be, in satisfaction of the Buyer's
withholding tax liability in respect of the purchase of such
Target Shares pursuant to subsection 116(5) of the Canadian
Income Tax, and any excess funds held by BJ following such
remittance (including any interest earned on the funds held in
trust less any Canadian withholding tax on such interest) shall
be paid to the applicable Shareholder;
(vii)the funds held by the Escrow Agent pursuant to this Section 2.7
shall be invested in an interest bearing account, with any such
interest to accrue for the benefit of the applicable Shareholder;
and
(viii) if requested by any applicable Shareholder, the Escrow Agent
will pay all or any portion of the Withheld Amount applicable to
such Shareholder to the Receiver General for Canada against
delivery of a Section 116 Certificate or a certificate issued
pursuant to subsection 116(4) of the Income Tax Act (Canada).
(c) In the event of any upward adjustment in the Purchase Price payable to
any Shareholders who are not residents of Canada for the purposes of
the Income Tax Act (Canada), including any adjustment in the Purchase
13
Price under Section 2.6, the provisions of this Section 2.7 shall
apply to any such additional payments made by the Buyer to such
Shareholders.
2.8 Withholding Rights. Except as otherwise provided in Section 2.7, the Buyer
shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Agreement to any Shareholder in exchange for
Target Shares such amounts as the Buyer is required to deduct and withhold
with respect to the making of such payment under the Code or any provision
of state, local or foreign tax law. Except as otherwise provided in Section
2.7, to the extent that amounts are so withheld and paid over to the
appropriate taxing authority by the Buyer, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the
Shareholder in exchange for Target Shares in respect of which such
deduction and withholding was made by the Buyer.
2.9 Completion of Permitted Transactions. In order to complete Permitted
Transactions on or after the Closing Date, upon delivery to the Buyer of a
certificate signed by the Sellers' Representatives specifying:
(i) the name of the shareholder whose shares are being repurchased;
(ii) the amount and type of shares being repurchased;
(iii)the amount of purchase price to be paid, which amount shall not
exceed the amount specified on Schedule 2.2 as of the Closing Date;
(iv) instructions as to delivery of payment of the amount specified in
(iii);
(v) that the repurchase is being made in accordance with the terms of a
Permitted Transaction and whether the shareholder has delivered stock
certificates, and valid instruments of transfer to McCuaig Desrochers
LLP; and
(vi) a direction to the Escrow Agent to immediately pay to or to the order
of the Buyer an amount equal to the amount specified in (iii), which
amount shall be deemed to be part of the Repurchase Amount;
then the Buyer shall, within five (5) days thereafter, pay or cause to be paid
the amount specified in (iii) as instructed in (iv) on behalf of the Target. If
the Buyer shall fail to perform its obligations under this Section 2.9 with
respect to any Target Shares, the Sellers shall be relieved of the obligation to
deliver the certification and legal opinion required under 2.5(b)(v) and
2.5(b)(vi) solely to the extent that such certification and opinion apply to the
repurchase of such Target Shares.
ARTICLE III
REPRESENTATIONS AND WARRANTIES CONCERNING THE TRANSACTIONS
3.1 Representations and Warranties of the Sellers. Each of the Sellers
represents and warrants to the Buyer that the statements contained in this
Section 3.1 are correct and complete as of the Closing Date with respect to
14
himself or itself, except as set forth in the Seller Disclosure Letter
delivered by such Seller to the Buyer prior to the execution of this
Agreement (each a "Seller Disclosure Letter").
(a) Organization of Certain Sellers. If the Seller is an entity, the
Seller is duly organized, validly existing, and in good standing under
the laws of the jurisdiction of its organization.
(b) Authorization of Transaction. The Seller has full power and authority
(including, if the Seller is an entity, full corporate, partnership or
limited liability company power and authority) to execute and deliver
this Agreement and to perform his or its obligations hereunder. This
Agreement constitutes the valid and legally binding obligation of the
Seller, enforceable in accordance with its terms and conditions. The
Seller need not give any notice to, make any filing with, or obtain
any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions
contemplated by this Agreement.
(c) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated
hereby, will (A) violate any constitution, statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other
restriction of any Governmental Entity to which the Seller is subject
or, if the Seller is an entity, any provision of its Organizational
Documents or (B) conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the
right to accelerate, terminate, modify, or cancel, or require any
notice under any agreement, contract, lease, license, instrument, or
other arrangement to which the Seller is a party or by which he or it
is bound or to which any of his or its assets is subject.
(d) Brokers' Fees. Neither the Target, its Subsidiary nor any Shareholder
has any Liability or obligation to pay any fees or commissions to any
broker, finder, or agent with respect to the transactions contemplated
by this Agreement for which the Buyer could become liable or
obligated, other than a fee payable by the Target to
PriceWaterhouseCoopers Securities Inc. in the amount of CAD$236,350
pursuant to that certain letter agreement dated March 6, 2002 (it
being understood that the Target prepaid CAD$80,000 in respect of the
fee of $316,350 due to PriceWaterhouseCoopers Securities Inc. in
respect of this transaction).
(e) Target Shares. The Seller holds of record and owns beneficially the
number of Target Shares set forth next to his or its name in Section
4.2 of the Target Disclosure Letter, free and clear of any
restrictions on transfer (other than any restrictions under the
Securities Act and state and provincial securities laws), Taxes,
Encumbrances, options, warrants, purchase rights, contracts,
commitments, equities, claims, Liabilities and demands. The Seller is
not a party to any option, warrant, purchase right, or other contract
or commitment that could require the Seller to sell, transfer, or
otherwise dispose of any capital stock of the Target (other than this
Agreement). The Seller is not a party to any voting trust, proxy, or
other agreement or understanding with respect to the voting of any
capital stock of the Target.
(f) Residency. To the Knowledge of the Seller, no Shareholder, other than
Christopher J. Church and Fred Heilbronner, is a non-resident of
Canada within the meaning of the Income Tax Act (Canada).
15
3.2 Representations and Warranties of the Buyer. The Buyer represents and
warrants to the Sellers that the statements contained in this Section 3.2
are correct and complete as of the Closing Date, except as set forth in the
Buyer Disclosure Letter delivered by the Buyer to the Sellers prior to the
execution of this Agreement (the "Buyer Disclosure Letter").
(a) Organization of the Buyer and the Parent. The Buyer is a company duly
organized, validly existing, and in good standing under the laws of
the Province of Nova Scotia. The Parent is a corporation duly
incorporated, validly existing, and in good standing under the laws of
the State of Delaware.
(b) Authorization of Transaction. The Buyer and the Parent have full power
and authority (including full corporate power and authority) to
execute and deliver this Agreement and to perform their obligations
hereunder. This Agreement constitutes the valid and legally binding
obligation of the Buyer and the Parent, enforceable in accordance with
its terms and conditions. Neither the Buyer nor the Parent need give
any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order
to consummate the transactions contemplated by this Agreement.
(c) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated
hereby, will (A) violate any constitution, statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other
restriction of any Governmental Entity to which the Buyer or the
Parent is subject or any provision of their respective Organizational
Documents or (B) conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the
right to accelerate, terminate, modify, or cancel, or require any
notice under any agreement, contract, lease, license, instrument, or
other arrangement to which the Buyer or the Parent is a party or by
which either of them is bound or to which any of their assets is
subject.
(d) Brokers' Fees. Neither the Buyer nor the Parent has any Liability or
obligation to pay any fees or commissions to any broker, finder, or
agent with respect to the transactions contemplated by this Agreement
for which any Seller could become liable or obligated.
(e) Investment. The Buyer is not acquiring the Target Shares with a view
to or for sale in connection with any distribution thereof within the
meaning of the Securities Act.
(f) Availability of Funds. At the Closing, the Buyer will have available
adequate cash to pay the Purchase Price.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES CONCERNING THE TARGET AND ITS SUBSIDIARY
The Sellers represent and warrant to the Buyer that the statements
contained in this Article IV are correct and complete as of the Closing Date,
except as set forth in the Target disclosure letter delivered by the Sellers to
the Buyer prior to the execution of this Agreement and initialed by the Parties
16
(the "Target Disclosure Letter"). Nothing in the Target Disclosure Letter shall
be deemed adequate to disclose an exception to a representation or warranty made
herein, however, unless the Target Disclosure Letter identifies the exception
with reasonable particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate to
disclose an exception to a representation or warranty made herein (unless the
representation or warranty has to do with the existence of the document or other
item itself).
4.1 Organization, Qualification, and Corporate Power. Each of the Target and
its Subsidiary is a corporation duly organized, validly existing, and in
good standing or, in the case of the Target, not in the process of being
dissolved, under the laws of the jurisdiction of its incorporation. Each of
the Target and its Subsidiary is duly authorized to conduct business and is
in good standing under the laws of each jurisdiction where such
qualification is required, all of which jurisdictions are listed on Section
4.1 of the Target Disclosure Letter. Each of the Target and its Subsidiary
has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged
and to own and use the properties owned and used by it. The Target has full
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. This Agreement constitutes the valid and
legally binding obligation of the Target, enforceable against the Target in
accordance with its terms and conditions. Section 4.1 of the Target
Disclosure Letter lists the directors and officers of each of the Target
and its Subsidiary. The Sellers have delivered to the Buyer correct and
complete copies of the Organizational Documents of each of the Target and
its Subsidiary (as amended to date). The Corporate Records of each of the
Target and its Subsidiary are correct and substantially complete. Neither
the Target nor its Subsidiary is in default under or in violation of any
provision of its Organizational Documents.
4.2 Capitalization. The entire authorized capital stock of the Target consists
of: (i) an unlimited number of Class A Common Shares, no par value, of
which 5,663,635 shares are issued and outstanding; (ii) an unlimited number
of Class B Common Shares, no par value, of which 7,724,747 shares are
issued and outstanding; and (iii) 1,400,000 Class C Preferred Shares, no
par value, all of which are issued and outstanding. All of the issued and
outstanding Target Shares have been duly authorized, are validly issued,
fully paid, and nonassessable, and are held of record and, to the Knowledge
of the Sellers and the officers and directors of the Target, owned
beneficially by the respective holders as set forth in Section 4.2 of the
Target Disclosure Letter (which Section 4.2 shall be updated by the
Sellers' Representatives and delivered to the Buyer on or before the
Business Day immediately preceding the Distribution Date to reflect any
changes in ownership of the Target Shares between the Closing Date and the
Distribution Date), free and clear of any restrictions on transfer (other
than any restrictions under the Securities Act and state and provincial
securities laws), Taxes, Encumbrances, options, warrants, purchase rights,
contracts, commitments, equities, claims, Liabilities and demands. There
are no outstanding or authorized options, warrants, purchase rights,
subscription rights, conversion rights, exchange rights, or other contracts
or commitments that could require the Target to issue, sell, or otherwise
cause to become outstanding any of its capital stock. The Target has
validly repurchased all stock options that were outstanding as of March 31,
2003 through completed Permitted Transactions. There are no outstanding or
authorized stock appreciation, phantom stock, profit participation, or
similar rights with respect to the Target. There are no voting trusts,
proxies, or other agreements or understandings with respect to the voting
17
of the capital stock of the Target. The Sellers and the Target collectively
have the power, authority and unconditional right to acquire or terminate
all Target Shares not owned by the Sellers as of the date of this
Agreement, without the consent or cooperation of any other Person,
including the other holders of such Target Shares as of the date of this
Agreement. The Sellers and the Target have exercised all rights the Sellers
or the Target have to acquire or terminate all Target Shares held by
Persons other than the Shareholders, and no such Target Shares shall be
outstanding upon completion of the Permitted Transactions, which Permitted
Transactions shall be completed on or prior to the ninetieth (90th) day
after the Closing Date, other than Target Shares that have been legally and
validly transferred to the Buyer.
4.3 Noncontravention. Neither the execution and the delivery of this Agreement,
nor the consummation of the transactions contemplated hereby, will (i)
violate any Laws to which any of the Target and its Subsidiary is subject
or any provision of the Organizational Documents of the Target and its
Subsidiary or (ii) conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the right
to accelerate, terminate, modify, or cancel, or require any notice under
any agreement, contract, lease, license, instrument, or other arrangement
to which the Target or its Subsidiary is a party or by which it is bound or
to which any of its assets is subject (or result in the imposition of any
Encumbrance, claim or Liability upon any of its assets). Neither the Target
nor its Subsidiary needs to give any notice to, make any filing with, or
obtain any Permit, authorization, consent, or approval of any Governmental
Entity or other Person in order for the Parties to consummate the
transactions contemplated by this Agreement, including pursuant to the ICA.
4.4 Brokers' Fees. Except for the fee payable to PriceWaterhouseCoopers
referred to in Section 3.1(d), neither the Target nor its Subsidiary has
any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
4.5 Title to Assets. The Target and its Subsidiary have good and marketable
title to, or a valid leasehold interest in, the properties and assets used
by them, and identified in Section 4.5 of the Target Disclosure Letter,
free and clear of all Encumbrances claims and Liabilities.
4.6 Subsidiaries. The Target has no Subsidiaries other than Shana Corporation
U.S.A., Inc. All of the issued and outstanding shares of capital stock of
the Subsidiary of the Target have been duly authorized and are validly
issued, fully paid, and nonassessable. The Target holds of record and owns
beneficially all of the outstanding shares of the Subsidiary of the Target,
free and clear of any restrictions on transfer (other than restrictions
under the Securities Act and state and provincial securities laws), Taxes,
Encumbrances, options, warrants, purchase rights, contracts, commitments,
equities, claims, Liabilities and demands, other than Permitted
Encumbrances. There are no outstanding or authorized options, warrants,
purchase rights, subscription rights, conversion rights, exchange rights,
or other contracts or commitments that could require the Target to sell,
transfer, or otherwise dispose of any capital stock of its Subsidiary or
that could require the Subsidiary of the Target to issue, sell, or
otherwise cause to become outstanding any of its own capital stock. There
are no outstanding stock appreciation, phantom stock, profit participation,
or similar rights with respect to the Subsidiary of the Target. There are
no voting trusts, proxies, or other agreements or understandings with
respect to the voting of any capital stock of any Subsidiary of the Target.
18
Neither the Target nor its Subsidiary controls directly or indirectly or
has any direct or indirect equity participation in any corporation,
partnership, trust, or other business association that is not a Subsidiary
of the Target.
4.7 Financial Statements. Included as Section 4.7 of the Target Disclosure
Letter are the following financial statements (collectively the "Financial
Statements"):
Year ended Entity Statements .
July 31, 2002 Shana Corporation Consolidated Audited - Balance Sheet, statements of income,
retained earnings and cash flow
July 31, 2002 Shana Corporation Unaudited - Balance Sheet, statements of income,
Non Consolidated and retained earnings
July 31, 2002 Shana Corporation, USA Unaudited - Balance Sheet, statements of income,
and retained earnings
July 31, 2001 Shana Corporation Consolidated Audited - Balance Sheet, statements of income,
retained earnings and cash flow
July 31, 2001 Shana Corporation Unaudited - Balance Sheet, statements of income,
Non Consolidated and retained earnings
July 31, 2001 Shana Corporation, USA Unaudited - Balance Sheet, statements of income,
and retained earnings
July 31, 2001 Blackstone Multimedia Unaudited - Balance Sheet, statements of income,
Corporation retained earnings and cash flow
July 31, 2000 Shana Corporation Consolidated Unaudited - Balance Sheet, statements of income,
retained earnings and cash flow
July 31, 2000 Shana Corporation Audited - Balance Sheet, statements of income,
retained earnings and cash flow
July 31, 2000 Shana Corporation, LLC Unaudited - Balance Sheet, statements of income,
and retained earnings
July 31, 2000 Blackstone Multimedia Unaudited - Balance Sheet, statements of income,
Corporation retained earnings and cash flow
July 31, 1999 Shana Corporation Consolidated Unaudited - Balance Sheet, statements of income,
retained earnings and cash flow
July 31, 1999 Shana Corporation Audited - Balance Sheet, statements of income,
Non Consolidated retained earnings and cash flow
July 31, 1999 Shana Corporation, LLC Unaudited - Balance Sheet, statements of income,
and retained earnings
July 31, 1999 Blackstone Multimedia Unaudited - Balance Sheet, statements of income,
Corporation retained earnings and cash flow
July 31, 1998 Shana Corporation Audited - Balance Sheet, statements of income,
Non Consolidated retained earnings and cash flow
July 31, 1998 Blackstone Multimedia Unaudited - Balance Sheet, statements of income,
Corporation retained earnings and cash flow
Non Consolidated .
19
together with unaudited consolidated and consolidating balance sheets and
statements of income, retained earnings, and cash flow (the "Most Recent
Financial Statements") as of and for the seven (7) months ended February 28,
2003 (the "Most Recent Fiscal Month End") for the Target and its Subsidiary. The
Financial Statements (including the notes thereto) have been prepared in
accordance with Canadian GAAP applied on a consistent basis throughout the
periods covered thereby, present fairly the financial condition of the Target
and its Subsidiary as of such dates and the results of operations of the Target
and its Subsidiary for such periods, are correct and complete, and are
consistent with the Books and Records of the Target and its Subsidiary (which
Books and Records are correct and complete); provided, however, that the Most
Recent Financial Statements are subject to normal year-end adjustments (which
adjustments will not exceed CAD$200,000 in the aggregate) and lack footnotes and
other presentation items.
4.8 Events Subsequent to Most Recent Fiscal Year End. Since the Most Recent
Fiscal Year End, there has not been any material adverse change in the
business, financial condition, operations, results of operations, or future
prospects of the Target or its Subsidiary. Without limiting the generality
of the foregoing, since that date, except as set forth on Section 4.8 of
the Target Disclosure Letter:
(a) neither the Target nor its Subsidiary has sold, leased, licensed,
transferred, or assigned any of its assets, tangible or intangible,
either involving more than $10,000 singly or $50,000 in the aggregate
or other than for a fair consideration in the Ordinary Course of
Business;
(b) neither the Target nor its Subsidiary has entered into any agreement,
contract, lease, or license (or series of related agreements,
contracts, leases, and licenses) either involving more than $10,000
singly or $50,000 in the aggregate or outside the Ordinary Course of
Business;
(c) no party (including any of the Target and its Subsidiary) has
accelerated, terminated, modified, or cancelled any agreement,
contract, lease, or license (or series of related agreements,
contracts, leases, and licenses) involving more than $10,000 to which
the Target or its Subsidiary is a party or by which either of them is
bound or outside the Ordinary Course of Business;
(d) neither the Target nor its Subsidiary has imposed or suffered any
Encumbrance upon any of its assets, tangible or intangible, other than
the Permitted Encumbrances;
(e) neither the Target nor its Subsidiary has made any capital expenditure
(or series of related capital expenditures) either involving more than
$10,000 singly or $50,000 in the aggregate or outside the Ordinary
Course of Business;
(f) neither the Target nor its Subsidiary has paid, discharged or
satisfied any Liability, other than any payment, discharge or
satisfaction in the Ordinary Course of Business of Liabilities set
forth or reserved for on the Financial Statements or incurred
subsequent thereto in the Ordinary Course of Business;
20
(g) neither the Target nor its Subsidiary has made any capital investment
in, any loan to, or any acquisition of the securities or assets of,
any other Person (or series of related capital investments, loans, and
acquisitions) either involving more than $10,000 singly or $50,000 in
the aggregate or outside the Ordinary Course of Business;
(h) neither the Target nor its Subsidiary has issued any note, bond, or
other debt security or created, incurred, assumed, or guaranteed any
indebtedness for borrowed money or capitalized lease obligation either
involving more than $10,000 singly or $50,000 in the aggregate;
(i) neither the Target nor its Subsidiary has delayed or postponed the
payment of accounts payable and other Liabilities outside the Ordinary
Course of Business;
(j) neither the Target nor its Subsidiary has cancelled, compromised,
waived, or released any right or claim (or series of related rights
and claims) either involving more than $10,000 singly or $50,000 in
the aggregate or outside the Ordinary Course of Business;
(k) neither the Target nor its Subsidiary has pledged, modified,
disclosed, disposed of or permitted to lapse any material rights,
including any Intellectual Property, in whole or in part, or suffered
any disclosure of any trade secret process or know-how or Confidential
Information to any Person other than officers, directors, employees
and full-time consultants of the Target or its Subsidiary or pursuant
to confidentiality agreements listed in Section 4.8(k) of the Target
Disclosure Letter and containing protections in favor of the Target or
its Subsidiary no less favorable than those set forth in Section 5.4.;
(l) neither the Target nor its Subsidiary has suffered or received threats
of any termination of, or adverse change in, the Target's or any of
its Subsidiary's relations with any of the Target's or any of its
Subsidiary's suppliers or customers, or experienced the occurrence of
any event that is likely to result in any such termination or adverse
change;
(m) there has been no change made or authorized in the Organizational
Documents or capital structure of either the Target or its Subsidiary;
(n) neither the Target nor its Subsidiary has issued, sold, or otherwise
disposed of any of its capital stock, or granted any options,
warrants, or other rights to purchase or obtain (including upon
conversion, exchange, or exercise) any of its capital stock;
(o) Except for Permitted Transactions, neither the Target nor its
Subsidiary has declared, set aside, or paid any dividend or made any
distribution with respect to its capital stock (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its capital
stock;
(p) neither the Target nor its Subsidiary has experienced any damage,
destruction, or loss (whether or not covered by insurance) to its
property in excess of $5,000;
(q) neither the Target nor its Subsidiary has made any loan to, or entered
into any other transaction with, any of its security holders,
directors, officers, and employees, and their respective Affiliates,
21
or any member of such Person's immediate family, or any other
Affiliate of the Target, outside the Ordinary Course of Business;
(r) neither the Target nor its Subsidiary has entered into any employment
contract or collective bargaining agreement, written or oral, or
modified the terms of any existing such contract or agreement;
(s) neither the Target nor its Subsidiary has granted any increase in the
base compensation of, or sales commission rate payable to, any of its
directors, officers, and employees;
(t) neither the Target nor its Subsidiary has adopted, amended, modified,
or terminated any bonus, profit-sharing, incentive, severance, or
other plan, contract, or commitment for the benefit of any of its
directors, officers, and employees (or taken any such action with
respect to any other Employee Plan);
(u) neither the Target nor its Subsidiary has made any other change in
employment terms for any of its directors, officers, and employees
outside the Ordinary Course of Business;
(v) neither the Target nor its Subsidiary has suffered or received threats
of any labor strike, dispute, slowdown or work stoppage;
(w) neither the Target nor its Subsidiary has terminated, removed or
otherwise replaced any of its auditors, directors, officers or had any
employee that earned more than $65,000 per year or had any such
employee terminate his or her employment or threaten to do the same;
(x) neither the Target nor its Subsidiary has changed its accounting
methods, principles or practices, including, without limitation, any
change in the application or interpretation of Canadian GAAP;
(y) neither the Target nor its Subsidiary made any Tax election, changed
any annual Tax accounting period, amended any Tax Return, settled or
compromised any income Tax Liability, entered into any closing
agreement, settled any Tax claim or assessment, surrendered any right
to claim a Tax refund or failed to make the payments or consent to any
extension or waiver of the limitations period applicable to any Tax
claim or assessment;
(z) neither the Target nor its Subsidiary has made or pledged to make any
charitable or other capital contribution outside the Ordinary Course
of Business;
(aa) neither the Target nor its Subsidiary has committed to any of the
foregoing.
4.9 Undisclosed Liabilities. Except as set forth in Section 4.9 of the Target
Disclosure Letter, neither the Target nor its Subsidiary has any Liability
(and, to the Knowledge of the Sellers and the officers and directors of the
Target, there is no Basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand
22
against any of them giving rise to any Liability), except for (i)
Liabilities set forth on the face of, and properly reserved against on, the
Most Recent Balance Sheet (rather than in any notes thereto), (ii)
Liabilities which have arisen after the Most Recent Fiscal Month End in the
Ordinary Course of Business (none of which results from, arises out of,
relates to, is in the nature of, or was caused by any breach of contract,
breach of warranty, tort, infringement, or violation of law) and (iii)
Liabilities arising under or referred to in this Agreement.
4.10 Legal Compliance. Each of the Target, its Subsidiary, and their respective
predecessors and Affiliates has complied with all applicable Laws of
Governmental Entities, and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed
or commenced against any of them alleging any failure so to comply or that
any currently existing circumstances are likely to result in any failure so
to comply.
4.11 Tax Matters.
(a) Except as set forth on Section 4.11(a) of the Target Disclosure
Letter, each of the Target and its Subsidiary has timely filed with
the appropriate taxing authorities all Tax Returns required to be
filed through the date hereof. All such Tax Returns are complete and
accurate in all respects. All Taxes due and owing by the Target or its
Subsidiary on or before the date hereof (whether or not shown on any
Tax Return) have been paid. Except as set forth on Section 4.11(a) of
the Target Disclosure Letter, neither the Target nor its Subsidiary
currently is the beneficiary of any extension of time within which to
file any Tax Return. No claim has ever been made by an authority in a
jurisdiction where any of the Target and its Subsidiary does not file
Tax Returns that it is or may be subject to taxation by that
jurisdiction.
(b) The unpaid Taxes of the Target and its Subsidiary (i) did not, as of
the dates of the Most Recent Financial Statements, exceed the reserve
for Tax Liability (excluding any reserve for deferred Taxes
established to reflect timing differences between book and Tax income)
set forth on the face of the balance sheets (rather than in any notes
thereto) contained in the Most Recent Financial Statements, and (ii)
will not exceed that reserve as adjusted for operations and
transactions through the Closing Date in accordance with the past
custom and practice of the Target and its Subsidiary in filing their
Tax Returns. Since the date of the Most Recent Financial Statements,
neither the Target nor its Subsidiary has incurred any Liability for
Taxes outside the Ordinary Course of Business or otherwise
inconsistent with past custom and practice.
(c) No deficiencies for Taxes for the Target or its Subsidiary have been
claimed, proposed or assessed by any taxing or other Governmental
Entity. Except as set forth on Section 4.11(c) of the Target
Disclosure Letter, there are no pending or, to the knowledge of any of
the Target and its Subsidiary, threatened audits, assessments, claims,
proceedings or investigations for or relating to any Liability in
respect of Taxes of any of the Target and its Subsidiary, and there
are no matters under discussion with any Governmental Entities, or
known to any of the Sellers, the Target and its Subsidiary, with
respect to Taxes that are likely to result in an additional Liability
for Taxes with respect to any of the Target and its Subsidiary. The
Sellers have delivered or made available to Buyer complete and
accurate copies of federal, state, provincial, local and foreign Tax
Returns of each of the Target and its Subsidiary and their
predecessors for the years ended July 31, 1998, 1999, 2000, 2001 and
23
2002 and complete and accurate copies of all examination reports and
statements of deficiencies assessed against or agreed to by any of the
Target and its Subsidiary or any predecessors since July 31, 1998.
Except as set forth on Section 4.11(c) of the Target Disclosure
Letter, neither the Target nor its Subsidiary nor any predecessor has
waived any statute of limitations in respect of Taxes or agreed to any
extension of time with respect to a Tax assessment or deficiency. Each
of the Target and its Subsidiary has disclosed on its federal income
Tax Returns all positions taken therein that could give rise to a
substantial understatement of U.S. federal income Tax within the
meaning of Code Section 6662.
(d) There are no Encumbrances, claims or Liabilities, for Taxes, other
than liens for Taxes not yet due and payable, on any assets of any of
the Target and its Subsidiary.
(e) All material elections with respect to Taxes affecting any of the
Target and its Subsidiary as of the date hereof, to the extent such
elections are not shown on or in the Tax Returns that have been
delivered or made available to Buyer, are set forth on Section 4.11(e)
of the Target Disclosure Letter. Neither the Target nor its Subsidiary
(i) has consented at any time under Section 341(f)(1) of the Code to
have the provisions of Section 341(f)(2) of the Code apply to any
disposition of the assets of the Target or its Subsidiary; (ii) has
agreed, or is required, to make any adjustment under Section 481(a) of
the Code by reason of a change in accounting method or otherwise;
(iii) has made an election, or is required, to treat any of its assets
as owned by another Person pursuant to the provisions of former
Section 168(f) of the Code or as tax-exempt bond financed property or
tax-exempt use property within the meaning of Section 168 of the Code;
(iv) has acquired or owns any assets that directly or indirectly
secure any debt the interest on which is tax-exempt under Section
103(a) of the Code; (v) has made or will make a consent dividend
election under Section 565 of the Code; or (vi) made any of the
foregoing elections or is required to apply any of the foregoing rules
under any comparable state or local Tax provision.
(f) There are no Tax-sharing agreements or similar arrangements (including
indemnity arrangements) with respect to or involving any of the Target
and its Subsidiary, and, after the Closing Date, none of the Target
and its Subsidiary shall be bound by any such Tax-sharing agreements
or similar arrangements or have any Liability thereunder for amounts
due in respect of periods prior to the Closing Date.
(g) None of the Target and its Subsidiary has been a member of an
Affiliated Group filing a consolidated U.S. federal income Tax Return
(other than a group the common parent of which is Target). None of the
Target and its Subsidiary has any Liability for the Taxes of any
Person (other than Taxes of the Target and its Subsidiary) (i) under
Treasury Regulation Section 1.1502-6 (or any similar provision of
state, local, or foreign law), (ii) as a transferee or successor,
(iii) by contract, or (iv) otherwise.
(h) Each of the Target and its Subsidiary has withheld and paid to the
proper Governmental Entity, on a timely basis, all Taxes required to
have been withheld and paid in connection with amounts paid or owing
to any employee, independent contractor, creditor, stockholder or
other third party. The transaction contemplated herein is not subject
to the tax withholding provisions of Section 3406 of the Code, or of
Subchapter A of Chapter 3 of the Code or of any other provision of
law.
24
(i) Neither the Target nor its Subsidiary has been a United States real
property holding corporation within the meaning of Section 897(c)(2)
of the Code during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code.
(j) Neither the Target nor its Subsidiary (i) is a partner for Tax
purposes with respect to any joint venture, partnership, or other
arrangement or contract which is treated as a partnership for Tax
purposes, (ii) owns a single member limited liability company which is
treated as a disregarded entity, (iii) is a shareholder of a
"controlled foreign corporation" as defined in Section 957 of the Code
(or any similar provision of state, local or foreign law) or (iv) is a
"personal holding company" as defined in Section 542 of the Code (or
any similar provision of state, local or foreign law).
(k) Neither the Target nor its Subsidiary has or has had a permanent
establishment in any foreign country, as defined in any applicable Tax
treaty or convention between the United States of America and such
foreign country, other than Canada.
(l) Except as set forth in Section 4.11(d) of the Target Disclosure
Letter, neither the Target nor its Subsidiary has claimed nor will
claim any reserve under any provision of the Income Tax Act (Canada)
or any equivalent provision, if such amount could be included in the
income of the Target or such Subsidiary for any period ending after
the date hereof.
(m) Neither the Target nor its Subsidiary has participated in, or
cooperated with, an international boycott within the meaning of
Section 999 of the Code.
(n) None of Section 78, Section 79, or Sections 80 to 80.04 of the Income
Tax Act (Canada), or any equivalent provincial provision, have applied
or will apply to the Target or its Subsidiary at any time on or before
the Closing Date.
(o) Neither the Target nor its Subsidiary has acquired property (whether
tangible or intangible) from, or disposed of property (whether
tangible or intangible) to, received payment for services from, or
made payment of services to, any Person with whom it does not deal at
arm's length (as that term is construed under the Income Tax Act
(Canada)) for proceeds less than the fair market value thereof, or for
proceeds greater than the fair market value thereof, including, for
greater certainty, in circumstances in which Section 160 of the Income
Tax Act (Canada) would apply to subject it to Liability for Tax.
Neither the Target nor its Subsidiary has any outstanding loans or
indebtedness incurred by directors, former directors, officers,
shareholders, and/or employees of the Target or its Subsidiary or by
any Person not dealing at arm's length (as that term is construed
under the Income Tax Act (Canada)) with any of the foregoing.
(p) None of Section 17 of the Income Tax Act (Canada), or any equivalent
provincial provision, have applied or will apply to any of the Target
and its Subsidiary at any time on or before the Closing Date.
(q) For all transactions involving the Target and its Subsidiary with any
person who is not a resident of Canada and deals with the Target and
its Subsidiary on a non-arm's length basis (each for the purposes of
25
the Income Tax Act (Canada)), each of the Target and its Subsidiary is
in substantial compliance with the transfer pricing requirements
contained in Section 247 of the Income Tax Act (Canada).
(r) Each of the Target and its Subsidiary that carry on business in Canada
is duly registered under subdivision (d) of Division V of Part IX of
the Excise Tax Act (Canada) with respect to goods and services Tax and
any harmonized sales Tax and, if applicable, under Division I of
Chapter VII of Title I of the Quebec Sales Tax Act with respect to any
Quebec sales Tax.
(s) Each of the Target and its Subsidiary has collected from its past and
present customers (or other Persons paying amounts to the Target or
its Subsidiary) the amount of all Taxes (including goods and services
Tax and sales Taxes) required to be collected and have remitted such
Taxes when due, in the form required under appropriate laws.
(t) There are no outstanding rulings issued by, or requests for rulings
from, any taxing authority that would have any impact on the Tax
position of the Target or its Subsidiary.
4.12 Real Property.
(a) Neither the Target nor its Subsidiary owns any real property.
(b) Section 4.12(b) of the Target Disclosure Letter lists and describes
briefly all real property leased or subleased to any of the Target and
its Subsidiary. The Sellers have delivered to the Buyer correct and
complete copies of the leases and subleases listed in Section 4.12(b)
of the Target Disclosure Letter (as amended to date). With respect to
each lease and sublease listed in Section 4.12(b) of the Target
Disclosure Letter:
(i) the lease or sublease is legal, valid, binding, enforceable, and
in full force and effect;
(ii) the lease or sublease will continue to be legal, valid, binding,
enforceable, and in full force and effect on identical terms
following the consummation of the transactions contemplated
hereby;
(iii)no party to the lease or sublease is in breach or default, and
no event has occurred which, with notice or lapse of time, would
constitute a breach or default or permit termination,
modification, or acceleration thereunder;
(iv) no party to the lease or sublease has repudiated any provision
thereof;
(v) there are no disputes, oral agreements, or forbearance programs
in effect as to the lease or sublease;
(vi) with respect to each sublease, the representations and warranties
set forth in subsections (i) through (v) above are true and
correct with respect to the underlying lease;
26
(vii)neither the Target nor its Subsidiary has assigned, transferred,
conveyed, mortgaged, deeded in trust, or encumbered any interest
in the leasehold or subleasehold;
(viii) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and
permits) required in connection with the operation thereof and
have been operated and maintained in accordance with applicable
laws, rules, and regulations;
(ix) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said
facilities; and
(x) to the Knowledge of the Sellers and the officers and directors of
the Target, the owner of the facility leased or subleased has
good and marketable title to the parcel of real property, free
and clear of any Encumbrance or other restriction, except for
installments of special easements not yet delinquent and recorded
easements, covenants, and other restrictions which do not impair
the current use, occupancy, or value, or the marketability of
title, of the property subject thereto.
4.13 Intellectual Property.
(a) Section 4.13 of the Target Disclosure Letter lists all Intellectual
Property of the Target and its Subsidiary related to, or necessary for
the operation of, the businesses of the Target and its Subsidiary as
presently or heretofore conducted or reasonably contemplated to be
conducted, all of which Intellectual Property is, and was at all times
when used, (i) owned by; (ii) licensed to; or (iii) developed or
created by or for Target. Section 4.13 of the Target Disclosure Letter
also sets forth with respect to such Intellectual Property: (i) for
each U.S., Canadian and foreign patent and patent application as
applicable, the number, normal expiration date, title and priority
information for each country in which such patent has been issued, or
the application number, date of filing, title and priority information
for each country; (ii) for each U.S., Canadian and foreign trademark,
tradename or service mark, whether or not registered, the date first
used, the application serial number or registration number, the class
of goods covered, the nature of the goods or services, the countries
in which the names or mark is used and the expiration date for each
country in which a trademark has been registered; (iii) for each U.S.,
Canadian and foreign copyright for which registration has been sought,
whether or not registered, the date of creation and first publication
of the work, the number and date of registration for each country in
which a copyright application has been registered; (iv) for each mask
work and integrated circuit topography, whether or not registered, the
date of first commercial exploitation and if registered, the
registration number and date of registration; and (v) all Intellectual
Property which has been licensed from a third party or licensed to a
third party. True and correct copies of all registrations, issued
patents, pending applications, file histories, invention disclosures,
prototypes, drawings and other documentation and tangible embodiments
of works of authorship pertaining to or embodying such Intellectual
Property has been delivered to or are in the possession of the Buyer.
(b) The Intellectual Property listed on Section 4.13 of the Target
Disclosure Letter constitute (i) all Intellectual Property used
primarily in connection with the businesses of the Target and its
27
Subsidiary, and (ii) all Intellectual Property necessary or desirable
for the normal conduct of the businesses of the Target and its
Subsidiary.
(c) There exists no contractual or other obligation to compensate any
Person for the use of any Intellectual Property listed on Section 4.13
of the Target Disclosure Letter nor has there been granted to any
Person any license, option or other rights to use in any manner any
such Intellectual Property, whether requiring the payment of royalties
or not (other than in the Ordinary Course of Business). There exists
no contractual obligation, including, without limitation, any covenant
not to compete or exclusive license, that would restrict the Buyer's
operation of the businesses of the Target and its Subsidiary, or use
of any of the Intellectual Property listed on Section 4.13 of the
Target Disclosure Letter, including any restriction based on
geographical boundaries, with respect to sales of products or
otherwise. The conduct of the businesses of the Target and its
Subsidiary including the design, development, use, import, manufacture
and sale of the products, technology or services (including products,
technology or services currently under development) prior to the
Closing Date has not infringed, and to the Knowledge of the Sellers
and the directors and officers (and employees responsible for
Intellectual Property matters) of the Target or its Subsidiary, the
contemplated use of the Target's and its Subsidiary's Intellectual
Property including the design, development, use, import, manufacture
and sale of the products, technology or services (including products,
technology or services currently under development) from and after the
Closing Date will not (i) infringe or misappropriate the Intellectual
Property of any third party (ii) violate any term or provision of any
license or contract concerning such Intellectual Property, (iii)
violate the rights of any third party (including rights to privacy or
publicity), or (iv) constitute unfair competition or an unfair trade
practice under any Law.
(d) The Target and its Subsidiary exclusively owns the Intellectual
Property listed on Section 4.13 of the Target Disclosure Letter
(excluding Intellectual Property licensed to the Target and its
Subsidiary under any license listed on Section 4.16 of the Target
Disclosure Letter) and is free and clear of any liens, and free and
clear of any rights or interests by federal agencies, governmental
entities, universities, or non-profit entities including any rights
that might arise associated with governmental funding, and such
Intellectual Property will not cease to be valid rights of the Target
and its Subsidiary by reason of the execution, delivery and
performance of this Agreement or the consummation of the transactions
contemplated hereby. The patents listed on Section 4.13 of the Target
Disclosure Letter are in full force and effect and are not subject to
any fines, maintenance fees or actions falling due within 90 days
after the Closing Date. With respect to Intellectual Property
identified on Section 4.13 as licensed to the Target and its
Subsidiary, the Target and its Subsidiary has all requisite right,
title and interest in or valid and enforceable rights under contracts
or licenses to make, have made, use, import, offer for sale,
distribute and sell the products, technology or services (including
products, technology or services currently under development)
necessary to conduct the business of Target and its Subsidiary. Except
as identified on Section 4.13 of the Target Disclosure Letter, neither
the Target nor any Subsidiary has granted any license of or other
right to use or authorized the retention of any rights to use any of
the Intellectual Property to any other third party. Furthermore, there
are no contracts or licenses related to the Intellectual Property
under which there is any dispute (or facts that may reasonably lead to
a dispute) known to Target or its Subsidiary regarding the scope of
28
such contract or license, or performance under such contract or
license, including with respect to any payments to be made or received
by the Target or its Subsidiary thereunder.
(e) Neither Target nor any Subsidiary of Target has received any notice of
(i) alleged invalidity with respect to any Intellectual Property
listed on Section 4.13 of the Target Disclosure Letter or (ii) alleged
infringement or misappropriation of any rights of others due to any
activity by the Target or its Subsidiary involving products derived
from, or containing such Intellectual Property or constitutes unfair
competition or unfair trade practices under any Law. The Target's use
and use by any Subsidiary of the Target in the conduct of their
respective businesses as currently contemplated of the Intellectual
Property listed on Section 4.13 of the Target Disclosure Letter do not
and will not infringe upon or otherwise violate the valid rights of
any third party anywhere in the world. No other Person (i) has
notified the Target or its Subsidiary that it is claiming any
ownership of or right to use any Intellectual Property listed on
Section 4.13 of the Target Disclosure Letter or (ii) to the Knowledge
of the Sellers and the directors and officers (and employees
responsible for Intellectual Property matters) of the Target or its
Subsidiary, is infringing upon any such Intellectual Property in any
way.
(f) The Target and its Subsidiary have taken all commercially reasonable
and prudent steps to protect the Intellectual Property listed on
Section 4.13 of the Target Disclosure Letter from infringement by any
other Person. All of the pending applications for such Intellectual
Property have been duly filed and is not subject to any statutory bars
known to the Target or its Subsidiary, or subject to acts committed by
the Target or the Subsidiary that would prevent the grant of the
patent protection sought or would invalidate any patent grant if later
learned such as, by way of example, failing to comply with statutory
bars associated with prior sales, offers for sale, public use, or
public disclosure, failure to fully enable the inventions, failure to
disclose the best mode of practicing the inventions, failure to
correctly list inventors, or failure to disclose all known prior art.
The Target and its Subsidiary have taken all commercially reasonable
steps necessary or appropriate to safeguard and maintain the secrecy
and confidentiality of all such Intellectual Property, including
assuring that all current and former employees and consultants of the
Target and its Subsidiary have signed agreements with the Target or
the Subsidiary of the Target conveying all Intellectual Property
arising from the employment or consulting activities to the Target or
the Subsidiary of the Target and have signed Intellectual Property
confidentiality agreements. All tangible embodiments of all
Intellectual Property that constitute trade secrets are located at
Target's offices in Edmonton, Alberta.
(g) None of the source code to any of the Software has been disclosed to
any third party and except for source code escrow obligations set
forth in Section 4.13(g) of the Target Disclosure Letter, neither the
Target nor its Subsidiary has delivered or is under any obligation to
deliver the source code to the Software to any third party, whether
such obligation currently exists or may arise in the future on the
happening of some event. Except as set forth in Section 4.13 of the
Target Disclosure Letter the Software also does not contain any
"freeware" or "shareware" and is not subject in any way to the GNU
General Public License (GPL) , the Lesser General Public License
(LGPL) or other license for publicly available software. In addition,
the Software does not contain therein any Adobe source code, object
code, derivative works or any other Adobe intellectual property rights
including rights associated with Adobe TrueForm.
29
(h) Target or its Subsidiary has a complete up-to-date copy of all of the
source code for the Software and a copy of all configuration files and
other material necessary to compile and run the Software.
(i) A second complete and up-to-date copy of the source code to the
Software and all configuration files and other material necessary to
compile and run the Software is stored at a secure and different
location from where the other copy of same is held and the Target or
its Subsidiary is able to retrieve the second copy on short notice
without material payment.
(j) Each of the Target's and its Subsidiary's software products performs
without defect and, where the installation is complete, in accordance
in all material respects with the functions described in any agreed
specifications, statements of work or end user documentation provided
to customers of the Target or its Subsidiary. The Target and its
Subsidiary have taken all reasonable actions customary in the software
industry for a company of similar size to the Target and its
Subsidiary to document the Software and its operation in a clear and
professional manner. To the Knowledge of the Sellers and the directors
and officers (and employees responsible for Intellectual Property
matters) of the Target or its Subsidiary, the Software does not
contain any disabling code or virus code of any nature that would
affect the customer's use of the software or any other customer
activity.
4.14 Tangible Assets. The Target and its Subsidiary own, license or lease all
buildings, machinery, equipment, and other tangible assets necessary for
the conduct of their businesses as presently conducted and such tangible
assets in the aggregate are in such operating condition and repair (subject
to normal wear and tear), as necessary for the conduct of such businesses
as presently conducted.
4.15 Inventory. The inventory of the Target and its Subsidiary consists of raw
materials and supplies, manufactured and purchased parts, goods in process,
and finished goods, all of which is merchantable and fit for the purpose
for which it was procured or manufactured, and none of which is obsolete,
damaged, or defective, subject only to the reserve for inventory writedown
set forth on the face of the Most Recent Balance Sheet (rather than in any
notes thereto) as adjusted for the passage of time through the Closing Date
in accordance with the past custom and practice of the Target and its
Subsidiary.
4.16 Contracts. Section 4.16 of the Target Disclosure Letter lists the following
contracts and other agreements to which any of the Target and its
Subsidiary is a party:
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments
in excess of $5,000 per annum;
(b) any agreement (or group of related agreements) for the purchase or
sale of raw materials, commodities, supplies, products, or other
personal property or assets, or for the furnishing or receipt of
services, the performance of which will (i) extend over a period of
more than one year, (ii) result in a loss to any of the Target and its
Subsidiary, or (iii) involve consideration in excess of $5,000;
30
(c) any agreement under which the Target or it Subsidiary is obligated to
develop computer software for a third party other than pursuant to the
Ordinary Course of Business maintenance agreements which accompany the
license of the Software;
(d) any agreement or license to any Software in favor of any third party
which permits the third party to sell such Software to others, or to
permit others to use such Software, whether on a stand-alone basis or
bundled with other Software;
(e) any agreement or license to any Software in favor of any third party
which permits the third party to us more than 10 copies of such
Software or permits more than 10 users to use such Software
concurrently;
(f) any agreement concerning partnership, joint venture, manufacturing or
research arrangements with, or other investment in or alliance with,
any other Person;
(g) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for
borrowed money, or any capitalized lease obligation, in excess of
$50,000 or under which it has imposed an Encumbrance on any of its
assets, tangible or intangible;
(h) any agreement relating to or which contains licenses or royalties,
whether the Target or its Subsidiary is the licensor or licensee
thereunder;
(i) any agreement relating to or which contains confidentiality or
noncompetition covenants;
(j) any agreement which contains any material provisions requiring the
Target or its Subsidiary to indemnify another Person (except for
customer service contracts entered into in the Ordinary Course of
Business);
(k) any agreement with any of the Sellers and their Affiliates (other than
the Target and its Subsidiary), or any Person with whom the Target or
its Subsidiary does not deal at arm's length within the meaning of the
Income Tax Act (Canada);
(l) any profit sharing, stock option, stock purchase, stock appreciation,
deferred compensation, severance, or other plan or arrangement for the
benefit of its current or former directors, officers, and employees;
(m) any collective bargaining agreement;
(n) any agreement for the employment of any individual on a full-time,
part-time, consulting, or other basis providing annual compensation in
excess of $65,000 or providing any employee, officer or director of
the Target or its Subsidiary with any severance payment or
entitlement, or any payment arising from a change of control of the
Target or its Subsidiary, or any payment arising as the result of a
retention bonus;
(o) any agreement under which it has advanced or loaned any amount to any
of its directors, officers, and employees;
31
(p) any agreement with any Governmental Entity;
(q) any agreement under which the consequences of a default or termination
could have a material adverse effect on the business, financial
condition, operations, results of operations, or future prospects of
either the Target or its Subsidiary; or
(r) any other agreement (or group of related agreements) the performance
of which involves consideration in excess of $50,000.
The Sellers have delivered to the Buyer a correct and complete copy of each
written agreement listed in Section 4.16 of the Target Disclosure Letter (as
amended to date) and a written summary setting forth the terms and conditions of
each oral agreement referred to in Section 4.16 of the Target Disclosure Letter.
With respect to each such agreement: (i) the agreement is legal, valid, binding,
enforceable, and in full force and effect; (ii) the agreement will continue to
be legal, valid, binding, enforceable, and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby; (iii)
no party is in breach or default, and no event has occurred which with notice or
lapse of time would constitute a breach or default, or permit termination,
modification, or acceleration, under the agreement; (iv) no party has repudiated
any provision of the agreement; and (v) none of the Sellers, the Target or its
Subsidiary has any reason to believe that the products or services called for by
any executory agreement cannot be supplied by the Target or its Subsidiary in
accordance with the terms of such agreement, including time specifications, and
has no reason to believe that any unfinished agreement will, upon performance by
the Target or its Subsidiary, result in a loss to the Target or its Subsidiary.
4.17 Permits. Section 4.17 of the Target Disclosure Letter lists all Permits
held by the Target and its Subsidiary, each of which is valid and in full
force and effect. The Target and its Subsidiary have all material Permits
required or necessary to the conduct of their businesses as now being
conducted or material to the ownership, lease and/or use and operations of
their assets and own or possess such Permits free and clear of any
Encumbrances, claims or Liabilities. Neither the Target nor any of its
Subsidiary has violated any such Permit in any respect, and each of the
Target and its Subsidiary is in compliance in all respects with all such
Permits. Neither the Target nor its Subsidiary has received any notice to
the effect that (a) the Target or its Subsidiary is not in compliance with,
or that it is in violation of, any Permits or (b) any currently existing
circumstances are likely to result in a failure of the Target or its
Subsidiary to comply with, or in a violation by the Target or its
Subsidiary of, any Permits. There are no pending or, to the Knowledge of
the Sellers, threatened proceedings to limit, modify or rescind any Permit.
Except as set forth on Section 4.17 of the Target Disclosure Letter, all
material Permits are renewable by their terms or in the Ordinary Course of
Business without the need to comply with any special qualification
procedures or to pay any amounts other than routine filing fees and such
Permits will not be subject to suspension, modification or revocation or
require any consent to transfer the same in connection with the completion
of the transactions contemplated by this Agreement.
4.18 Notes and Accounts Receivable. All notes and accounts receivable of the
Target and its Subsidiary are reflected properly on their books and
records, are valid receivables subject to no setoffs or counterclaims, are
current and collectible, and will be collected in accordance with their
32
terms at their recorded amounts, subject only to the reserve for bad debts
set forth on the face of the Most Recent Balance Sheet (rather than in any
notes thereto) as adjusted for the passage of time through the Closing Date
in accordance with the past custom and practice of the Target and its
Subsidiary.
4.19 Powers of Attorney. Except as set forth in Section 4.19 of the Target
Disclosure Letter, there are no outstanding powers of attorney executed on
behalf of either of the Target and its Subsidiary.
4.20 Insurance. Section 4.20 of the Target Disclosure Letter sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which any of the Target and
its Subsidiary has been a party, a named insured, or otherwise the
beneficiary of coverage at any time within the past three (3) years:
(a) the name, address, and telephone number of the agent;
(b) the name of the insurer, the name of the policyholder, and the name of
each covered insured;
(c) the policy number and the period of coverage;
(d) the scope (including an indication of whether the coverage was on a
claims made, occurrence, or other basis) and amount (including a
description of how deductibles and ceilings are calculated and
operate) of coverage; and
(e) a description of any retroactive premium adjustments or other
loss-sharing arrangements.
With respect to each such insurance policy: (i) the policy is legal, valid,
binding, enforceable, and in full force and effect; (ii) the policy will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby; (iii) neither the Target, its Subsidiary nor any other party to the
policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with notice
or the lapse of time, would constitute such a breach or default, or permit
termination, modification, or acceleration, under the policy; and (iii) no party
to the policy has repudiated any provision thereof. Each of the Target and its
Subsidiary has been covered during the past three (3) years by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 4.20 of the Target Disclosure
Letter describes any self-insurance arrangements affecting any of the Target and
its Subsidiary.
4.21 Litigation. Section 4.21 of the Target Disclosure Letter sets forth each
instance in which either the Target or its Subsidiary (i) is subject to any
outstanding injunction, judgment, order, decree, ruling, or charge or (ii)
is a party or, to the Knowledge of any of the Sellers and the directors and
officers (and employees with responsibility for litigation matters) of the
Target and its Subsidiary, is threatened to be made a party to any action,
suit, proceeding, hearing, or investigation of, in, or before any court or
quasi-judicial or administrative agency of any federal, state, local, or
33
foreign jurisdiction or before any arbitrator. None of the actions, suits,
proceedings, hearings, and investigations set forth in Section 4.21 of the
Target Disclosure Letter could result in any material adverse change in the
business, financial condition, operations, results of operations, or future
prospects of either the Target or its Subsidiary. None of the Sellers and
the directors and officers (and employees with responsibility for
litigation matters) of the Target and its Subsidiary has any reason to
believe that any such action, suit, proceeding, hearing, or investigation
may be brought or threatened against either the Target or its Subsidiary.
4.22 Product Liability. Neither the Target nor its Subsidiary has any Liability
(and, to the Knowledge of the Sellers and the officers and directors of the
Target, there is no Basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand
against any of them giving rise to any Liability) arising out of any injury
to individuals or property as a result of the ownership, possession, or use
of any product manufactured, sold, licensed, leased, or delivered by any of
the Target and its Subsidiary, including the Software.
4.23 Employees.
(a) Section 4.23 of the Target Disclosure Letter sets forth a complete
list of the Target's and its Subsidiary's officers, directors,
employees and consultants, their current salary, hourly wages and/or
rates of commissions, bonus or other incentive compensation,
entitlement to benefits, job title, status as full or part-time
employee, location of employment, length of service, annual vacation
entitlement, accrued but unused vacation time, annual sick leave
entitlement and accrued but unused sick time, and length of notice or
termination entitlement contained in any written agreement. To the
Knowledge of any of the Sellers and the directors and officers (and
employees with responsibility for employment matters) of the Target
and its Subsidiary, no executive, key employee, or group of employees
has any plans to terminate employment with either the Target or its
Subsidiary.
(b) Neither the Target nor its Subsidiary is a party to or bound by any
collective bargaining agreement, certification or voluntary
recognition agreement, with any trade union or employee bargaining
agency, nor has any of them experienced any strikes, grievances,
claims of unfair labor practices, or other collective bargaining
disputes. Neither the Target nor its Subsidiary has committed any
unfair labor practice. There is no organizational effort presently
being made or threatened by or on behalf of any labor union with
respect to employees of either of the Target and its Subsidiary.
(c) The Target and its Subsidiary have no liability for any claims for
past due salary, wages, overtime pay, bonuses, commissions or vacation
pay, or any penalties for failure to comply with any of the foregoing,
and are in compliance with all terms and conditions of employment and
all Laws respecting employment and employment practices. All amounts
due or accruing due for salary, wages, overtime pay, bonuses,
commissions or vacation pay are accurately reflected in the Books and
Records. There are no outstanding assessments, penalties, fines,
liens, charges, surcharges, or other amounts due or owing pursuant to
any workers' compensation legislation in respect of the Canadian
business of the Target and its Subsidiary and, to the Knowledge of the
Sellers, no audit of the Canadian business of the Target and its
Subsidiary is currently being performed pursuant to applicable
workers' compensation legislation. There are no existing facts or
circumstances that may materially affect the accident cost experience
34
of the Canadian business of the Target and its Subsidiary under any
applicable worker's compensation legislation. The Target has provided
to the Buyer all orders and inspection reports under applicable
occupational health and safety legislation relating to the Canadian
business of the Target and its Subsidiary, together with the minutes
of any joint health and safety committee meetings for the past
twenty-four (24) months, and the Target and its Subsidiary have
complied in all material respects with any orders issued under
applicable occupational health and safety legislation in respect of
the Canadian business of the Target and its Subsidiary and there are
no appeals of any orders currently outstanding or charges pending
under any occupational health and safety legislation.
4.24 Employee Plans.
(a) Section 4.24 of the Target Disclosure Letter lists all Employee Plans.
The Target has made available to the Buyer true, correct and complete
copies of all the Employee Plans (or, where such Employee Plans are
oral commitments, written summaries of the terms thereof) as amended,
together with all related documentation including, without limitation,
funding and investment management agreements, summary plan
descriptions, the most recent actuarial reports, financial statements
and asset statements, all material opinions and memoranda (whether
externally or internally prepared) and all material correspondence
with all Governmental Entities or other relevant Persons with respect
to such Employee Plans. No changes have occurred which would
materially affect the information contained in the actuarial reports,
financial statements or asset statements required to be provided to
the Buyer pursuant to this Section.
(b) All of the Employee Plans are and have been established, registered,
funded, qualified, invested and administered, in all respects, in
accordance with their terms and all applicable Laws. No Employee plans
entitle participants to any preferential Tax treatment.
(c) All material obligations regarding the Employee Plans have been
satisfied, there are no outstanding defaults or violations by any
party to any Employee Plan and no Taxes, penalties, or fees are owing
or exigible under or in respect of any of the Employee Plans.
(d) No Employee Plan is subject to any pending investigation, examination
or other proceeding, action or claim initiated by any Governmental
Entity or by any other party (other than routine claims for benefits
payable in the normal course of operation of the Employee Plan), and
there exists no state of facts which could reasonably be expected to
give rise to any such investigation, examination or other proceeding,
action or claim or to affect the registration of any Employee Plan
required to be registered.
(e) All contributions or premiums required to be paid by the Target or its
Subsidiary under the terms of each Employee Plan or by applicable Laws
have been made in a timely fashion in accordance with applicable Laws
and the terms of the Employee Plans and the Target does not have any
Liability (other than Liabilities accruing after the Closing Date)
with respect to any of the Employee Benefit Plans. Contributions or
premiums for the period up to the Closing Date have been paid by the
Target, or its Subsidiary, as applicable, even though not otherwise
required to be paid until a later date.
35
(f) No commitments to amend any Employee Plan have been made except as
required by applicable Law.
(g) There have been no improper withdrawals, applications or transfers of
assets of any Employee Plan and neither the Target, its Subsidiary,
nor any of their representatives, has breached any fiduciary
obligation with respect to the administration or investment of any
Employee Plan.
(h) Each Employee Plan which is a funded plan is fully funded on both a
going concern and a solvency basis pursuant to the actuarial
assumptions and methodology utilized in the most recent actuarial
valuation therefore.
(i) None of the Employee Plans enjoy any special Tax status under any
applicable Laws (other than that normally accorded to plans registered
under the Income Tax Act (Canada) and to benefits paid pursuant to
disability benefits plans for which contributions are solely paid by
the employee members), nor have any advance Tax rulings been sought or
received in respect of any Employee Plan.
(j) No insurance policy or any other agreement affecting any Employee Plan
requires or permits a retroactive increase in contributions, premiums
or other payments due thereunder. The level of insurance reserves
under each insured Employee Plan is reasonable and sufficient to
provide for all incurred but unreported claims.
(k) None of the Employee Plans (other than pension plans) provide benefits
to retired employees or to the beneficiaries or dependants of retired
employees.
(l) The Target may unilaterally amend, modify, vary, revoke or terminate,
in whole or in part, each Employee Plan and take contribution holidays
under or withdraw surplus funds from each Employee Plan (where
applicable), subject only to approvals required under applicable Laws.
(m) Subject only to approvals required under applicable Laws, the Target
may transfer, revise or merge any Employee Plan or the assets
transferred from any Employee Plan to or with any other arrangement,
plan or fund.
(n) All employee data necessary to administer each Employee Plan has been
provided or otherwise made available by the Target or the Sellers to
the Buyer and is true and correct in all material respects.
(o) Neither the Target nor any of its Affiliates maintains, or has ever
maintained an ERISA Plan or is, has been, or has ever been deemed to
be an ERISA Affiliate with respect to an ERISA Plan. In addition,
neither the Target nor any of its Affiliates contributes to or is
required to contribute to or has contributed to or been required to
contribute to any ERISA Plan. Neither the Target nor any of its
Affiliates has, or in the past had, or is, has been, or has ever been
deemed to have any liability or obligations with respect to any ERISA
Plan.
36
4.25 Guaranties. Except as set forth in Section 4.25 of the Target Disclosure
Schedule, neither the Target nor its Subsidiary is a guarantor or otherwise
is liable for any Liability or obligation (including indebtedness) of any
other Person.
4.26 Environment, Health, and Safety.
(a) Each of the Target, its Subsidiary, and their respective predecessors
and Affiliates has complied with all Environmental Laws, and no
action, suit, proceeding, hearing, investigation, charge, complaint,
claim, demand, or notice has been filed or commenced against any of
them alleging any failure so to comply. Without limiting the
generality of the preceding sentence, each of the Target, its
Subsidiary, and their respective predecessors and Affiliates has
obtained and been in compliance with all of the terms and conditions
of all permits, licenses, and other authorizations which are required
under, and has complied with all other limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations,
schedules, and timetables which are contained in, all Environmental
Laws.
(b) Neither the Target nor its Subsidiary has any Liability (and none of
the Target, its Subsidiary, and their respective predecessors and
Affiliates has handled or disposed of any substance, arranged for the
disposal of any substance, exposed any employee or other individual to
any substance or condition, or owned or operated any property or
facility in any manner that could form the Basis for any present or
future action, suit, proceeding, hearing, investigation, charge,
complaint, claim, or demand against the Target or its Subsidiary
giving rise to any Liability) for damage to any site, location, or
body of water (surface or subsurface), for any illness of or personal
injury to any employee or other individual, or for any reason under
any Environmental Law.
(c) To the Knowledge of the Sellers and the officers and directors of the
Target, all properties and equipment used in the business of the
Target, its Subsidiary, and their respective predecessors and
Affiliates have been free of asbestos, PCB's, methylene chloride,
trichloroethylene, 1,2-trans-dichloroethylene, dioxins, dibenzofurans,
and Extremely Hazardous Substances, or, if present, such substances
have been present in amounts and states permitted by applicable
Environmental Laws.
4.27 Certain Business Relationships with the Target and Its Subsidiary. No
holder of more than five percent (5%) of the Target's or its Subsidiary's
shares or any of their Affiliates, no director or officer of the Target or
its Subsidiary or any of their Affiliates, and no member of any such
person's immediate family, or any other Affiliate of the Target or its
Subsidiary is currently, or within the last five (5) years has been, a
party to any transaction with the Target or its Subsidiary, including,
without limitation, any agreement (a) providing for the furnishing of
services by, (b) providing for the lease or rental of real or personal
property from or (c) otherwise requiring payments to (other than for
services as an officer, director or employee of the Target or its
Subsidiary), any such person or any corporation, partnership, trust or
other entity in which any such person is an officer, director, trustee or
partner at rates that exceed the market rates for such services in the
location where they are performed. In addition, no such Person has an
interest in any corporation, partnership, trust or other entity that
engages in competition with the Target or its Subsidiary with respect to
any products or services of the Target and its Subsidiary (except for
37
ownership of less than one percent (1%) of the outstanding capital stock of
any corporation that is publicly traded on any recognized exchange or in
the over-the-counter market).
4.28 Private Issuer Status. The Target is a "private issuer" as such term is
defined in the Securities Act (Alberta).
4.29 Disclosure. The representations, warranties and other statements contained
in this Agreement, and the exhibits and schedules hereto, and the Target
Disclosure Letter, do not contain any untrue statement of a material fact,
or to the Knowledge of the Sellers, omit to state any material fact that is
necessary to make the statements contained herein or therein not
misleading.
ARTICLE V
POST-CLOSING COVENANTS
5.1 General. Each of the Parties will use his or its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in
order to consummate and make effective the transactions contemplated by
this Agreement (including satisfaction, but not waiver, of the conditions
set forth in Article VII below). In case at any time after the Closing any
further action is necessary or desirable to carry out the purposes of this
Agreement, each of the Parties will take such further action (including the
execution and delivery of such further instruments and documents) as any
other Party reasonably may request, all at the sole cost and expense of the
requesting Party (unless the requesting Party is entitled to
indemnification therefore under Article VII below). The Sellers acknowledge
and agree that from and after the Closing the Buyer will be entitled to
possession of all documents, books, records (including Tax records),
agreements, and financial data of any sort relating to the Target and its
Subsidiary.
5.2 Litigation Support. In the event and for so long as any Party actively is
contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection with (i)
any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or
prior to the Closing Date involving any of the Target and its Subsidiary,
other than an action, suit, proceeding, hearing, investigation charge,
complaint, claim or demand between the Parties, each of the other Parties
will cooperate with him or it and his or its counsel in the contest or
defense, make available their personnel, and provide such testimony and
access to their books and records as shall be necessary in connection with
the contest or defense, all at the sole cost and expense of the contesting
or defending Party (unless the contesting or defending Party is entitled to
indemnification therefore under Article VII below).
5.3 Transition. None of the Sellers will take any action that is designed or
intended to have the effect of discouraging any lessor, licensor, customer,
supplier, or other business associate of any of the Target and its
Subsidiary from maintaining the same business relationships with the Target
and its Subsidiary after the Closing as it maintained with the Target and
its Subsidiary prior to the Closing. Each of the Sellers will refer all
customer inquiries relating to the businesses of the Target and its
Subsidiary to the Target or the Buyer from and after the Closing.
38
5.4 Confidentiality. Each of the Sellers will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly
to the Target or destroy, at the request and option of the Buyer, all
tangible embodiments (and all copies) of the Confidential Information which
are in his or its possession. In the event that any of the Sellers is
requested or required (by oral question or request for information or
documents in any legal proceeding, interrogatory, subpoena, civil
investigative demand, or similar process) to disclose any Confidential
Information, that Seller will notify the Buyer promptly of the request or
requirement so that the Buyer may seek an appropriate protective order or
waive compliance with the provisions of this Section 5.4. If, in the
absence of a protective order or the receipt of a waiver hereunder, any of
the Sellers is, on the advice of counsel, compelled to disclose any
Confidential Information to any tribunal or else stand liable for contempt,
that Seller may disclose the Confidential Information to the tribunal;
provided, however, that the disclosing Seller shall use his or its best
efforts to obtain, at the request of the Buyer, an order or other assurance
that confidential treatment will be accorded to such portion of the
Confidential Information required to be disclosed as the Buyer shall
designate. The foregoing provisions shall not apply to any Confidential
Information that is generally available to the public immediately prior to
the time of disclosure.
5.5 Covenant Not to Compete. For a period of three (3) years from and after the
Closing Date, none of the Sellers who were employed by the Target
immediately prior to the Closing and are listed on Exhibit G attached
hereto will engage directly or indirectly in any business related to
Eforms, Business Process Management or Content Management that the Target
or its Subsidiary conducts as of the Closing Date in any geographic area in
which the Target or its Subsidiary conducts that business as of the Closing
Date, other than as an employee or consultant of the Target or any of its
Affiliates, and in consideration of this separate covenant from these
Sellers the Buyer agrees to pay a non-competition fee on or prior to the
Distribution Date in the amount set forth in Exhibit H attached hereto;
provided, however, that no owner of less than one percent (1%) of the
outstanding stock of any publicly traded corporation shall be deemed to
engage solely by reason thereof in any of its businesses. If the final
judgment of a court of competent jurisdiction declares that any term or
provision of this Section 5.5 is invalid or unenforceable, the Parties
agree that the court making the determination of invalidity or
unenforceability shall have the power to reduce the scope, duration, or
area of the term or provision, to delete specific words or phrases, or to
replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to
expressing the intention of the invalid or unenforceable term or provision,
and this Agreement shall be enforceable as so modified after the expiration
of the time within which the judgment may be appealed.
ARTICLE VI
CONDITIONS TO DISTRIBUTION OF INITIAL PURCHASE AMOUNT
Subject to the terms and conditions of the Escrow Agreement, the Initial
Purchase Amount shall not be distributed by the Escrow Agent until all of the
following conditions have been satisfied by the Sellers or waived in writing by
the Buyer:
39
(a) the Sellers shall have performed and complied with all of their
covenants hereunder with respect to the Permitted Transactions;
(b) the Sellers shall have delivered or caused to be delivered to Buyer
the various certificates, instruments, and documents referred to in
Sections 2.5(a) and 2.5(b) above (other than 2.5(b)(iii), the failure
to comply with which shall only result in the application of Section
2.7 to the applicable Shareholder); in particular, the Sellers shall
have delivered or caused to be delivered to the Buyer stock
certificates representing all outstanding Target Shares, endorsed in
blank or accompanied by duly executed assignment documents, and, in
the case of Target Shares held by Other Shareholders, Other
Shareholder Representation Statements in the form attached hereto as
Exhibit B, duly executed by each of the Other Shareholders.
ARTICLE VII
Remedies for Breaches of This Agreement
7.1 Survival of Representations and Warranties. All of the representations and
warranties of the Sellers contained in Sections 3.1(b), 3.1(e), 4.2, 4.11,
4.24(o) and 4.26 shall survive the Closing hereunder (even if the Buyer
knew or had reason to know of any misrepresentation or breach of warranty
at the time of Closing) and continue in full force and effect forever
thereafter (subject to any applicable statutes of limitations). All of the
other representations and warranties of the Parties contained in this
Agreement shall survive the Closing (even if the damaged Party knew or had
reason to know of any misrepresentation or breach of warranty at the time
of Closing) and continue in full force and effect for a period of eighteen
months thereafter.
7.2 Indemnification Provisions for Benefit of the Buyer.
(a) In the event any of the Sellers, Other Shareholders or the Target
breaches (or in the event any third party alleges facts that, if true,
would mean any of the Sellers, Other Shareholders or the Target has
breached) any of their representations, warranties, or covenants
contained herein or in the Other Shareholder Representation
Statements, respectively, and, if there is an applicable survival
period pursuant to Section 7.1 above, provided that the Buyer makes a
written claim (a "Claim Notice") for indemnification against any of
the Sellers pursuant to Section 9.9 below within such survival period,
then each of the Sellers agrees to indemnify the Buyer and its
Affiliates from and against the entirety of any Adverse Consequences
the Buyer or its Affiliates may suffer through and after the date of
the claim for indemnification (including any Adverse Consequences the
Buyer or its Affiliates may suffer after the end of any applicable
survival period) resulting from, arising out of, relating to, in the
nature of, or caused by the breach (or the alleged breach).
(b) Each of the Sellers agrees to indemnify the Buyer and its Affiliates
from and against the entirety of any Adverse Consequences the Buyer or
its Affiliates may suffer resulting from, arising out of, relating to,
in the nature of, or caused by claims by any holder or former holder
of Target Shares regarding (i) the relative amount of the
consideration received or not received by such holder for such
holder's Target Shares in connection with the transactions
contemplated by this Agreement, or (ii) the exercise or purported
exercise of any rights to purchase, redeem or cancel any Target Shares
40
or options, warrants or other rights to acquire Target Shares;
provided, however, that the Sellers shall not be obligated to
indemnify the Buyer for any such Adverse Consequences caused by any
breach by the Buyer of Section 2.2 or 2.9.
(c) Each of the Sellers agrees to indemnify the Buyer and its Affiliates
from and against the entirety of any Adverse Consequences the Buyer
may suffer resulting from, arising out of, relating to, in the nature
of, or caused by any Liability of the Target or its Subsidiary (i) for
any Taxes of the Target and its Subsidiary with respect to any Tax
year or portion thereof ending on or before the Closing Date (or for
any Tax year beginning before and ending after the Closing Date to the
extent allocable (determined in a manner consistent with Section 8.3)
to the portion of such period beginning before and ending on the
Closing Date), except to the extent such Taxes are both (x) reflected
in the reserve for Tax Liability (rather than any reserve for deferred
Taxes established to reflect timing differences between book and Tax
income) shown on the face of the Closing Balance Sheet and (y)
included in the calculation of the Adjustment Amount, and (ii) for the
unpaid Taxes of any Person (other than the Target or its Subsidiary)
under Reg. Section 1.1502-6 (or any similar provision of state, local,
or foreign law), as a transferee or successor, by contract, or
otherwise. For purposes of the preceding sentence, in the case of any
Taxes that are imposed on a periodic basis and are payable for a
Taxable period that includes (but does not end on) the Closing Date,
the portion of such Tax which relates to the portion of such Taxable
period ending on the Closing Date shall (x) in the case of any Taxes
other than Taxes based upon or related to income or receipts, be
deemed to be the amount of such Tax for the entire Taxable period
multiplied by a fraction the numerator of which is the number of days
in the Taxable period ending on the Closing Date and the denominator
of which is the number of days in the entire Taxable period, and (y)
in the case of any Tax based upon or related to income or receipts be
deemed equal to the amount which would be payable if the relevant
Taxable period ended on the Closing Date. For the avoidance of doubt,
since the reserve for Tax Liability on the face of the Closing Balance
Sheet will reflect CAD$1,029,000 on account of Adverse Consequences
arising from the request to amend the 2002 T2 and AT1 Tax Returns of
the Target and since such reserve will be included in the calculation
of the Adjustment Amount, the Parties acknowledge that the Sellers
will not be obligated to indemnify the Buyer or its Affiliates for
Adverse Consequences arising from the request to amend the 2002 T2 and
AT1 Tax Returns of the Target except to the extent that such Adverse
Consequences, including any amounts paid on account of income Taxes on
or after the Closing Date, exceed CAD$1,029,000 in the aggregate.
(d) Without limiting the generality of Section 7.2(a) and notwithstanding
any disclosures made in the Target Disclosure Letter, each of the
Sellers agrees to indemnify the Buyer and its Affiliates from and
against the entirety of any Adverse Consequences the Buyer or its
Affiliates may suffer through and after the date of the claim for
indemnification (including any Adverse Consequences the Buyer or its
Affiliates may suffer after the end of any applicable survival period)
resulting from, arising out of, relating to, in the nature of, or
caused by the actual or alleged use or incorporation of any
Intellectual Property owned by any third party in any product of the
Target without adequate license from, or consent of, such third party.
7.3 Indemnification Provisions for Benefit of the Sellers. In the event the
Buyer breaches (or in the event any third party alleges facts that, if
true, would mean the Buyer has breached) any of its representations,
warranties, or covenants contained herein, and, if there is an applicable
survival period pursuant to Section 7.1 above, provided that any of the
41
Sellers delivers a Claim Notice for indemnification to the Buyer pursuant
to Section 9.9 below within such survival period, then the Buyer agrees to
indemnify each of the Sellers and their Affiliates from and against the
entirety of any Adverse Consequences the Seller or its Affiliates may
suffer through and after the date of the claim for indemnification
(including any Adverse Consequences the Seller or its Affiliates may suffer
after the end of any applicable survival period) resulting from, arising
out of, relating to, in the nature of, or caused by the breach (or the
alleged breach).
7.4 Procedure for Claims between Parties. If a claim for indemnification is to
be made by a Party entitled to indemnification hereunder, such Party shall
give written notice to the indemnifying Party, as soon as reasonably
practicable after such indemnified Party becomes aware that any existing or
occurred fact, condition or event may give rise to Adverse Consequences for
which indemnification may be sought under this Article VII. Any failure to
submit any such notice of claim to the indemnifying Party shall not relieve
the indemnifying Party of any liability hereunder, except to the extent the
indemnifying Party is actually prejudiced by such failure. The indemnifying
Party shall be deemed to have accepted the notice of claim and the
indemnifying Party shall be deemed to have agreed to indemnify for the
Adverse Consequences at issue if the indemnifying Party does not send a
notice of disagreement to the indemnified Party within 10 days after
receiving the written notice of a claim.
7.5 Matters Involving Third Parties.
(a) If any third party shall notify any Party (the "Indemnified Party")
with respect to any matter (a "Third Party Claim") which may give rise
to a claim for indemnification against any other Party (the
"Indemnifying Party") under this Article VII, then the Indemnified
Party shall promptly deliver a Claim Notice with respect to such claim
to each Indemnifying Party; provided, however, that no delay on the
part of the Indemnified Party in notifying any Indemnifying Party
shall relieve the Indemnifying Party from any obligation hereunder
unless (and then solely to the extent) the Indemnifying Party thereby
is prejudiced.
(b) Any Indemnifying Party will have the right to defend the Indemnified
Party against the Third Party Claim (other than a Third Party Claim
with respect to Taxes, which shall be governed by Section 8.6) with
counsel of its choice satisfactory to the Indemnified Party so long as
(i) the Indemnifying Party notifies the Indemnified Party in writing
within fifteen (15) days after the Indemnified Party has given notice
of the Third Party Claim that the Indemnifying Party will indemnify
the Indemnified Party from and against the entirety of any Adverse
Consequences the Indemnified Party may suffer resulting from, arising
out of, relating to, in the nature of, or caused by the Third Party
Claim, (ii) the Indemnifying Party provides the Indemnified Party with
evidence acceptable to the Indemnified Party that the Indemnifying
Party will have the financial resources to defend against the Third
Party Claim and fulfill its indemnification obligations hereunder,
(iii) the Third Party Claim involves only money damages and does not
seek an injunction or other equitable relief, (iv) settlement of, or
an adverse judgment with respect to, the Third Party Claim is not, in
the good faith judgment of the Indemnified Party, likely to establish
a precedential custom or practice adverse to the continuing business
interests of the Indemnified Party, and (v) the Indemnifying Party
conducts the defense of the Third Party Claim actively and diligently.
42
(c) So long as the Indemnifying Party is conducting the defense of the
Third Party Claim in accordance with Section 7.5(b) above, (i) the
Indemnified Party may retain separate co-counsel at its sole cost and
expense and participate in the defense of the Third Party Claim, (ii)
the Indemnified Party will not consent to the entry of any judgment or
enter into any settlement with respect to the Third Party Claim
without the prior written consent of the Indemnifying Party (not to be
withheld unreasonably), and (iii) the Indemnifying Party will not
consent to the entry of any judgment or enter into any settlement with
respect to the Third Party Claim without the prior written consent of
the Indemnified Party (not to be withheld unreasonably).
(d) In the event any of the conditions in Section 7.5(b) above is or
becomes unsatisfied, however, (i) the Indemnified Party may defend
against, and consent to the entry of any judgment or enter into any
settlement with respect to, the Third Party Claim in any manner it may
deem appropriate (and the Indemnified Party need not consult with, or
obtain any consent from, any Indemnifying Party in connection
therewith), (ii) the Indemnifying Parties will reimburse the
Indemnified Party promptly and periodically for the costs of defending
against the Third Party Claim (including attorneys' fees and
expenses), and (iii) the Indemnifying Parties will remain responsible
for any Adverse Consequences the Indemnified Party may suffer
resulting from, arising out of, relating to, in the nature of, or
caused by the Third Party Claim to the fullest extent provided in this
Article VII.
7.6 Determination of Adverse Consequences. All indemnification payments under
this Article VII shall be deemed adjustments to the Purchase Price. To the
extent that Adverse Consequences are incurred or suffered in Canadian
dollars, the amount of such Adverse Consequences in U.S. dollars shall be
determined using the closing exchange rate published by the Bank of Canada
for the date the applicable Claim Notice is delivered to the Indemnifying
Party.
7.7 Buyer's Right of Offset. Anything in this Agreement to the contrary
notwithstanding, Buyer may withhold and set off against any other amounts
otherwise due the Sellers any amount as to which the Sellers are obligated
to indemnify Buyer pursuant to any provision of this Article VII.
7.8 Payment of Indemnity Holdback Amount. The Escrow Agent shall hold and pay
the Indemnity Holdback Amount pursuant to this Article VII and the Escrow
Agreement. If the Buyer has not delivered a Claim Notice to the Sellers
within eighteen months after the Closing Date, all of the Indemnity
Holdback Amount shall be paid promptly thereafter to the Shareholders. If
the Buyer has delivered one or more Claim Notices to the Sellers and the
Escrow Agent within eighteen months after the Closing Date and has received
a distribution from the Indemnity Holdback Amount in respect of such Claim
Notice, or the amount of Adverse Consequences related to such Claim Notice
has been determined but not paid, or the amount of Adverse Consequences
related to such Claim Notice has not then been determined, the Escrow Agent
shall distribute to the Shareholder promptly after the expiration of such
eighteen month period an amount equal to the Indemnity Holdback Amount less
(i) any amounts previously distributed to the Buyer pursuant to the Escrow
Agreement and (ii) an amount reasonably estimated by Buyer to cover any
unpaid or unresolved claims. Any payments to be made to the Shareholders
under this Section 7.8 shall be made to or to the order of each Shareholder
43
pro-rata as described in Section 2.2. The Buyer and the Sellers agree and
acknowledge that claims against the Indemnity Holdback Amount shall not be
the Buyer's exclusive method of receiving indemnification from the Sellers
pursuant to this Article VII.
7.9 Manner of Payment. All payments made by the Buyer or the Sellers under this
Article VII, including distributions of the Indemnity Holdback Amount to
the Sellers, shall be made by wire transfer of immediately available funds
to an account designated by the payee. The Sellers shall be jointly and
severally liable for any amounts to be paid to the Buyer under this Article
VII.
7.10 Limitation on Indemnity. The maximum aggregate amount of Adverse
Consequences for which the Sellers or the Buyer, respectively, shall be
liable under this Article VII shall be USD$8,550,000; provided, however,
that the maximum aggregate amount of Adverse Consequences for which the
Sellers or the Buyer, respectively, shall be liable for claims for which a
Claim Notice is delivered after the six month anniversary of the Closing
Date shall be USD$3,775,000; provided, further, that the maximum aggregate
amount of Adverse Consequences for which the Sellers or the Buyer,
respectively, shall be liable for claims for which a Claim Notice is
delivered after the one year anniversary of the Closing Date shall be
USD$2,137,500. Notwithstanding the foregoing, the limitations contained in
this Section 7.10 shall not apply with respect to claims for
indemnification for Adverse Consequences (i) arising in connection with a
breach of representation or warranty contained in Sections 3.1(b), 3.1(e),
4.2, 4.11, 4.24(o) and 4.26, (ii) arising in connection with a breach of a
covenant contained in Article V, or (iii) made under Sections 7.2(b),
7.2(c) or 7.2(d).
7.11 Other Indemnification Provisions. The foregoing indemnification provisions
are in addition to, and not in derogation of, any statutory, equitable, or
common law remedy any Party may have for breach of representation,
warranty, or covenant. Each of the Sellers hereby agrees that he or it will
not make any claim for indemnification against the Target or its Subsidiary
by reason of the fact that he or it was a director, officer, employee, or
agent of any such entity or was serving at the request of any such entity
as a partner, trustee, director, officer, employee, or agent of another
entity (whether such claim is for judgments, damages, penalties, fines,
costs, amounts paid in settlement, losses, expenses, or otherwise and
whether such claim is pursuant to any statute, charter document, bylaw,
agreement, or otherwise) with respect to any action, suit, proceeding,
complaint, claim, or demand brought by the Buyer against such Seller
(whether such action, suit, proceeding, complaint, claim, or demand is
pursuant to this Agreement, applicable law, or otherwise).
ARTICLE VIII
TAX MATTERS
The following provisions shall govern the allocation of responsibility as
between Buyer and Sellers for certain Tax matters following the Closing Date:
8.1 Section 338 Election. With respect to the purchase of the Target Shares,
the Buyer may, in its sole discretion, make the election provided for by
Section 338(g) of the Code and the Treasury Regulations promulgated
thereunder and any comparable election under state, local or foreign Tax
Law (the "Section 338 Election"). With respect to the Section 338 Election,
44
if the Buyer opts to make the Section 338 Election, the Buyer and the
Sellers shall take no action inconsistent with the Section 338 Election or
the allocation of the Purchase Price among the assets of the Target (as
such allocation will be prepared by the Buyer and delivered to the Sellers)
for the purpose of all Tax Returns filed by each of them, unless required
by law.
8.2 Tax Periods Ending on or Before the Closing Date. The Buyer shall cause the
Target to prepare or cause to be prepared and file or cause to be filed all
Tax Returns for the Target and its Subsidiary for all periods ending on or
prior to the Closing Date which are filed after the Closing Date. The Buyer
shall permit the Target and its Subsidiary to review and comment on each
such Tax Return described in the preceding sentence prior to filing, and
Buyer shall consider any such comments. The Sellers shall reimburse the
Buyer for Taxes of the Target and its Subsidiary with respect to such
periods within fifteen (15) days after payment by the Buyer or the Target
and its Subsidiary of such Taxes, except to the extent such Taxes are both
(x) reflected in the reserve for Tax Liability (rather than any reserve for
deferred Taxes established to reflect timing differences between book and
Tax income) shown on the face of the Closing Balance Sheet and (y) included
in the calculation of the Adjustment Amount.
8.3 Tax Periods Beginning Before and Ending After the Closing Date. The Buyer
shall prepare or cause to be prepared and file or cause to be filed any Tax
Returns of the Target and its Subsidiary for Tax periods which begin before
the Closing Date and end after the Closing Date. The Sellers shall pay to
the Buyer within fifteen (15) days after the date on which Taxes are paid
with respect to such periods an amount equal to the portion of such Taxes
which relates to the portion of such Taxable period ending on the Closing
Date, except to the extent such Taxes are both (x) reflected in the reserve
for Tax Liability (rather than any reserve for deferred Taxes established
to reflect timing differences between book and Tax income) shown on the
face of the Closing Balance Sheet and (y) included in the calculation of
the Adjustment Amount. For purposes of the preceding sentence, Taxes shall
be allocated in the manner set forth in the penultimate sentence of Section
7.2(c).
8.4 Third Party Costs of Tax Return Preparation. All third party fees, expenses
and costs incurred in connection with any Tax Returns prepared and filed
pursuant to Sections 8.2 and 8.3 shall be borne 50% by the Buyer and 50% by
the Sellers; provided, that the Sellers shall not be obligated to pay more
than $3,000 for fees, expenses and costs incurred in connection with any
Tax Returns prepared and filed pursuant to Section 8.3.
8.5 Cooperation on Tax Matters.
(a) The Buyer, the Target and its Subsidiary and the Sellers shall
cooperate fully, as and to the extent reasonably requested by the
other party, in connection with the filing of Tax Returns pursuant to
this Article and any audit, litigation or other proceeding with
respect to Taxes. As part of such cooperation, the Sellers shall make
themselves available to the Buyer, the Target and its Subsidiary on a
mutually convenient basis to provide explanations of any materials
delivered hereunder, to provide additional information and to respond
to inquiries with respect to Taxes. The Sellers shall deliver to the
Buyer within thirty (30) days of the Closing Date all books and
records with respect to Tax matters pertinent to the Target and its
Subsidiary relating to any taxable period beginning before the Closing
Date.
45
(b) The Buyer and the Sellers further agree, upon request, to use their
best efforts to obtain any certificate or other document from any
Governmental Entity or any other Person as may be necessary to
mitigate, reduce or eliminate any Tax that could be imposed
(including, but not limited to, with respect to the transactions
contemplated hereby).
(c) The Buyer and the Sellers further agree, upon request, to provide the
other party with all information that either party may be required to
report pursuant to Section 6043 of the Code and all Treasury
Department Regulations promulgated thereunder.
8.6 Contest Provisions. The Buyer shall have the right to control, and to
represent the interests of all affected taxpayers in, any audit, assessment
of Taxes, other examination by any Taxing authority, proceeding or appeal
of such a proceeding, whether judicial or administrative, relating to Taxes
of the Target and its Subsidiary (any such proceeding, a "Contest") and to
employ counsel of its choice; provided, however, that, with respect to any
such Contest for Taxes for which the Sellers may be required to indemnify
the Buyer, the Sellers shall be entitled to participate in such Contest at
their own expense; provided, further, that notwithstanding the Sellers'
participation in any Contest, Buyer shall retain control of all such
Contests.
8.7 Certain Taxes. All transfer, documentary, sales, use, stamp, registration
and other such Taxes and fees (including any penalties and interest)
incurred in connection with this Agreement (including any New York State
Gains Tax, New York City Transfer Tax and any similar Tax imposed in other
states or subdivisions), shall be paid by the Sellers when due, and the
Sellers will, at their own expense, file all necessary Tax Returns and
other documentation with respect to all such transfer, documentary, sales,
use, stamp, registration and other Taxes and fees, and, if required by
applicable law, the Buyer will, and will cause its affiliates to, join in
the execution of any such Tax Returns and other documentation. The Sellers
shall provide the Buyer with evidence satisfactory to the Buyer that such
Taxes have been paid by the Sellers.
ARTICLE IX
MISCELLANEOUS
9.1 Nature of Obligations. Except as provided below, the representations,
warranties, and covenants of the Sellers in this Agreement are joint
obligations of the Sellers. This means that the Sellers as a group will be
responsible to the extent provided in Article VII above for the entirety of
any Adverse Consequences the Buyer may suffer as a result of any breach
thereof, and each Seller shall be responsible for the proportion of such
Adverse Consequences equal to the proportion of the total consideration
paid to the Sellers pursuant to Section 2.2 that is paid to such Seller.
Notwithstanding the foregoing, (i) each Seller shall be jointly and
severally liable for all obligations arising under this Agreement of such
Seller's spouse (or any person who was such Seller's spouse as of the
Closing Date), and (ii) the Sellers shall be severally and not jointly
liable for their respective obligations under Sections 5.4 and 5.5.
9.2 Allocation of Purchase Price. The Sellers acknowledge that they are solely
responsible for determining the allocation of the Purchase Price among the
holders of the Target Shares as set forth on Schedule 2.2, and agree that
Buyer shall have no Liability relating to such allocation or arising from
the distribution of the Purchase Price or any portion thereof in accordance
with Schedule 2.2. All disputes among the Sellers or among the Sellers and
46
the other holders or former holders of Target Shares, or any of them,
relating to the allocation of the Purchase Price shall be resolved between
such parties without the involvement of the Buyer or any affiliate of the
Buyer.
9.3 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of
this Agreement without the prior written approval of the Buyer and the
Sellers' Representatives; provided, however, that any Party may make any
public disclosure it believes in good faith is required by applicable law
or any listing or trading agreement concerning its publicly-traded
securities (in which case the disclosing Party will use its reasonable best
efforts to advise the other Parties prior to making the disclosure).
9.4 No Third-Party Beneficiaries. This Agreement shall not confer any rights or
remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
9.5 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes
any prior understandings, agreements, or representations by or among the
Parties, written or oral, to the extent they related in any way to the
subject matter hereof.
9.6 Succession and Assignment. This Agreement shall be binding upon and inure
to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of
his or its rights, interests, or obligations hereunder without the prior
written approval of the Buyer and the Sellers' Representatives; provided,
however, that the Buyer may (i) assign any or all of its rights and
interests hereunder to one or more of its Affiliates and (ii) designate one
or more of its Affiliates to perform its obligations hereunder (in any or
all of which cases the Buyer nonetheless shall remain responsible for the
performance of all of its obligations hereunder).
9.7 Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original but all of which together will
constitute one and the same instrument.
9.8 Headings. The section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.9 Notices. All notices, requests, demands, claims, and other communications
hereunder will be in writing. Any notice, request, demand, claim, or other
communication hereunder shall be deemed duly given when received if
personally delivered; when transmitted if transmitted by confirmed
telecopy; the day after it is sent, if sent for next day delivery to a
domestic address by recognized overnight delivery service (e.g., FedEx);
and upon receipt, if sent by certified or registered mail, return receipt
requested, and addressed to the intended recipient as set forth below:
47
If to the Sellers:
Copy to:
McCuaig Desrochers LLP
2401 TD Tower
10088 - 102 Avenue
Edmonton Centre N.W.
Edmonton, Alberta T5J 2Z1
Attention: Pierre Desrochers
Telecopy: (780) 426-0982
If to the Buyer:
Copy to:
Latham and Watkins LLP
650 Town Center Drive, 20th Floor
Costa Mesa, California 92626
Attention: R. Scott Shean, Esq.
Telecopy: (714) 755-8290
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Parties
notice in the manner herein set forth.
9.10 Sellers' Representatives. Each Seller by executing this Agreement hereby
irrevocably constitutes and appoints Donald Murphy and Wayne Malkin as the
Sellers' Representatives, with full power and authority to act in the name
of and for and on behalf of such Seller with respect to all matters arising
in connection with, or related to, this Agreement and the transactions
contemplated hereby and thereby. The Sellers' Representatives are hereby
appointed (i) the agents and true and lawful attorneys-in-fact of each
Seller, with full power of substitution, and with full capacity and
authority in their sole discretion, to act in the name of and for and on
behalf of each Seller in connection with all matters arising out of,
resulting from, contemplated by or related or incident to this Agreement;
provided, that any affirmative action taken by the Sellers' Representatives
shall only be effective if approved or consented to by both Sellers'
Representatives, and (ii) the agents for service of process for each
Seller, and each Seller hereby irrevocably consents to the service of any
and all process in any action or proceeding arising out of or relating to
this Agreement by the delivery of such process to either of the Sellers'
Representatives. Without limiting the generality of the foregoing, the
power of the Sellers' Representatives shall include the power to represent
each Seller with respect to all aspects of this Agreement, which power
shall include, without limitation, the power to (i) waive any and all
48
conditions of this Agreement, (ii) amend this Agreement and any agreement
executed in connection herewith in any respect, (iii) bring, assert,
defend, negotiate or settle any claims or actions for indemnity pursuant to
Article VII hereof, (iv) retain legal counsel or accountants and be
reimbursed by the Sellers for all fees, expenses and other charges of such
legal counsel or accountants, (v) receive notices or other communications,
(vi) deliver any notices, certificates or other documents required, and
(vii) take all such other action and to do all such other things as the
Sellers' Representatives deems necessary, appropriate, desirable or
advisable with respect to this Agreement. The Buyer shall have the absolute
right and authority to rely upon the acts taken or omitted to be taken by
the Sellers' Representatives on behalf of the Sellers (even if any omission
to act is due to a failure of both Sellers' Representatives to agree), and
the Buyer shall have no duty to inquire as to the acts and omissions of the
Sellers' Representatives. Each Seller hereby acknowledges and agrees that
(i) all deliveries by the Buyer, including, without limitation, any
payment, to the Sellers' Representatives shall be deemed deliveries to the
Sellers, (ii) the Buyer shall not have any liability with respect to any
aspect of the distribution or communication of such deliveries between the
Sellers' Representatives and any Seller and (iii) any disclosure made to
the Sellers' Representatives by or on behalf of the Buyer shall be deemed
to be a disclosure made to each Seller. The Sellers shall indemnify the
Buyer for any damages suffered, including, but not limited to, attorneys'
fees and other costs, as a result of the Buyer's good faith reliance on the
acts or omissions of the Sellers' Representatives. Each Seller hereby
agrees that any payment made by or on behalf of the Buyer to the Sellers'
Representatives on such Seller's behalf shall be deemed a direct payment to
such Seller, and such Seller shall have no recourse to the Buyer in the
event that such payment is not delivered to such Seller by the Sellers'
Representatives for any reason. In the event such Sellers' Representatives
refuses to, or is no longer capable of, serving as the Sellers'
Representatives hereunder, the Requisite Sellers shall promptly appoint a
successor Sellers' Representative or Representatives who shall be one or
more of David Perman, John Murphy or Tim Senger, and shall thereafter be
successor Sellers' Representatives hereunder, and the Sellers'
Representatives shall serve until such successor is duly appointed and
qualified to act hereunder. In no event shall the Sellers' Representatives
be liable to any Seller other than for acts or omissions that constitute
gross negligence or willful misconduct on the part of the Sellers'
Representatives. The Sellers shall indemnify the Sellers' Representatives
for any costs or expenses incurred by or on behalf of the Sellers'
Representatives in connection with his duties as, and in his capacity as,
Sellers' Representatives and the Sellers' Representatives may withhold from
any amounts otherwise distributable from the Indemnity Holdback Amount in
order to obtain reimbursement for any such costs and expenses. The Buyer
agrees that any Sellers' Representative who is an employee of the Buyer or
any of its Affiliates shall not be deemed to be in breach of fiduciary duty
by virtue of acting as a Sellers' Representative, and shall not be
prohibited by his employer from or disciplined by his employer for acting
in his capacity as a Sellers' Representative, notwithstanding that actions
taken in good faith in such capacity may be inconsistent with the best
interests of his employer; provided, however, that nothing in this sentence
shall be construed as granting to any such Sellers' Representative any
right with respect to continuance of employment by the Buyer or any of its
Affiliates, and the right of such Sellers' Representative's employer to
terminate at will such Sellers' Representative's employment at any time
(whether by dismissal, discharge or otherwise), with or without cause, is
specifically reserved.
9.11 Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the Province of Alberta without giving
effect to any choice or conflict of law provision or rule (whether of the
49
Province of Alberta or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the Province of
Alberta. The Parties hereby attorn to the jurisdiction of the courts of the
Province of Alberta in respect of any dispute relating to this Agreement.
9.12 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by the Buyer
and the Sellers' Representatives. No waiver by any Party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent
such occurrence.
9.13 Severability. Any term or provision of this Agreement that is invalid or
unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any
other situation or in any other jurisdiction.
9.14 Expenses. Each of the Parties, the Target, and its Subsidiary will bear his
or its own costs and expenses (including legal fees and expenses) incurred
in connection with this Agreement and the transactions contemplated hereby.
The Sellers agree that neither the Target nor its Subsidiary has borne or
will bear any of the Sellers' costs and expenses (including any of their
legal fees and expenses) in connection with this Agreement or any of the
transactions contemplated hereby.
9.15 Specific Performance. Each of the Parties acknowledges and agrees that the
other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically this Agreement and the terms and provisions hereof, in
addition to any other remedy to which they may be entitled, at law or in
equity.
9.16 Guaranty of Obligations.
(a) In order to induce the Sellers to enter into this Agreement, the
Parent does hereby unconditionally guarantee to the Sellers the full
performance and observance of all of the covenants, conditions,
representations and agreements provided, and to be performed and
observed by the Buyer in Sections 2.2, 2.6, 5.1, 5.2 and 5.5 and
Articles III, VII and VIII of the Agreement.
(b) The Parent does hereby waive acceptance and notice of acceptance of
the guaranty provided in this Section 9.16, waive all demands of
payment and/or performance and the Parent agrees that its liability
under this Section 9.16 shall not be affected, reduced or impaired by
reason of the failure of the Sellers to pursue or enforce against the
Buyer any right or remedy available to the Sellers, and the Parent
hereby waives all right to require the Sellers first to pursue,
enforce or resort to any or all such rights or remedies of the Sellers
against the Buyer.
50
(c) The guaranty provided in this Section 9.16 is independent of and in
addition to any security or other remedies which the Sellers have or
may have for performance of any of the obligations on the part of the
Buyer; and the Parent agrees that the Sellers shall not be required to
resort to any other security or other remedies before proceeding upon
the guaranty provided in this Section 9.16, but that the Sellers may
proceed hereunder against the Parent at any time it sees fit,
independently of or concurrently with any other remedies it may have.
*****
51
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
FILENET NOVA SCOTIA CORPORATION,
a Nova Scotia unlimited liability corporation
By: .
Name: .
Title: .
.
DONALD MURPHY
.
JOHN MURPHY
.
TIM SENGER
.
WAYNE MALKIN
.
DAVID PERMAN
.
DENISE MURPHY
.
COLLEEN MURPHY
.
KATHY MALKIN
.
DONNA PERMAN
SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT
SHANA CORPORATION,
an Alberta corporation
By: .
Name: .
Title: .
FILENET CORPORATION,
a Delaware corporation
By: .
Name: .
Title: .
SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT
EXHIBIT 10.15.1
EXECUTION COPY
ESCROW AGREEMENT
THIS Escrow Agreement (this "Agreement") made and entered into as of this
2nd day of April by and among FileNet Nova Scotia Corporation, a Nova Scotia
unlimited liability corporation (the "Buyer"), Donald Murphy, John Murphy, Tim
Senger, Wayne Malkin, David Perman, Denise Murphy, Colleen Murphy, Kathy Malkin
and Donna Perman (collectively the "Sellers"), and Bennett Jones LLP, as Escrow
Agent ("the Escrow Agent").
RECITALS
A. Concurrently with the execution and delivery hereof, the Buyer is
acquiring the all shares of the capital stock of the Target held by the Sellers
pursuant to a Stock Purchase Agreement by and among the Buyer, the Sellers,
Shana Corporation, an Alberta corporation (the "Target") and FileNet
Corporation, a Delaware corporation, dated as of April 2, 2002 (the "Purchase
Agreement").
B. The Purchase Agreement provides that the Sellers and the Target shall
cause all other shares of the capital stock of the Target to be sold to either
the Buyer or the Target, and that the Sellers and the Other Shareholders of the
Target selling shares to the Buyer shall receive the Purchase Price once the
Sellers have delivered or caused to be delivered to the Buyer all of the
outstanding shares of the capital stock of the Target (the "Target Shares").
C. The Purchase Agreement also provides that the Buyer shall pay the
Purchase Price into escrow upon execution of the Purchase Agreement, to be
distributed to the Sellers and the Other Shareholders as provided in the
Purchase Agreement and this Agreement.
D. The Purchase Agreement also provides that the Sellers shall indemnify
the Buyer and its Affiliates with respect to certain matters upon the terms and
subject to the conditions provided in the Purchase Agreement and that as
security therefore (and not in lieu thereof) an escrow shall be established for
the protection of Buyer.
E. A material condition to the consummation of the transactions
contemplated by the Purchase Agreement is that the parties hereto enter into
this Agreement.
AGREEMENT
NOW THEREFORE, as a material inducement to Buyer to acquire the Target
Shares in accordance with the terms and conditions of the Purchase Agreement,
and for other good and valuable consideration, the receipt and adequacy of which
is hereby acknowledged, the parties hereby agree as follows:
1. Defined Terms. Capitalized terms used herein without definition shall
have the meanings ascribed to them in the Purchase Agreement.
2. Appointment of Representatives. The Sellers' Representatives are hereby
appointed as agents and attorneys-in-fact (the "Representatives") of the Sellers
and the Other Shareholders for all actions or decisions hereunder, and any
action taken by the Representatives shall be binding and conclusive on the
Sellers and the Other Shareholders and may be relied upon by the Buyer and the
Escrow Agent; provided, that any affirmative action taken by the Representatives
shall only be effective if approved or consented to by both Representatives. In
the event of the resignation, death or incapacity of a Representative, a
successor Representative shall be appointed as provided in Section 9.10 of the
Purchase Agreement. The Representatives shall not be liable for any action taken
or omitted by them, or any action suffered by them to be taken or omitted, in
good faith, and in the exercise of their own best judgment. Sam Auriemma is
hereby irrevocably appointed as agent and attorney-in-fact (the "Buyer's Agent")
of the Buyer for all actions or decisions hereunder, and any action taken by the
Buyer's Agent shall be binding and conclusive on the Buyer and may be relied
upon by the other parties hereto. In the event of the resignation, death or
incapacity of the Buyer's Agent, the Buyer's Agent shall be the President of the
Buyer or such other person as shall be designated by the President of the Buyer.
The Buyer's Agent shall not be liable for any action taken or omitted by him, or
any action suffered by him to be taken or omitted, in good faith, and in the
exercise of his own best judgment.
3. Commencement of Duties. The Buyer, simultaneously with the execution and
delivery of this Agreement, will transfer to the Escrow Agent the aggregate sum
of Eight Million Five Hundred Fifty Thousand Dollars ($8,550,000) (the "Escrowed
Funds"), to be held as follows: (i) $1,026,000 as the "Indemnity Holdback
Amount" and (ii) $7,524,000 as the "Initial Purchase Amount". Upon receipt by
the Escrow Agent of the Escrowed Funds, the duties and obligations of each of
the parties to this Agreement will commence.
4. Escrowed Funds. Upon receipt of the Escrowed Funds, the Escrow Agent
shall send a notice to the Representatives and the Buyer's Agent acknowledging
receipt of the Escrowed Funds and shall hold the Escrowed Funds in escrow
pursuant to the terms of this Agreement. Until such time as the Escrowed Funds
shall be distributed by the Escrow Agent as provided herein, the Escrowed Funds
shall be invested and reinvested by the Escrow Agent in accordance with the
written instructions of the Representatives, subject to the following
limitations:
(a) The Escrowed Funds shall be held and invested separately as the
Indemnity Holdback Amount and the Initial Purchase Amount. Except as
provided in Section 2.7 of the Purchase Agreement, the Escrowed Funds shall
be held and invested in United States dollars. Such funds shall be invested
and reinvested solely
(i) at the risk of the Sellers and the Other Shareholders,
(ii) in the name of the Escrow Agent or its nominee and in such
amounts as the Representatives shall designate; and
(iii) in either of the following:
2
(1) an interest bearing account or term deposit with a
Canadian chartered bank or bonds, debentures or other
evidences of indebtedness of or guaranteed by the
Government of Canada or the Government of Alberta; or
(2) such other instruments as may be specifically approved
in writing by both the Representatives and the Buyer's
Agent.
If the Representatives do not provide the Escrow Agent with written
instructions directing the investment or reinvestment of any of the Escrowed
Funds, the Escrow Agent shall automatically and forthwith invest such funds in
accordance with Section 4(a)(iii)(1) until the Escrow Agent has received
appropriate written instructions from the Representatives.
(b) The Escrow Agent shall be entitled to sell or redeem any such
investment as necessary to make any distributions required under this
Agreement and shall not be liable or responsible for any loss resulting
from any such sale or redemption.
(c) Income, if any, resulting from the investment of the Escrowed
Funds shall be retained by the Escrow Agent and shall be considered, for
all purposes of this Agreement, to be part of the Initial Purchase Amount
and the Indemnity Holdback Amount, respectively, to be distributed as
provided in this Agreement for such amounts; provided, that in the event
that the Sellers fail to deliver to the Buyer the items required by Article
VI of the Purchase Agreement within ninety (90) days after the Closing
Date, all income, if any, resulting from the investment of the Escrowed
Funds from the Closing Date shall be attributed and paid to the Buyer ten
(10) days after receipt of written notice from the Buyer to that effect and
stating that such notice has been served on the Sellers' Representatives
pursuant to this Agreement, unless the Sellers' Representatives shall,
within such ten (10) day period, deliver to the Escrow Agent a copy of all
items required by Article VI together with proof of timely delivery to the
Buyer. Thereafter, all income, if any, resulting from the investment of the
Escrowed Funds shall be paid to the Buyer when and as received by the
Escrow Agent, until such time as such certificate shall have been delivered
to the Buyer and the Escrow Agent.
5. Delivery and Distributions of the Initial Purchase Amount. Subject to
the withholding requirements with respect to non-residents of Canada set forth
in Section 2.7 of the Purchase Agreement, which Section is incorporated herein
by this reference as if set out in full herein, the Initial Purchase Amount
shall be distributed by the Escrow Agent in accordance with the following:
(a) Upon the Escrow Agent's receipt of a written notice from the
Representatives (the "Distribution Notice"):
(i) stating that the conditions set forth in Article VI of the
Purchase Agreement (the "Distribution Conditions" have been
satisfied or waived in writing by the Buyer, and attaching
copies of any such waivers; and
3
(ii) stating the total amount of the Repurchase Amount; and
(iii)stating that written notice has also been served on the
Buyer's Agent pursuant to this Agreement,
the Escrow Agent shall, unless it receives within five (5) Business
Days following the date of its receipt of the Distribution Notice (the
"Distribution Notice Period") a written notice signed by the Buyer's Agent
denying the satisfaction or waiver of the conditions set forth in Article
VI of the Purchase Agreement or disputing the amount of the Repurchase
Amount (a "Distribution Objection Notice"), distribute to the Shareholders
pro-rata as provided in Section 2.2 of the Purchase Agreement the Initial
Purchase Amount plus any income resulting from the investment of such
amount (unless paid to the Buyer pursuant to Section 4(c)) less the
Repurchase Amount, if any, and shall distribute to the Buyer the Repurchase
Amount.
(b) If the Escrow Agent receives a Distribution Objection Notice
within such Distribution Notice Period, the Escrow Agent shall:
(i) distribute to the Shareholders the amount, if any, of the
Initial Purchase Amount which is not in dispute from the
Escrowed Funds in the foregoing manner; and
(ii) hold the disputed amount of the Initial Purchase Amount (the
"Disputed Purchase Amount"), which shall be the entire
Initial Purchase Amount if the Distribution Objection Notice
contains a denial of the satisfaction or waiver of the
conditions set forth in Article VI of the Purchase
Agreement, subject to distribution in the manner as may be
mutually agreed upon by the Buyer's Agent and the
Representatives, pursuant to joint written instructions from
the Buyer's Agent and the Representatives.
In the event the Buyer's Agent and the Representatives are unable to
resolve any Disputed Purchase Amount within thirty (30) days after the date
of the Distribution Notice, the Disputed Purchase Amount shall be submitted
by the Buyer and the Seller to court action to be conducted in the City of
Calgary, in the Province of Alberta. Upon the resolution of such dispute,
whether by agreement of the parties or by court order, if the Distribution
Conditions have not been satisfied or waived, the Initial Purchase Amount
shall continue to be retained by the Escrow Agent pursuant to the terms of
this Agreement, and if the Distribution Conditions have been satisfied or
waived, the portion of the Disputed Purchase Amount, if any, to which the
Shareholders are entitled shall be distributed by the Escrow Agent to the
Shareholders, and the remainder of the Disputed Purchase Amount, if any,
shall be distributed to the Buyer.
(c) Notwithstanding any of the foregoing provisions of this Section 5,
the Escrow Agent shall deliver or distribute all or any portion of the
Initial Purchase Amount in accordance with any joint written notice
executed and delivered by, both Buyer's Agent and the Representatives.
4
6. Delivery and Distributions of the Indemnity Holdback Amount. The
Indemnity Holdback Amount shall be distributed by the Escrow Agent in accordance
with the following:
(a) Upon the Escrow Agent's receipt of a written notice from the
Buyer's Agent (a "Claim Notice"):
(i) stating the total monetary amount, if determined, of any
claim for which the Buyer or its Affiliate seeks
indemnification pursuant to terms and subject to the
conditions of Article VII of the Purchase Agreement (a
"Claim"), describing the Claim in reasonable detail and
demanding satisfaction of the Claim; and
(ii) stating that written notice has also been served on the
Representative pursuant to this Agreement,
the Escrow Agent shall, unless it receives within ten (10) Business
Days following the date of its receipt of the Claim Notice (the "Claim
Notice Period") a written notice signed by the Representatives objecting to
all or a portion of such Claim (an "Objection Notice"), distribute to the
Buyer or its Affiliate, as applicable, the amount of such Claim in
accordance with the Claim Notice.
(b) If the Escrow Agent receives an Objection Notice within such Claim
Notice Period, the Escrow Agent shall:
(i) distribute to the Buyer or its Affiliate, as applicable, the
amount, if any, of such Claim which is not in dispute from
the Indemnity Holdback Amount in the foregoing manner; and
(ii) hold the disputed amount of such Claim (the "Disputed
Claim") subject to distribution in the manner as may be
mutually agreed upon by the Buyer's Agent and the
Representatives, pursuant to joint written instructions from
the Buyer's Agent and the Representatives.
In the event the Buyer's Agent and the Representatives are unable to
resolve any Disputed Claim within sixty (60) days after delivery of the
applicable Claim Notice, the Disputed Claim shall be submitted by Buyer and
Seller to court action to be conducted in the City of Calgary, in the
Province of Alberta. Upon the resolution of such dispute, the portion of
the Disputed Claim, if any, to which the Buyer or its Affiliate, as
applicable, is entitled shall be distributed by the Escrow Agent to the
Buyer or its Affiliate, as applicable, and the remainder of the Disputed
Claim, if any, shall no longer be a Disputed Claim and shall again become
part of the Indemnity Holdback Amount.
(c) Notwithstanding anything to the contrary in the foregoing, in no
event shall the Escrow Agent distribute any portion of the Indemnity
Holdback Amount with respect to any Claim Notice received by the Escrow
Agent after October 2, 2004, (the "Expiration Date") without the express
written consent of the Representatives.
5
(d) If on the day after the Expiration Date, any amount of the
Indemnity Holdback Amount is being held by the Escrow Agent pending
("Pending Amounts"):
(i) distribution to the Buyer or its Affiliate, as applicable,
with respect to a Claim or Claims, then the Escrow Agent
shall continue to hold such amounts until they are
distributed in accordance with Section 6(a) of this
Agreement;
(ii) expiration of the Claim Notice Period with respect to a
Claim, then the Escrow Agent shall continue to hold such
amounts until it is determined that such Claim is either
(1) a Claim which is not a Disputed Claim (in which case
such amounts shall be held and distributed in
accordance with Section 6(a) of this Agreement); or
(2) a Disputed Claim (in which case such amounts shall be
held and distributed in accordance with Section 6(b))
of this Agreement; or
(3) a Claim which is partially disputed (in which case the
amounts of the undisputed Claim and the Disputed Claim
shall be held and distributed in accordance with
Sections 6(b)(i) and (ii) of this Agreement,
respectively); or
(iii)resolution of a Disputed Claim, then the Escrow Agent shall
continue to hold such amounts until such Disputed Claim is
resolved pursuant to Section 6(b)(ii) of this Agreement and
thereafter distribute such amounts in accordance with the
terms of such resolution;
(iv) the determination of the amount due with respect to a Claim,
then the Escrow Agent shall continue to hold only an amount
reasonably estimated by the Buyer's Agent until such amount
due is determined, at which time it shall be distributed in
accordance with this Section 6(d).
(e) If on the day after the Expiration Date, there remain Escrowed
Funds which are not Pending Amounts, then these non-Pending Amounts, if
any, shall be distributed by the Escrow Agent to or to the order of the
Shareholders pro-rata as provided in Section 2.2 of the Purchase Agreement.
(f) Notwithstanding any of the foregoing provisions of this Section 6,
the Escrow Agent shall deliver or distribute all or any portion of the
Indemnification Holdback Amount in accordance with any joint written notice
executed and delivered by, both Buyer's Agent and the Representatives.
7. Termination. Upon the final distribution of all of the Escrowed Funds in
accordance with the terms of this Agreement, this Agreement shall terminate.
6
8. Tax Matters.
(a) The Parties agree and acknowledge that the Initial Purchase Amount
and the Indemnity Holdback Amount shall be treated as property of the
Shareholders for all Tax purposes, and all income earned or realized on the
amounts in the Escrowed Funds shall be treated as income of the
Shareholders, all parties shall report such income in a manner consistent
with such treatment, and the Buyer shall not be responsible for any taxes
on such income.
(b) Any Withheld Amounts held by the Escrow Agent pursuant to Section
2.7 of the Purchase Agreement shall be held and released by the Escrow
Agent as provided in such Section 2.7.
(c) The Buyer and the Sellers, jointly and severally, covenant and
agree to indemnify and hold the Escrow Agent harmless against all liability
for tax withholding and/or reporting for any payments made by the Escrow
Agent pursuant to this Agreement.
9. Duties of the Escrow Agent. The Escrow Agent shall have no duties or
responsibilities other than those expressly set forth in this Agreement, and no
implied duties or obligations shall be read into this Agreement against the
Escrow Agent. The Escrow Agent shall have no duty to enforce any obligation of
any person, other than as provided herein. The Escrow Agent shall be under no
liability to anyone by reason of any failure on the part of any party hereto or
any maker, endorser or other signatory of any document or any other person to
perform such person's obligations under any such document.
10. Liability of the Escrow Agent; Withdrawal. The Escrow Agent shall not
be liable for any action taken or omitted by it, or any action suffered by it to
be taken or omitted, in good faith, and in the exercise of its own best
judgment, and may rely conclusively and shall be protected in acting upon any
order, notice, demand, certificate, opinion or advice of counsel (including
counsel chosen by the Escrow Agent), statement, instrument, report or other
paper or document (not only as to its due execution and the validity and
effectiveness of its provisions, but also as to the truth and acceptability of
any information therein contained) which is believed by the Escrow Agent to be
genuine and to be signed or presented by the proper person(s). The Escrow Agent
shall not be held liable for any error in judgment made in good faith by an
officer of the Escrow Agent unless it shall be proved that the Escrow Agent was
grossly negligent in ascertaining the pertinent facts or acted intentionally in
bad faith. The Escrow Agent shall not be bound by any notice of demand, or any
waiver, modification, termination or rescission of this Agreement or any of the
terms hereof, unless evidenced by a writing delivered to the Escrow Agent signed
by the proper party or parties and, if the duties or rights of the Escrow Agent
are affected, unless it shall give its prior written consent thereto. The Escrow
Agent shall be entitled to retain the services of such professional advisors as
the Escrow Agent may reasonably deem necessary in order to fulfill its duties
under this Agreement, the costs of which shall be treated as fees of the Escrow
Agent as described in Section 11.
The Escrow Agent shall not be responsible, may conclusively rely upon and
shall be protected, indemnified and held harmless by the Buyer and the Sellers,
7
acting jointly and severally, for the sufficiency or accuracy of the form of, or
the execution, validity, value or genuineness of any document or property
received, held or delivered by it hereunder, or of the signature or endorsement
thereon, or for any description therein; nor shall the Escrow Agent be
responsible or liable in any respect on account of the identity, authority or
rights of the persons executing or delivering or purporting to execute or
deliver an document, property or this Agreement.
In the event that the Escrow Agent shall become involved in any arbitration
or litigation relating to the Escrowed Funds, the Escrow Agent is authorized to
comply with any decision reached through such arbitration or litigation. In the
event of any dispute between the Buyer and the Shareholders, or between the
Escrow Agent and any other person, with respect to the release of any portion of
the Escrowed Funds, then Escrow Agent shall be entitled, in its discretion, to
interplead with respect to such amount and lodge such amount with the Court of
Queen's Bench of the Province of Alberta.
The Escrow Agent may resign at any time and be discharged from its duties
or obligations hereunder by giving twenty (20) days' notice in writing of such
resignation to each party specifying a date when such resignation shall take
effect. The parties agree that in the event of such a resignation, the parties
will use commercially reasonable efforts to agree on another law firm located in
Calgary, Alberta to act as replacement Escrow Agent. In the event that the
parties are not able to agree on a replacement Escrow Agent within ten (10) days
of such notice, each party shall select a nominee replacement Escrow Agent,
which shall a law firm located in Calgary, Alberta within five (5) days
thereafter and the existing Escrow Agent shall in its sole discretion select one
of such nominees to act as the replacement Escrow Agent.
11. The Escrow Agent's Fee. The Escrow Agent's fees shall be paid one-half
by the Sellers as a group and one-half by the Buyer, and shall be able to
withhold any amounts due from either party in respect of such fees from any
amounts payable to such party out of the Escrowed Funds.
In connection with acting as Escrow Agent hereunder, the Escrow Agent shall
be paid fees determined based on its regular hourly rates and the amount of time
spent in fulfilling its duties hereunder. The Buyer and the Sellers, jointly and
severally, hereby agree to indemnify the Escrow Agent for, and to hold it
harmless against any loss, liability or expense incurred without gross
negligence or willful misconduct on the part of the Escrow Agent, including
without limitation legal or other fees arising out of or in connection with its
entering into this Agreement and carrying out its duties hereunder, including
without limitation the costs and expenses of defending itself against any claim
of liability in the premises or any action for interpleader. The Escrow Agent
shall be under no obligation to institute or defend any action, suit, or legal
proceeding in connection herewith, unless first indemnified and held harmless to
its satisfaction in accordance with the foregoing, except that the Escrow Agent
shall not be indemnified against any loss, liability or expense arising out of
its gross negligence or willful misconduct. Such indemnity shall survive the
termination or discharge of this Agreement or resignation of the Escrow Agent.
The Escrow Agent shall be reimbursed one-half by the Sellers and one-half by the
Buyer for any reasonable expenses or disbursements incurred in connection with
the performance of the Escrow Agent's obligations hereunder including without
limitation the actual cost of legal services should the Escrow Agent deem it
necessary to retain an attorney.
8
12. Inspection. All funds or other property held as part of the escrow
shall at all times be clearly identified by the Escrow Agent as being held by
the Escrow Agent hereunder. Any party hereto may at any time during the Escrow
Agent's business hours (with reasonable notice) inspect any records or reports
relating to the Escrowed Funds.
13. Controlling Document. To the extent provisions of the Purchase
Agreement are inconsistent with the provisions contained herewith, this
Agreement shall supersede the Purchase Agreement and be the controlling
document; provided, however, that the provisions of Article VII of the Purchase
Agreement shall control for all purposes, except for the Escrow Agent's duties.
14. Notices. All notices, demands and requests required or permitted to be
given under the provisions hereof must be in writing and shall be deemed to have
been sufficiently given when received if personally delivered or sent by
telecopy or if mailed by registered or certified mail, with return receipt
requested, on the third day after mailing, addressed as follows:
(1) If to the Sellers or the Representatives: To the Seller or Representative
c/o McCuaig Desrochers LLP
2401, TD Tower 10088-102 Avenue
Edmonton, Alberta T5J 2Z1
Attention: Pierre Desrochers
Telecopy: (780) 426-0982
with a copy to: McCuaig Desrochers LLP
2401, TD Tower 10088-102 Avenue
Edmonton, Alberta T5J 2Z1
Attention: Pierre Desrochers
Telecopy: (780) 426-0982
(2) If to Buyer or Buyer's Agent: FileNet Nova Scotia Corporation
c/o 3565 Harbor Boulevard
Costa Mesa, California 92626
Attention: Sam M. Auriemma
Telecopy: (714) 327-3232
with a copy to: Latham and Watkins
650 Town Center Drive, 20th Floor
Costa Mesa, California 92626
Attention: R. Scott Shean, Esq.
Telecopy: (714) 755-8290
9
(3) If to the Escrow Agent: Bennett Jones LLP
4500, 855 2nd Street S.W.
Calgary, Alberta T2P 4K7
Attention: Brad D. Markel
Telecopy: (403) 265-7219
15. Non-Exclusive Remedy. The Buyer and the Sellers agree and acknowledge
that the Escrowed Funds shall not be the Buyer's exclusive method of receiving
indemnification from the Sellers pursuant to Article VII of the Purchase
Agreement.
16. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the Province of Alberta without regard to the
principles of conflicts of law. The parties hereby attorn to the jurisdiction of
the courts of the Province of Alberta in respect of any dispute relating to this
Agreement.
17. Binding Effect; Benefit. This Agreement shall be binding upon and inure
to the benefit of the successors and assigns of the parties hereto.
18. Modification. This Agreement may be amended or modified at any time by
a writing executed by the Sellers, the Buyers and the Escrow Agent.
19. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
20. Headings. The section headings contained in this Agreement are inserted
for convenience only, and shall not affect in any way, the meaning or
interpretation of this Agreement.
21. Severability and Further Assurances. This Agreement and the Purchase
Agreement constitute the entire agreement among the parties and supersede all
prior and contemporaneous agreements and undertakings of the parties on
connection herewith. No failure or delay of the Escrow Agent in exercising any
right, power or remedy may be, or may be deemed to be, a waiver thereof; nor may
any single or partial exercise of any right, power or remedy preclude any other
or further exercise of any right, power or remedy. In the event that any one or
more of the provisions contained in this Agreement, shall, for any reason, be
held to be invalid, illegal or unenforceable in any respect, then to the maximum
extent permitted by law, such invalidity, illegality or unenforceability shall
not affect any other provision of this Agreement. Each of the parties hereto
shall, at the request of the other party, deliver to the requesting party all
further documents or other assurances as may reasonably be necessary or
desirable in connection with this Agreement.
22. Acknowledgement by Shareholders. Notwithstanding that Bennett Jones LLP
is acting as Escrow Agent hereunder, the Shareholders acknowledge that Bennett
Jones LLP will continue to be the solicitors for the Buyer and Shana
Corporation, and any conflict which may be created by Bennett Jones LLP
continuing to so act is hereby waived by the Shareholders.
10
23. Authorization. Each Seller and each Other Shareholder hereby directs
the Escrow Agent, at the request of the Sellers' Representatives, to make any
payments due to such Seller or Other Shareholder pursuant to the Escrow
Agreement to or to the order of McCuaig Desrochers in trust for delivery to such
Seller or Other Shareholder. Payments made by the Escrow Agent to McCuaig
Desrochers in the manner specified shall relieve the Escrow Agent of any
obligations to such Seller or Other Shareholder with respect to the amount so
paid.
[SIGNATURE PAGE FOLLOWS]
11
IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement
as of the date first above written.
"BUYER"
FILENET NOVA SCOTIA CORPORATION,
a Nova Scotia unlimited liability corporation
__________________________
DONALD MURPHY
By: __________________________________
Name: __________________________________
__________________________ Its: __________________________________
JOHN MURPHY
__________________________ "ESCROW AGENT"
TIM SENGER
BENNETT JONES LLP
__________________________ By: _________________________________
WAYNE MALKIN Name: _________________________________
Its: _________________________________
__________________________
DAVID PERMAN
__________________________
DENISE MURPHY
__________________________
COLLEEN MURPHY
__________________________
KATHY MALKIN
__________________________
DONNA PERMAN
SIGNATURE PAGE TO THE ESCROW AGREEMENT
EXHIBIT 10.16
[FILENET LETTERHEAD]
May 15, 2003
Mr. Lee D. Roberts
3926 95th Street NE
Bellevue, WA 98004
Dear Mr. Roberts:
This letter agreement constitutes an amendment and restatement of our
letter agreement dated October 15, 2001.
We are pleased to inform you that the Compensation Committee of the
Company's Board of Directors and the Board of Directors has approved a special
severance benefit program for you and other key executives. The purpose of this
letter agreement is to set forth the terms and conditions of your new benefits
and to explain the limitations that will govern their overall value.
Your new severance package will become payable in the event your employment
terminates under certain circumstances within a specified time period following
a substantial change in ownership or control of the Company. To understand the
full scope of your benefits, you should familiarize yourself with the
definitional provisions of Part One of this letter agreement. The benefits
comprising your severance package are detailed in Part Two, and the dollar
limitations on the overall value of your benefit package and other applicable
restrictions are specified in Parts Three and Four. Part Five deals with
ancillary matters affecting your severance arrangement.
PART ONE - DEFINITIONS
For purposes of this letter agreement, the following definitions will be in
effect:
Average Compensation means the average of your W-2 wages from the Company
for the five (5) calendar years (or such fewer number of calendar years of
employment with the Company) completed immediately prior to the calendar year in
which the Change in Control is effected. Any W-2 wages for a partial year of
employment will be annualized, in accordance with the frequency which such wages
are paid during such partial year, before inclusion in your Average
Compensation.
Base Salary means the annual rate of base salary in effect for you
immediately prior to the Change in Control or (if greater) the annual rate of
base salary in effect at the time of your Involuntary Termination or resignation
for Good Reason.
Board means the Company's Board of Directors.
Cause means any of the following reasons for which the Company may
terminate your employment: (i) your willful failure or refusal to perform your
duties (other than any such failure attributable to your incapacity due to
physical or mental illness) which is not cured within ten (10) business days
after written notice from the Company in which there is identified the manner in
which Company believes that you have not performed such duties and the steps
required to cure such failure; (ii) your conviction of, or entering a plea of
nolo contendere with respect to, a felony; (iii) any intentional misconduct on
your part which has a materially adverse effect upon the Company, monetarily or
otherwise; or (iv) any unauthorized use or disclosure by you of the Company's
proprietary information.
Change in Control means any of the following transactions:
(i) a merger or consolidation in which securities possessing more than
fifty percent (50%) of the total combined voting power of the
Company's outstanding securities are transferred to a person or
persons different from the persons holding those securities
immediately prior to such transaction;
(ii) any sale, transfer or other disposition of all or substantially all of
the Company's assets;
(iii) a complete liquidation or dissolution of the Company;
(iv) the acquisition, directly or indirectly, by any person or related
group of persons (other than the Company or a person that directly or
indirectly controls, is controlled by or is under common control with,
the Company) of beneficial ownership (within the meaning of Rule 13d-3
of the Securities Exchange Act of 1934, as amended) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Company's outstanding securities; or
(v) a change in the composition of the Board over a period of thirty-six
(36) consecutive months or less such that a majority of the Board
members ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B)
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 (A) who were still in office at the time the Board approved
such election or nomination.
Code means the Internal Revenue Code of 1986, as amended.
Common Stock means the Company's common stock.
Company means FileNET Corporation, a Delaware corporation, or any successor
corporation, whether or not resulting from a Change in Control.
Fair Market Value means, with respect to the shares of Common Stock subject
to any of your Options, the average of the high and low selling prices per share
2
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. If
there are no selling prices reported 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 report exists.
Good Reason means any of the following reasons for which you may terminate
your employment at any time within the eighteen (18) month period following a
Change in Control: (i) the assignment to you of any duties inconsistent with
your position (including status, offices, titles and reporting requirements),
authority, duties or responsibilities as in effect immediately prior to the
Change in Control, or any other action by the Company which results in a
material diminution in such position, authority, duties or responsibilities,
(ii) a reduction in your level of compensation (including Base Salary, Target
Bonus and fringe benefits) by more than fifteen percent (15%) or (iii) a
relocation of your principal place of employment by more than thirty-five (35)
miles from the location in effect immediately prior to the Change in Control,
unless such change, reduction or relocation is effected with your written
consent.
Involuntary Termination means the involuntary termination of your
employment with the Company other than a termination for Cause. An Involuntary
Termination will not be deemed to occur in the event your employment terminates
by reason of your death or Disability.
Option means any option granted to you (a) under the Plan or (b) outside of
the Plan, which is outstanding at the time of the Change in Control or upon the
subsequent Involuntary Termination of your employment or resignation for Good
Reason. Your Options will be divided into two (2) separate categories as
follows:
Acquisition-Accelerated Options: any outstanding Option (or
installment thereof) which automatically accelerates, pursuant to the
acceleration provisions of an applicable agreement evidencing that Option,
upon a Change in Control. These options are not the subject matter of this
letter agreement.
Severance-Accelerated Options: any outstanding Option (or installment
thereof) that, pursuant to Part Two of this letter agreement, accelerates
upon an Involuntary Termination or resignation for Good Reason.
Option Parachute Payment means, with respect to any Acquisition-Accelerated
Option or any Severance-Accelerated Option, the portion of that Option deemed to
be a parachute payment under Code Section 280G and the Treasury Regulations
issued thereunder. The portion of such Option which is categorized as an Option
Parachute Payment will be calculated in accordance with the valuation provisions
established under Code Section 280G and the applicable Treasury Regulations and
will include an appropriate dollar adjustment to reflect the lapse of your
obligation to remain in the Company's employ as a condition to the vesting of
the accelerated installment. In no event, however, will the Option Parachute
Payment attributable to any Acquisition-Accelerated Option or
Severance-Accelerated Option (or accelerated installment) exceed the spread (the
excess of the Fair Market Value of the accelerated option shares over the option
exercise price payable for those shares) existing at the time of acceleration.
3
Other Parachute Payment means any payment in the nature of compensation
(other than the benefits to which you become entitled under Part Two of this
letter agreement) which are made to you in connection with the Change in Control
and which accordingly qualify as parachute payments within the meaning of Code
Section 280G(b)(2) and the Treasury Regulations issued thereunder. Your Other
Parachute Payment will include (without limitation) the Present Value, measured
as of the Change in Control, of the aggregate Option Parachute Payment
attributable to your Acquisition-Accelerated Options (if any).
Parachute Payment means any payment or benefit provided you under Part Two
of this letter agreement (other than the Option Parachute Payment attributable
to your Severance-Accelerated Options) which is deemed to constitute a parachute
payment within the meaning of Code Section 280G(b)(2) and the Treasury
Regulations issued thereunder.
Permanent Disability means your inability to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more.
Plan means (i) the Company's 1995 Stock Option Plan, as amended or restated
from time to time, and (ii) any successor stock incentive plan subsequently
implemented by the Company.
Present Value means the value, determined as of the date of the Change in
Control, of any payment in the nature of compensation to which you become
entitled in connection with the Change in Control or the subsequent Involuntary
Termination of your employment or resignation for Good Reason, including
(without limitation) the Option Parachute Payment attributable to your
Severance-Acceleration Options, the additional benefits to which you become
entitled under Part Two of this letter agreement and the Option Parachute
Payment attributable to your Acquisition-Accelerated Options. The Present Value
of each such payment shall be determined in accordance with the provisions of
Code Section 280G(d)(4), utilizing a discount rate equal to one hundred twenty
percent (120%) of the applicable Federal rate in effect at the time of such
determination, compounded semi-annually to the effective date of the Change in
Control.
Target Bonus means the annual incentive bonus to which you may become
entitled under the Company's Officer Bonus Plan for one or more calendar years
upon the Company's attainment of the performance milestones designated for the
each such year and your attainment of the personal objectives specified for you
for such year, if any, assuming that all financial and other targets are
achieved at the level of 100%.
PART TWO - CHANGE IN CONTROL BENEFITS
Should your employment with the Company terminate by reason of an
Involuntary Termination, or should you resign for Good Reason within eighteen
(18) months following a Change in Control, then you will become entitled to
receive the severance benefits provided under this Part Two, subject to the
4
benefit limitations of Part Three of this letter agreement. Such benefits will
be in lieu of all other severance benefits to which you might otherwise be
entitled upon such a termination of your employment.
1. Accelerated Vesting.
Each outstanding Option which you hold at the time of your Involuntary
Termination or resignation for Good Reason, to the extent not otherwise
exercisable for all the shares of Common Stock subject to that Option, shall
immediately become exercisable for all those option shares and may be exercised
for any or all of those shares as fully vested shares. Each Option so
accelerated shall remain exercisable until the earlier of (i) the expiration of
the option term or (ii) the end of the three (3) month period following the date
of your Involuntary Termination or resignation for Good Reason for options
granted prior to or on March 16, 2001 or (iii) the end of the six (6) month
period following the date of your Involuntary Termination or resignation for
Good Reason for options granted after March 16, 2001. Incentive Stock Options
("ISOs") granted subsequent to March 16, 2001, will retain their favorable tax
treatment to the extent said options are exercised within three (3) months from
the date of your Involuntary Termination or resignation for Good Reason. If said
options are exercised after the three (3) month period but prior to end of the
six (6) month extension period, such options will be characterized as
Nonqualified Stock Options and reported as additional compensation subject to
full withholding taxes on the your Form W-2 or Form 1099, as applicable.
2. Severance Payment.
Subject to the limitations of Part Three of this letter agreement, you will
be entitled a cash lump sum severance payment in an amount equal to the sum of
(i) twelve (12) months of your Base Salary, (ii) a pro-rata portion of your
Target Bonus for the calendar year in which the Change of Control occurs, based
upon the number of days you were employed during the calendar year in which your
Involuntary Termination or resignation for Good Reason occurs relative to the
total number of days in such year and (iii) the greater of (A) your Target Bonus
for the calendar year in which your Involuntary Termination or resignation for
Good Reason occurs or (B) your Target Bonus for the calendar year in which the
Change in Control occurs.
Said lump sum severance payment will be made in a cash lump sum within
thirty (30) days following your Involuntary Termination or resignation for Good
Reason, and will be subject to the Company's collection of all applicable income
and employment withholding taxes.
In addition, you will be entitled to twelve (12) months of continuation
payments at your Base Salary and the greater of (i) your Target Bonus for the
calendar year in which your Involuntary Termination or resignation for Good
Reason occurs or (ii) your Target Bonus for the calendar year in which the
Change in Control occurs. These payments will be made at bi-weekly intervals for
twelve (12) months commencing on the next administratively feasible payroll
cycle from the date of your Involuntary Termination or resignation for Good
Reason.
3. Benefits Coverage.
The Company will make a lump sum payment to you equal to twenty-four (24)
months of the current monthly Internal Revenue Code Section 4980B medical
premium ("COBRA") for you and your eligible dependents. This lump sum payment
will be remitted to you thirty (30) days from the date of Involuntary
5
Termination or resignation for Good Reason. It is your responsibility to
complete the necessary documents and make payments directly to the COBRA
administrator to maintain medical coverage throughout the period you are
eligible for COBRA benefits. Any additional health care coverage to which you
and your dependents may be entitled under COBRA will be at your sole cost and
expense.
In addition, if currently enrolled in the Company's Group Universal Life
("GUL") insurance program, the Company will make a lump sum payment to you equal
to twenty-four (24) months of the current monthly GUL insurance premium. This
lump sum payment will be remitted to you thirty (30) days from the date of
Involuntary Termination or resignation for Good Reason. It is your
responsibility to complete the necessary documents and make payments directly to
the GUL administrator to maintain coverage.
Your payments and benefits under Paragraph 2 will immediately terminate in
the event you fail to abide by the restrictive covenants set forth in Part Four
of this letter agreement. Your Paragraph 2 payments will be subject to the
Company's collection of applicable federal and state income and employment
withholding taxes.
You shall not be required to mitigate the amount of any payment or benefit
provided for in this Part Two by seeking other employment or otherwise nor shall
the amount of any payment or benefit provided for in this Part Two be reduced by
any compensation earned by you as the result of employment by another employer
or self-employment, by retirement benefits, by offset against any amount claimed
to be owed by you to the Company, or otherwise.
PART THREE - LIMITATION ON BENEFITS
1. Additional Payment.
Anything in this letter agreement to the contrary notwithstanding and
except as set forth below in Paragraph 2, in the event it shall be determined
that any Payment (as defined below) would be subject to the Excise Tax (as
defined below), then you shall be entitled to receive an additional payment (the
"Gross-Up Payment") in an amount such that, after payment by you of all taxes
(and any interest or penalties imposed with respect to such taxes), including,
without limitation, any income taxes (and any interest and penalties imposed
with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, you
retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Payments. Notwithstanding any other provision of this Part Three, the
Company may, in its sole discretion, withhold and pay over to the Internal
Revenue Service or any other applicable taxing authority, for your benefit, all
or any portion of any Gross-Up Payment, and you hereby consent to such
withholding.
2. Benefit Limitation.
Notwithstanding Paragraph 1 of this Part Three, if it shall be determined
that the net after-tax benefit that you would receive if you received all of the
Payments (and on the assumption that you are not entitled to a Gross-Up Payment)
would be less than the net after-tax benefit that you would receive if the
6
Parachute Value (as defined below) of all Payments did not exceed the Safe
Harbor Amount (as defined below), then no Gross-Up Payment shall be made to you
and the amounts payable under this letter agreement shall be reduced so that the
Parachute Value of all Payments, in the aggregate, equals the Safe Harbor
Amount. The reduction of the amounts payable hereunder, if applicable, shall be
made by first reducing the payments under Paragraph 2 of Part Two, unless an
alternative method of reduction is elected by you, and in any event shall be
made in such a manner as to maximize the Value as defined below of all Payments
actually made to you. For purposes of reducing the Payments to the Safe Harbor
Amount, only amounts payable under Part Two of this letter agreement (and no
other Payments) shall be reduced. If the reduction of the amount payable under
Part Two of this letter agreement would not result in a reduction of the
Parachute Value of all Payments to the Safe Harbor Amount, no amounts payable
under this letter agreement shall be reduced pursuant to this Paragraph 2 unless
you elect to have any such amounts reduced.
3. Resolution Procedure.
(a) All determinations required to be made under this Part Three, including
whether and when a Gross-Up Payment is required, the amount of such Gross-Up
Payment and the assumptions to be utilized in arriving at such determination,
shall be made by the Company's independent certified public accountants serving
immediately prior to the Change in Control, or such other nationally recognized
accounting firm as may be agreed by the Company and you (the "Accounting Firm");
provided, that the Accounting Firm's determination shall be made based upon
"substantial authority" within the meaning of Section 6662 of the Code. The
Accounting Firm shall provide detailed supporting calculations both to the
Company and you within 15 business days of the receipt of notice from you that
there has been a Payment or such earlier time as is requested by the Company.
All fees and expenses of the Accounting Firm shall be borne solely by the
Company. Any Gross-Up Payment, as determined pursuant to this Part Three, shall
be paid by the Company to you within 5 days of the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be binding
upon the Company and you.
(b) As a result of the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments that will not have been made by
the Company should have been made (the "Underpayment"), consistent with the
calculations required to be made hereunder. In the event the Company exhausts
its remedies pursuant to Paragraph 3(c) and you thereafter are required to make
a payment of any Excise Tax, the Accounting Firm shall determine the amount of
the Underpayment that has occurred and any such Underpayment shall be promptly
paid by the Company to or for your benefit.
(c) You shall notify the Company in writing of any claim by the Internal
Revenue Service that, if successful, would require the payment by the Company of
the Gross-Up Payment. Such notification shall be given as soon as practicable,
but no later than 10 business days after you are informed in writing of such
claim. You shall apprise the Company of the nature of such claim and the date on
which such claim is requested to be paid. You shall not pay such claim prior to
the expiration of the 30-day period following the date on which you give such
notice to the Company (or such shorter period ending on the date that any
7
payment of taxes with respect to such claim is due). If the Company notifies you
in writing prior to the expiration of such period that the Company desires to
contest such claim, you shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to
time, including, without limitation, accepting legal
representation with respect to such claim by an attorney
reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to
contest such claim, and
(iv) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs
and expenses (including additional interest and penalties) incurred in
connection with such contest, and shall indemnify and hold you harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties) imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this Paragraph 3(c),
the Company shall control all proceedings taken in connection with such contest,
and, at its sole discretion, may pursue or forgo any and all administrative
appeals, proceedings, hearings and conferences with the applicable taxing
authority in respect of such claim and may, at its sole discretion, either
direct you to pay the tax claimed and sue for a refund or contest the claim in
any permissible manner, and you agree to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that, if the Company directs you to pay such claim
and sue for a refund, the Company shall advance the amount of such payment to
you, on an interest-free basis, and shall indemnify and hold you harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties) imposed with respect to such advance or with respect to any imputed
income in connection with such advance; and provided, further, that any
extension of the statute of limitations relating to payment of taxes for your
taxable year with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which the Gross-Up
Payment would be payable hereunder, and you shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after your receipt of a Gross-Up Payment or an amount advanced by
the Company pursuant to Part Three, you become entitled to receive any refund
with respect to the Excise Tax to which such Gross-Up Payment relates or with
respect to such claim, you shall (subject to the Company's complying with the
requirements of Paragraph 3(c), if applicable) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after your receipt of an amount advanced by the
Company pursuant to Part Three, a determination is made that you shall not be
8
entitled to any refund with respect to such claim and the Company does not
notify you in writing of its intent to contest such denial of refund prior to
the expiration of 30 days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount of such advance
shall offset, to the extent thereof, the amount of Gross-Up Payment required to
be paid.
(e) Definitions. The following terms shall have the following meanings for
purposes of this Part Three.
"Excise Tax" shall mean the excise tax imposed by Section 4999 of the
Code, together with any interest or penalties imposed with respect to such
excise tax.
"Parachute Value" of a Payment shall mean the present value as of the
date of the change of control for purposes of Section 280G of the Code of
the portion of such Payment that constitutes a "parachute payment" under
Section 280G(b)(2), as determined by the Accounting Firm for purposes of
determining whether and to what extent the Excise Tax will apply to such
Payment.
A "Payment" shall mean any payment or distribution in the nature of
compensation (within the meaning of Section 280G(b)(2) of the Code) to or
for your benefit, whether paid or payable pursuant to this letter agreement
or otherwise.
The "Safe Harbor Amount" shall mean 2.99 times your "base amount,"
within the meaning of Section 280G(b)(3) of the Code.
"Value" of a Payment shall mean the economic present value of a
Payment as of the date of the change of control for purposes of Section
280G of the Code, as determined by the Accounting Firm using the discount
rate required by Section 280G(d)(4) of the Code.
PART FOUR - SPECIAL RESTRICTIVE COVENANTS
Any salary/bonus continuation payments to which you become entitled
hereunder as a severance payment shall immediately cease if at any time during
the applicable salary/bonus continuation period, you:
(a) own, manage, operate, join, control or participate in the
ownership, management, operation or control of, or be employed by
or connected in any manner with, any enterprise which is engaged
in any business competitive with or similar to that of the
Company; provided, however, that such restriction shall not apply
to any passive investment representing an interest of less than
one percent (1%) of an outstanding class of publicly-traded
securities of any corporation or other enterprise which is not,
at the time of such investment, engaged in a business competitive
with the Company's business;
(b) encourage or solicit any of the Company's employees to leave the
Company's employ for any reason or interfere in any other manner
9
with employment relationships at the time existing between the
Company and its employees; or
(c) solicit any client or customer of the Company, induce any of the
Company's clients, customers, suppliers, vendors or distributors
to terminate their existing business relationships with the
Company or interfere in any other manner with any existing
business relationship between the Company and any client,
customer, supplier, vendor, distributor or other third party.
PART FIVE - MISCELLANEOUS
1. Termination for Cause.
Should your employment be terminated for Cause, the Company will only be
required to pay you (i) any unpaid compensation earned for services previously
rendered through the date of such termination and (ii) any accrued but unpaid
vacation benefits or sick days, and no benefits will be payable to you under
Part Two of this letter agreement.
2. Death or Permanent Disability.
Should you die or become permanently disabled before receipt of one or more
salary/bonus continuation payments to which you become entitled under this
letter agreement, then those payments will be made to the executors or
administrators of your estate. Should you die or become permanently disabled
before you exercise all your outstanding Options as accelerated hereunder, then
such Options may be exercised, within twelve (12) months after the date of your
Death or Permanent Disability, by the executors or administrators of your estate
or by persons to whom the Options are transferred pursuant to your will or in
accordance with the laws of inheritance. In no event, however, may any such
Option be exercised after the specified expiration date of the option term.
3. General Creditor Status.
All cash payments to which you become entitled hereunder will be paid, when
due, from the general assets of the Company, and no trust fund, escrow
arrangement or other segregated account will be established as a funding vehicle
for such payment. Accordingly, your right (or the right of the personal
representatives or beneficiaries of your estate) to receive such cash payments
hereunder will at all times be that of a general creditor of the Company and
will have no priority over the claims of other general creditors.
4. Miscellaneous.
This letter agreement will be binding upon the Company, its successors and
assigns (including, without limitation, the surviving entity in any Change in
Control) and is to be construed and interpreted under the laws of the State of
California. This letter agreement supersedes all prior agreements between you
and the Company relating to the subject of severance benefits payable upon a
change in control or ownership of the Company, and you will not be entitled to
10
any other severance benefits upon such a termination other than those that are
provided in this letter agreement. This letter may only be amended by written
instrument signed by you and an authorized officer of the Company. If any
provision of this letter agreement as applied to you or the Company or to any
circumstance should be adjudged by a court of competent jurisdiction to be void
or unenforceable for any reason, the invalidity of that provision will in no way
affect (to the maximum extent permissible by law) the application of such
provision under circumstances different from those adjudicated by the court, the
application of any other provision of this letter agreement, or the
enforceability or invalidity of this letter agreement as a whole. Should any
provision of this letter agreement become or be deemed invalid, illegal or
unenforceable in any jurisdiction by reason of the scope, extent or duration of
its coverage, then such provision will be deemed amended to the extent necessary
to conform to applicable law so as to be valid and enforceable or, if such
provision cannot be so amended without materially altering the intention of the
parties, then such provision will be stricken and the remainder of this letter
agreement will continue in full force and effect.
5. No Employment or Service Contract.
Nothing in this letter agreement is intended to provide you with any right
to continue in the employ of the Company (or any subsidiary) for any period of
specific duration or interfere with or otherwise restrict in any way your rights
or the rights of the Company (or any subsidiary), which rights are hereby
expressly reserved by each, to terminate your employment at will or as otherwise
specified in an applicable employment contract.
6. Indemnification Agreement.
Notwithstanding any provision of your Indemnification Agreement with the
Company dated April 16, 1998 (the "Indemnification Agreement"), after a Change in
Control (and including after any termination of your employment after a Change
in Control) you shall continue to be entitled to receive all of the benefits
provided under the Indemnification Agreement.
7. Attorneys Fees and Expenses.
In addition to all other amounts payable to you under this letter
agreement, the Company shall pay to you all legal fees and expenses incurred by
you in connection with any dispute arising out of or relating to this letter
agreement or the interpretation thereof (including, without limitation, all such
fees and expenses, if any, incurred in seeking to obtain or enforce any right or
benefit provided by this letter agreement, or in connection with any tax audit
or proceeding to the extent attributable to the application of Section 4999 of
the Code to any payment or benefit provided hereunder), regardless of the
outcome of such proceeding; provided, however, that you shall not be entitled to
recover such fees and costs if the court determines that your claim was brought
in bad faith or that your claim was frivolous. Any attorney's fees incurred by
you shall be paid by the Company in advance of the final disposition of such
action or challenge, as such fees and expenses are incurred; provided, however,
that you agree to repay such amounts, net of any income taxes paid or payable by
you with respect to such amounts, if it is ultimately determined by the court
that your claim was brought in bad faith or that your claim was frivolous.
11
Please indicate your acceptance of the foregoing by signing the enclosed
copy of this letter agreement and returning it to the Company.
Very truly yours,
FILENET CORPORATION
By: /s/ Sam M. Auriemma .
Sam M. Auriemma
Title: Senior Vice President,
Chief Financial Officer
ACCEPTANCE
I hereby agree to all the terms and provisions of the foregoing letter
agreement governing the special benefits to which I may become entitled upon an
involuntary termination of my employment or resignation under certain prescribed
circumstances following a substantial change in control or ownership of the
Company.
Signature: /s/ Lee D. Roberts .
Lee D. Roberts
Dated: May 17, 2003
12
EXHIBIT 10.17
To Ron Ercanbrack and Sam Auriemma
[FILENET LETTERHEAD]
Dear:
This letter agreement constitutes an amendment and restatement of our
letter agreement dated ______________, 2001.
We are pleased to inform you that the Compensation Committee of the
Company's Board of Directors has approved a special severance benefit program
for you and other key executives. The purpose of this letter agreement is to set
forth the terms and conditions of your new benefits and to explain the
limitations that will govern their overall value.
Your new severance package will become payable in the event your employment
terminates under certain circumstances within a specified time period following
a substantial change in ownership or control of the Company. To understand the
full scope of your benefits, you should familiarize yourself with the
definitional provisions of Part One of this letter agreement. The benefits
comprising your severance package are detailed in Part Two, and the dollar
limitations on the overall value of your benefit package and other applicable
restrictions are specified in Parts Three and Four. Part Five deals with
ancillary matters affecting your severance arrangement.
PART ONE -- DEFINITIONS
For purposes of this letter agreement, the following definitions will be in
effect:
Average Compensation means the average of your W-2 wages from the Company
for the five (5) calendar years (or such fewer number of calendar years of
employment with the Company) completed immediately prior to the calendar year in
which the Change in Control is effected. Any W-2 wages for a partial year of
employment will be annualized, in accordance with the frequency which such wages
are paid during such partial year, before inclusion in your Average
Compensation.
Base Salary means the annual rate of base salary in effect for you
immediately prior to the Change in Control or (if greater) the annual rate of
base salary in effect at the time of your Involuntary Termination or resignation
for Good Reason.
Board means the Company's Board of Directors.
Cause means any of the following reasons for which the Company may
terminate your employment: (i) your willful failure or refusal to perform your
duties (other than any such failure attributable to your incapacity due to
physical or mental illness) which is not cured within ten (10) business days
after written notice from the Company in which there is identified the manner in
which Company believes that you have not performed such duties and the steps
required to cure such failure; (ii) your conviction of, or entering a plea of
nolo contendere with respect to, a felony; (iii) any intentional misconduct on
your part which has a materially adverse effect upon the Company, monetarily or
otherwise; or (iv) any unauthorized use or disclosure by you of the Company's
proprietary information.
Change in Control means any of the following transactions:
(i) a merger or consolidation in which securities possessing more than
fifty percent (50%) of the total combined voting power of the
Company's outstanding securities are transferred to a person or
persons different from the persons holding those securities
immediately prior to such transaction;
(ii) any sale, transfer or other disposition of all or substantially all of
the
Company's assets;
(iii) a complete liquidation or dissolution of the Company;
(iv) the acquisition, directly or indirectly, by any person or related
group of persons (other than the Company or a person that directly or
indirectly controls, is controlled by or is under common control with,
the Company) of beneficial ownership (within the meaning of Rule 13d-3
of the Securities Exchange Act of 1934, as amended) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Company's outstanding securities; or
(v) a change in the composition of the Board over a period of thirty-six
(36) consecutive months or less such that a majority of the Board
members ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B)
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 (A) who were still in office at the time the Board approved
such election or nomination.
Code means the Internal Revenue Code of 1986, as amended.
Common Stock means the Company's common stock.
Company means FileNET Corporation, a Delaware corporation, or any successor
corporation, whether or not resulting from a Change in Control.
Fair Market Value means, with respect to the shares of Common Stock subject
to any of your Options, 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. If
there are no selling prices reported 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 report exists.
2
Good Reason means any of the following reasons for which you may terminate
your employment at any time within the eighteen (18) month period following a
Change in Control: (i) the assignment to you of any duties inconsistent with
your position (including status, offices, titles and reporting requirements),
authority, duties or responsibilities as in effect immediately prior to the
Change in Control, or any other action by the Company which results in a
material diminution in such position, authority, duties or responsibilities,
(ii) a reduction in your level of compensation (including Base Salary, Target
Bonus and fringe benefits) by more than fifteen percent (15%) or (iii) a
relocation of your principal place of employment by more than thirty-five (35)
miles from the location in effect immediately prior to the Change in Control,
unless such change, reduction or relocation is effected with your written
consent.
Involuntary Termination means the involuntary termination of your
employment with the Company other than a termination for Cause. An Involuntary
Termination will not be deemed to occur in the event your employment terminates
by reason of your death or Disability.
Option means any option granted to you (a) under the Plan or (b) outside of
the Plan, which is outstanding at the time of the Change in Control or upon the
subsequent Involuntary Termination of your employment or resignation for Good
Reason. Your Options will be divided into two (2) separate categories as
follows:
Acquisition-Accelerated Options: any outstanding Option (or
installment thereof) that automatically accelerates, pursuant to the
acceleration provisions of an applicable agreement evidencing that Option,
upon a Change in Control. These options are not the subject matter of this
letter agreement.
Severance-Accelerated Options: any outstanding Option (or installment
thereof) which, pursuant to Part Two of this letter agreement, accelerates
upon an Involuntary Termination or resignation for Good Reason.
Option Parachute Payment means, with respect to any Acquisition-Accelerated
Option or any Severance-Accelerated Option, the portion of that Option deemed to
be a parachute payment under Code Section 280G and the Treasury Regulations
issued thereunder. The portion of such Option which is categorized as an Option
Parachute Payment will be calculated in accordance with the valuation provisions
established under Code Section 280G and the applicable Treasury Regulations and
will include an appropriate dollar adjustment to reflect the lapse of your
obligation to remain in the Company's employ as a condition to the vesting of
the accelerated installment. In no event, however, will the Option Parachute
Payment attributable to any Acquisition-Accelerated Option or
Severance-Accelerated Option (or accelerated installment) exceed the spread (the
excess of the Fair Market Value of the accelerated option shares over the option
exercise price payable for those shares) existing at the time of acceleration.
Other Parachute Payment means any payment in the nature of compensation
(other than the benefits to which you become entitled under Part Two of this
letter agreement) which are made to you in connection with the Change in Control
and which accordingly qualify as parachute payments within the meaning of Code
3
Section 280G(b)(2) and the Treasury Regulations issued thereunder. Your Other
Parachute Payment will include (without limitation) the Present Value, measured
as of the Change in Control, of the aggregate Option Parachute Payment
attributable to your Acquisition-Accelerated Options (if any).
Parachute Payment means any payment or benefit provided you under Part Two
of this letter agreement (other than the Option Parachute Payment attributable
to your Severance-Accelerated Options) which is deemed to constitute a parachute
payment within the meaning of Code Section 280G(b)(2) and the Treasury
Regulations issued thereunder.
Permanent Disability means your inability to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more.
Plan means (i) the Company's 1995 Stock Option Plan, as amended or restated
from time to time, and (ii) any successor stock incentive plan subsequently
implemented by the Company.
Present Value means the value, determined as of the date of the Change in
Control, of any payment in the nature of compensation to which you become
entitled in connection with the Change in Control or the subsequent Involuntary
Termination of your employment or resignation for Good Reason, including
(without limitation) the Option Parachute Payment attributable to your
Severance-Acceleration Options, the additional benefits to which you become
entitled under Part Two of this letter agreement and the Option Parachute
Payment attributable to your Acquisition-Accelerated Options. The Present Value
of each such payment shall be determined in accordance with the provisions of
Code Section 280G(d)(4), utilizing a discount rate equal to one hundred twenty
percent (120%) of the applicable Federal rate in effect at the time of such
determination, compounded semi-annually to the effective date of the Change in
Control.
Target Bonus means the annual incentive bonus to which you may become
entitled under the Company's Officer Bonus Plan for one or more calendar years
upon the Company's attainment of the performance milestones designated for the
each such year and your attainment of the personal objectives specified for you
for such year, if any, assuming that all financial and other targets are
achieved at the level of 100%.
PART TWO -- CHANGE IN CONTROL BENEFITS
Should your employment with the Company terminate by reason of an
Involuntary Termination, or should you resign for Good Reason within eighteen
(18) months following a Change in Control, then you will become entitled to
receive the severance benefits provided under this Part Two, subject to the
benefit limitations of Part Three of this letter agreement. Such benefits will
be in lieu of all other severance benefits to which you might otherwise be
entitled upon such a termination of your employment.
4
1. Accelerated Vesting.
Each outstanding Option which you hold at the time of your Involuntary
Termination or resignation for Good Reason, to the extent not otherwise
exercisable for all the shares of Common Stock subject to that Option, shall
immediately become exercisable for all those option shares and may be exercised
for any or all of those shares as fully vested shares. Each Option so
accelerated shall remain exercisable until the earlier of (i) the expiration of
the option term or (ii) the end of the three (3) month period following the date
of your Involuntary Termination or resignation for Good Reason for options
granted prior to or on March 16, 2001 or (iii) the end of the six (6) month
period following the date of your Involuntary Termination or resignation for
Good Reason for options granted after March 16, 2001. Incentive Stock Options
("ISOs") granted subsequent to March 16, 2001, will retain their favorable tax
treatment to the extent said options are exercised within three (3) months from
the date of your Involuntary Termination or resignation for Good Reason. If said
options are exercised after the three (3) month period but prior to end of the
six (6) month extension period, such options will be characterized as
Nonqualified Stock Options and reported as additional compensation subject to
full withholding taxes on the your Form W-2 or Form 1099, as applicable.
2. Severance Payment.
Subject to the limitations of Part Three of this letter agreement, you will
be entitled a cash lump sum severance payment in an amount equal to the sum of
(i) nine (9) months of your Base Salary, (ii) a pro-rata portion of your Target
Bonus for the calendar year in which the Change of Control occurs, based upon
the number of days you were employed during the calendar year in which your
Involuntary Termination or resignation for Good Reason occurs relative to the
total number of days in such year and (iii) the greater of (A) three-fourths
(3/4) of your Target Bonus for the calendar year in which your Involuntary
Termination or resignation for Good Reason occurs or (B) three-fourths (3/4) of
your Target Bonus for the calendar year in which the Change in Control occurs.
Said lump sum severance payment will be made in a cash lump sum within
thirty (30) days following your Involuntary Termination or resignation for Good
Reason, and will be subject to the Company's collection of all applicable income
and employment withholding taxes.
In addition, you will be entitled to nine (9) months of continuation
payments at your Base Salary and the greater of (i) three-fourths (3/4) of your
Target Bonus for the calendar year in which your Involuntary Termination or
resignation for Good Reason occurs or (ii) three-fourths (3/4) of your Target
Bonus for the calendar year in which the Change in Control occurs. These
payments will be made at bi-weekly intervals for nine (9) months commencing on
the next administratively feasible payroll cycle from the date of your
Involuntary Termination or resignation for Good Reason.
5
3. Benefits Coverage.
The Company will make a lump sum payment to you equal to eighteen (18)
months of the current monthly Internal Revenue Code Section 4980B medical
premium ("COBRA") for you and your eligible dependents. This lump sum payment
will be remitted to you thirty (30) days from the date of Involuntary
Termination or resignation for Good Reason. It is your responsibility to
complete the necessary documents and make payments directly to the COBRA
administrator to maintain medical coverage throughout the period you are
eligible for COBRA benefits. Any additional health care coverage to which you
and your dependents may be entitled under COBRA will be at your sole cost and
expense.
In addition, if currently enrolled in the Company's Group Universal Life
("GUL") insurance program, the Company will make a lump sum payment to you equal
to eighteen (18) months of the current monthly GUL insurance premium. This lump
sum payment will be remitted to you thirty (30) days from the date of
Involuntary Termination or resignation for Good Reason. It is your
responsibility to complete the necessary documents and make payments directly to
the GUL administrator to maintain coverage
Your payments and benefits under Paragraph 2 will immediately terminate in
the event you fail to abide by the restrictive covenants set forth in Part Four
of this letter agreement. Your Paragraph 2 payments will be subject to the
Company's collection of applicable federal and state income and employment
withholding taxes.
You shall not be required to mitigate the amount of any payment or benefit
provided for in this Part Two by seeking other employment or otherwise nor shall
the amount of any payment or benefit provided for in this Part Two be reduced by
any compensation earned by you as the result of employment by another employer
or self-employment, by retirement benefits, by offset against any amount claimed
to be owed by you to the Company, or otherwise.
PART THREE -- LIMITATION ON BENEFITS
1. Benefit Limitation.
Anything in this letter agreement to the contrary notwithstanding, if it
shall be determined that the net after-tax benefit that you would receive if you
received all of the Payments would be less than the net after-tax benefit that
you would receive if the Parachute Value (as defined below) of all Payments did
not exceed the Safe Harbor Amount (as defined below), then the amounts payable
under this letter agreement shall be reduced so that the Parachute Value of all
Payments, in the aggregate, equals the Safe Harbor Amount. The reduction of the
amounts payable hereunder, if applicable, shall be made by first reducing the
payments under Paragraph 2 of Part Two, unless an alternative method of
reduction is elected by you, and in any event shall be made in such a manner as
to maximize the Value (as defined below) of all Payments actually made to you.
For purposes of reducing the Payments to the Safe Harbor Amount, only amounts
payable under Part Two of this letter agreement (and no other Payments) shall be
reduced. If the reduction of the amount payable under Part Two of this letter
6
agreement would not result in a reduction of the Parachute Value of all Payments
to the Safe Harbor Amount, no amounts payable under this letter agreement shall
be reduced pursuant to this Paragraph 1 unless you elect to have any such
amounts reduced.
2. Resolution Procedure.
(a) All determinations required to be made under this Part Three, including
whether and a reduction of any Payment is required and the assumptions to be
utilized in arriving at such determination, shall be made by the Company's
independent certified public accountants serving immediately prior to the Change
in Control, or such other nationally recognized accounting firm as may be agreed
by the Company and you (the "Accounting Firm"); provided, that the Accounting
Firm's determination shall be made based upon "substantial authority" within the
meaning of Section 6662 of the Code. The Accounting Firm shall provide detailed
supporting calculations both to the Company and you within 15 business days of
the receipt of notice from you that there has been a Payment or such earlier
time as is requested by the Company. All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any determination by the Accounting
Firm shall be binding upon the Company and you.
(b) Definitions. The following terms shall have the following meanings for
purposes of this Part Three.
"Parachute Value" of a Payment shall mean the present value as of the
date of the change of control for purposes of Section 280G of the Code of
the portion of such Payment that constitutes a "parachute payment" under
Section 280G(b)(2), as determined by the Accounting Firm for purposes of
determining whether and to what extent the Excise Tax will apply to such
Payment.
A "Payment" shall mean any payment or distribution in the nature of
compensation (within the meaning of Section 280G(b)(2) of the Code) to or
for your benefit, whether paid or payable pursuant to this letter agreement
or otherwise.
The "Safe Harbor Amount" shall mean 2.99 times the Executive's "base
amount," within the meaning of Section 280G(b)(3) of the Code.
"Value" of a Payment shall mean the economic present value of a
Payment as of the date of the change of control for purposes of Section
280G of the Code, as determined by the Accounting Firm using the discount
rate required by Section 280G(d)(4) of the Code.
PART FOUR - SPECIAL RESTRICTIVE COVENANTS
Any salary/bonus continuation payments to which you become entitled
hereunder as a severance payment shall immediately cease if at any time during
the applicable salary/bonus continuation period, you:
(a) own, manage, operate, join, control or participate in the
ownership, management, operation or control of, or be employed by
or connected in any manner with, any enterprise which is engaged
7
in any business competitive with or similar to that of the
Company; provided, however, that such restriction shall not apply
to any passive investment representing an interest of less than
one percent (1%) of an outstanding class of publicly-traded
securities of any corporation or other enterprise which is not,
at the time of such investment, engaged in a business competitive
with the Company's business;
(b) encourage or solicit any of the Company's employees to leave the
Company's employ for any reason or interfere in any other manner
with employment relationships at the time existing between the
Company and its employees; or
(c) solicit any client or customer of the Company, induce any of the
Company's clients, customers, suppliers, vendors or distributors
to terminate their existing business relationships with the
Company or interfere in any other manner with any existing
business relationship between the Company and any client,
customer, supplier, vendor, distributor or other third party.
PART FIVE -- MISCELLANEOUS
1. Termination for Cause.
Should your employment be terminated for Cause, the Company will only be
required to pay you (i) any unpaid compensation earned for services previously
rendered through the date of such termination and (ii) any accrued but unpaid
vacation benefits or sick days, and no benefits will be payable to you under
Part Two of this letter agreement.
2. Death or Permanent Disability.
Should you die or become permanently disabled before receipt of one or more
salary/bonus continuation payments to which you become entitled under this
letter agreement, then those payments will be made to the executors or
administrators of your estate. Should you die or become permanently disabled
before you exercise all your outstanding Options as accelerated hereunder, then
such Options may be exercised, within twelve (12) months after the date your
Death or Permanent Disability, by the executors or administrators of your estate
or by persons to whom the Options are transferred pursuant to your will or in
accordance with the laws of inheritance. In no event, however, may any such
Option be exercised after the specified expiration date of the option term.
3. General Creditor Status.
All cash payments to which you become entitled hereunder will be paid, when
due, from the general assets of the Company, and no trust fund, escrow
arrangement or other segregated account will be established as a funding vehicle
for such payment. Accordingly, your right (or the right of the personal
representatives or beneficiaries of your estate) to receive such cash payments
hereunder will at all times be that of a general creditor of the Company and
will have no priority over the claims of other general creditors.
8
4. Miscellaneous.
This letter agreement will be binding upon the Company, its successors and
assigns (including, without limitation, the surviving entity in any Change in
Control) and is to be construed and interpreted under the laws of the State of
California. This letter agreement supersedes all prior agreements between you
and the Company relating to the subject of severance benefits payable upon a
change in control or ownership of the Company, and you will not be entitled to
any other severance benefits upon such a termination other than those that are
provided in this letter agreement. This letter may only be amended by written
instrument signed by you and an authorized officer of the Company. If any
provision of this letter agreement as applied to you or the Company or to any
circumstance should be adjudged by a court of competent jurisdiction to be void
or unenforceable for any reason, the invalidity of that provision will in no way
affect (to the maximum extent permissible by law) the application of such
provision under circumstances different from those adjudicated by the court, the
application of any other provision of this letter agreement, or the
enforceability or invalidity of this letter agreement as a whole. Should any
provision of this letter agreement become or be deemed invalid, illegal or
unenforceable in any jurisdiction by reason of the scope, extent or duration of
its coverage, then such provision will be deemed amended to the extent necessary
to conform to applicable law so as to be valid and enforceable or, if such
provision cannot be so amended without materially altering the intention of the
parties, then such provision will be stricken and the remainder of this letter
agreement will continue in full force and effect.
5. No Employment or Service Contract.
Nothing in this letter agreement is intended to provide you with any right
to continue in the employ of the Company (or any subsidiary) for any period of
specific duration or interfere with or otherwise restrict in any way your rights
or the rights of the Company (or any subsidiary), which rights are hereby
expressly reserved by each, to terminate your employment at will or as otherwise
specified in an applicable employment contract.
6. Indemnification Agreement.
Notwithstanding any provision of your Indemnification Agreement with the
Company dated _____________ (the "Indemnification Agreement"), after a Change in
Control (and including after any termination of your employment after a Change
in Control) you shall continue to be entitled to receive all of the benefits
provided under the Indemnification Agreement.
7.Attorneys Fees and Expenses.
In addition to all other amounts payable to you under this letter
agreement, the Company shall pay to you all legal fees and expenses incurred by
you in connection with any dispute arising out of or relating to this letter
agreement or the interpretation thereof (including, without limitation, all such
fees and expenses, if any, incurred in seeking to obtain or enforce any right or
benefit provided by this letter agreement, or in connection with any tax audit
or proceeding to the extent attributable to the application of Section 4999 of
the Code to any payment or benefit provided hereunder), regardless of the
outcome of such proceeding; provided, however, that you shall not be entitled to
9
recover such fees and costs if the court determines that your claim was brought
in bad faith or that your claim was frivolous. Any attorney's fees incurred by
you shall be paid by the Company in advance of the final disposition of such
action or challenge, as such fees and expenses are incurred; provided, however,
that you agree to repay such amounts, net of any income taxes paid or payable by
you with respect to such amounts, if it is ultimately determined by the court
that your claim was brought in bad faith or that your claim was frivolous.
Please indicate your acceptance of the foregoing by signing the enclosed
copy of this letter agreement and returning it to the Company.
Very truly yours,
FILENET CORPORATION
By: ______________________________
Lee D. Roberts
Title: Chief Executive Officer
ACCEPTANCE
I hereby agree to all the terms and provisions of the foregoing letter
agreement governing the special benefits to which I may become entitled upon an
involuntary termination of my employment or resignation under certain prescribed
circumstances following a substantial change in control or ownership of the
Company.
Signature: _____________________________
Dated: _____________________________
EXHIBIT 10.18
To 16 (b) officers except Lee Roberts, Ron Ercanbrack and Sam Auriemma
FILENET LETTERHEAD
Dear:
This letter agreement constitutes an amendment and restatement of our
letter agreement dated ______________, 2001.
We are pleased to inform you that the Compensation Committee of the
Company's Board of Directors has approved a special severance benefit program
for you and other key executives. The purpose of this letter agreement is to set
forth the terms and conditions of your new benefits and to explain the
limitations that will govern their overall value.
Your new severance package will become payable in the event your employment
terminates under certain circumstances within a specified time period following
a substantial change in ownership or control of the Company. To understand the
full scope of your benefits, you should familiarize yourself with the
definitional provisions of Part One of this letter agreement. The benefits
comprising your severance package are detailed in Part Two, and the dollar
limitations on the overall value of your benefit package and other applicable
restrictions are specified in Parts Three and Four. Part Five deals with
ancillary matters affecting your severance arrangement.
PART ONE -- DEFINITIONS
For purposes of this letter agreement, the following definitions will be in
effect:
Average Compensation means the average of your W-2 wages from the Company
for the five (5) calendar years (or such fewer number of calendar years of
employment with the Company) completed immediately prior to the calendar year in
which the Change in Control is effected. Any W-2 wages for a partial year of
employment will be annualized, in accordance with the frequency which such wages
are paid during such partial year, before inclusion in your Average
Compensation.
Base Salary means the annual rate of base salary in effect for you
immediately prior to the Change in Control or (if greater) the annual rate of
base salary in effect at the time of your Involuntary Termination or resignation
for Good Reason.
Board means the Company's Board of Directors.
Cause means any of the following reasons for which the Company may
terminate your employment: (i) your willful failure or refusal to perform your
duties (other than any such failure attributable to your incapacity due to
physical or mental illness) which is not cured within ten (10) business days
after written notice from the Company in which there is identified the manner in
which Company believes that you have not performed such duties and the steps
required to cure such failure; (ii) your conviction of, or entering a plea of
nolo contendere with respect to, a felony; (iii) any intentional misconduct on
your part which has a materially adverse effect upon the Company, monetarily or
otherwise; or (iv) any unauthorized use or disclosure by you of the Company's
proprietary information.
Change in Control means any of the following transactions:
(i) a merger or consolidation in which securities possessing more than
fifty percent (50%) of the total combined voting power of the
Company's outstanding securities are transferred to a person or
persons different from the persons holding those securities
immediately prior to such transaction;
(ii) any sale, transfer or other disposition of all or substantially all of
the Company's assets;
(iii) a complete liquidation or dissolution of the Company;
(iv) the acquisition, directly or indirectly, by any person or related
group of persons (other than the Company or a person that directly or
indirectly controls, is controlled by or is under common control with,
the Company) of beneficial ownership (within the meaning of Rule 13d-3
of the Securities Exchange Act of 1934, as amended) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Company's outstanding securities; or
(v) a change in the composition of the Board over a period of thirty-six
(36) consecutive months or less such that a majority of the Board
members ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B)
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 (A) who were still in office at the time the Board approved
such election or nomination.
Code means the Internal Revenue Code of 1986, as amended.
Common Stock means the Company's common stock.
Company means FileNet Corporation, a Delaware corporation, or any successor
corporation, whether or not resulting from a Change in Control.
Fair Market Value means, with respect to the shares of Common Stock subject
to any of your Options, 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. If
there are no selling prices reported for the Common Stock on the date in
2
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 report exists.
Good Reason means any of the following reasons for which you may terminate
your employment at any time within the eighteen (18) month period following a
Change in Control: (i) the assignment to you of any duties inconsistent with
your position (including status, offices, titles and reporting requirements),
authority, duties or responsibilities as in effect immediately prior to the
Change in Control, or any other action by the Company which results in a
material diminution in such position, authority, duties or responsibilities,
(ii) a reduction in your level of compensation (including Base Salary, Target
Bonus and fringe benefits) by more than fifteen percent (15%) or (iii) a
relocation of your principal place of employment by more than thirty-five (35)
miles from the location in effect immediately prior to the Change in Control,
unless such change, reduction or relocation is effected with your written
consent.
Involuntary Termination means the involuntary termination of your
employment with the Company other than a termination for Cause. An Involuntary
Termination will not be deemed to occur in the event your employment terminates
by reason of your death or Disability.
Option means any option granted to you (a) under the Plan or (b) outside of
the Plan, which is outstanding at the time of the Change in Control or upon the
subsequent Involuntary Termination of your employment or resignation for Good
Reason. Your Options will be divided into two (2) separate categories as
follows:
Acquisition-Accelerated Options: any outstanding Option (or
installment thereof) which automatically accelerates, pursuant to the
acceleration provisions of an applicable agreement evidencing that Option,
upon a Change in Control. These options are not the subject matter of this
letter agreement.
Severance-Accelerated Options: any outstanding Option (or installment
thereof) which, pursuant to Part Two of this letter agreement, accelerates
upon an Involuntary Termination or resignation for Good Reason.
Option Parachute Payment means, with respect to any Acquisition-Accelerated
Option or any Severance-Accelerated Option, the portion of that Option deemed to
be a parachute payment under Code Section 280G and the Treasury Regulations
issued thereunder. The portion of such Option which is categorized as an Option
Parachute Payment will be calculated in accordance with the valuation provisions
established under Code Section 280G and the applicable Treasury Regulations and
will include an appropriate dollar adjustment to reflect the lapse of your
obligation to remain in the Company's employ as a condition to the vesting of
the accelerated installment. In no event, however, will the Option Parachute
Payment attributable to any Acquisition-Accelerated Option or
Severance-Accelerated Option (or accelerated installment) exceed the spread (the
excess of the Fair Market Value of the accelerated option shares over the option
exercise price payable for those shares) existing at the time of acceleration.
3
Other Parachute Payment means any payment in the nature of compensation
(other than the benefits to which you become entitled under Part Two of this
letter agreement) which are made to you in connection with the Change in Control
and which accordingly qualify as parachute payments within the meaning of Code
Section 280G(b)(2) and the Treasury Regulations issued thereunder. Your Other
Parachute Payment will include (without limitation) the Present Value, measured
as of the Change in Control, of the aggregate Option Parachute Payment
attributable to your Acquisition-Accelerated Options (if any).
Parachute Payment means any payment or benefit provided you under Part Two
of this letter agreement (other than the Option Parachute Payment attributable
to your Severance-Accelerated Options) which is deemed to constitute a parachute
payment within the meaning of Code Section 280G(b)(2) and the Treasury
Regulations issued thereunder.
Permanent Disability means your inability to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more.
Plan means (i) the Company's 1995 Stock Option Plan, as amended or restated
from time to time, and (ii) any successor stock incentive plan subsequently
implemented by the Company.
Present Value means the value, determined as of the date of the Change in
Control, of any payment in the nature of compensation to which you become
entitled in connection with the Change in Control or the subsequent Involuntary
Termination of your employment or resignation for Good Reason, including
(without limitation) the Option Parachute Payment attributable to your
Severance-Acceleration Options, the additional benefits to which you become
entitled under Part Two of this letter agreement and the Option Parachute
Payment attributable to your Acquisition-Accelerated Options. The Present Value
of each such payment shall be determined in accordance with the provisions of
Code Section 280G(d)(4), utilizing a discount rate equal to one hundred twenty
percent (120%) of the applicable Federal rate in effect at the time of such
determination, compounded semi-annually to the effective date of the Change in
Control.
Target Bonus means the annual incentive bonus to which you may become
entitled under the Company's Officer Bonus Plan for one or more calendar years
upon the Company's attainment of the performance milestones designated for the
each such year and your attainment of the personal objectives specified for you
for such year, if any, assuming that all financial and other targets are
achieved at the level of 100%.
PART TWO -- CHANGE IN CONTROL BENEFITS
Should your employment with the Company terminate by reason of an
Involuntary Termination, or should you resign for Good Reason within eighteen
(18) months following a Change in Control, then you will become entitled to
receive the severance benefits provided under this Part Two, subject to the
benefit limitations of Part Three of this letter agreement. Such benefits will
4
be in lieu of all other severance benefits to which you might otherwise be
entitled upon such a termination of your employment.
1. Accelerated Vesting.
Each outstanding Option which you hold at the time of your Involuntary
Termination or resignation for Good Reason, to the extent not otherwise
exercisable for all the shares of Common Stock subject to that Option, shall
immediately become exercisable for all those option shares and may be exercised
for any or all of those shares as fully vested shares. Each Option so
accelerated shall remain exercisable until the earlier of (i) the expiration of
the option term or (ii) the end of the three (3) month period following the date
of your Involuntary Termination or resignation for Good Reason for options
granted prior to or on March 16, 2001 or (iii) the end of the six (6) month
period following the date of your Involuntary Termination or resignation for
Good Reason for options granted after March 16, 2001. Incentive Stock Options
("ISOs") granted subsequent to March 16, 2001, will retain their favorable tax
treatment to the extent said options are exercised within three (3) months from
the date of your Involuntary Termination or resignation for Good Reason. If said
options are exercised after the three (3) month period but prior to end of the
six (6) month extension period, such options will be characterized as
Nonqualified Stock Options and reported as additional compensation subject to
full withholding taxes on the your Form W-2 or Form 1099, as applicable.
2. Severance Payment.
Subject to the limitations of Part Three of this letter agreement, you will
be entitled a cash lump sum severance payment in an amount equal to the sum of
(i) six (6) months of your Base Salary, (ii) a pro-rata portion of your Target
Bonus for the calendar year in which the Change of Control occurs, based upon
the number of days you were employed during the calendar year in which your
Involuntary Termination or resignation for Good Reason occurs relative to the
total number of days in such year and (iii) the greater of (A) one-half (1/2) of
your Target Bonus for the calendar year in which your Involuntary Termination or
resignation for Good Reason occurs or (B) one-half (1/2) of your Target Bonus
for the calendar year in which the Change in Control occurs.
Said lump sum severance payment will be made in a cash lump sum within thirty
(30) days following your Involuntary Termination or resignation for Good Reason,
and will be subject to the Company's collection of all applicable income and
employment withholding taxes.
In addition, you will be entitled to six (6) months of continuation
payments at your Base Salary and the greater of (i) one-half (1/2) of your
Target Bonus for the calendar year in which your Involuntary Termination or
resignation for Good Reason occurs or (ii) one-half (1/2) of your Target Bonus
for the calendar year in which the Change in Control occurs. These payments will
be made at bi-weekly intervals for six (6) months commencing on the next
administratively feasible payroll cycle from the date of your Involuntary
Termination or resignation for Good Reason.
5
3. Benefits Coverage.
The Company will make a lump sum payment to you equal to twelve (12) months
of the current monthly Internal Revenue Code Section 4980B medical premium
("COBRA") for you and your eligible dependents. This lump sum payment will be
remitted to you thirty (30) days from the date of Involuntary Termination or
resignation for Good Reason. It is your responsibility to complete the necessary
documents and make payments directly to the COBRA administrator to maintain
medical coverage throughout the period you are eligible for COBRA benefits. Any
additional health care coverage to which you and your dependents may be entitled
under COBRA will be at your sole cost and expense.
In addition, if currently enrolled in the Company's Group Universal Life
("GUL") insurance program, the Company will make a lump sum payment to you equal
to twelve (12) months of the current monthly GUL insurance premium. This lump
sum payment will be remitted to you thirty (30) days from the date of
Involuntary Termination or resignation for Good Reason. It is your
responsibility to complete the necessary documents and make payments directly to
the GUL administrator to maintain coverage.
Your payments and benefits under Paragraph 2 will immediately terminate in
the event you fail to abide by the restrictive covenants set forth in Part Four
of this letter agreement. Your Paragraph 2 payments will be subject to the
Company's collection of applicable federal and state income and employment
withholding taxes.
You shall not be required to mitigate the amount of any payment or benefit
provided for in this Part Two by seeking other employment or otherwise nor shall
the amount of any payment or benefit provided for in this Part Two be reduced by
any compensation earned by you as the result of employment by another employer
or self-employment, by retirement benefits, by offset against any amount claimed
to be owed by you to the Company, or otherwise.
PART THREE -- LIMITATION ON BENEFITS
1. Benefit Limit.
Anything in this letter agreement to the contrary notwithstanding, if it
shall be determined that the net after-tax benefit that you would receive if you
received all of the Payments would be less than the net after-tax benefit that
you would receive if the Parachute Value (as defined below) of all Payments did
not exceed the Safe Harbor Amount (as defined below), then the amounts payable
under this letter agreement shall be reduced so that the Parachute Value of all
Payments, in the aggregate, equals the Safe Harbor Amount. The reduction of the
amounts payable hereunder, if applicable, shall be made by first reducing the
payments under Paragraph 2 of Part Two, unless an alternative method of
reduction is elected by you, and in any event shall be made in such a manner as
to maximize the Value (as defined below) of all Payments actually made to you.
For purposes of reducing the Payments to the Safe Harbor Amount, only amounts
payable under Part Two of this letter agreement (and no other Payments) shall be
reduced. If the reduction of the amount payable under Part Two of this letter
6
agreement would not result in a reduction of the Parachute Value of all Payments
to the Safe Harbor Amount, no amounts payable under this letter agreement shall
be reduced pursuant to this Paragraph 1 unless you elect to have any such
amounts reduced.
2. Resolution Procedure.
(a) All determinations required to be made under this Part Three,
including whether and a reduction of any Payment is required and the
assumptions to be utilized in arriving at such determination, shall be
made by the Company's independent certified public accountants serving
immediately prior to the Change in Control, or such other nationally
recognized accounting firm as may be agreed by the Company and you
(the "Accounting Firm"); provided, that the Accounting Firm's
determination shall be made based upon "substantial authority" within
the meaning of Section 6662 of the Code. The Accounting Firm shall
provide detailed supporting calculations both to the Company and you
within 15 business days of the receipt of notice from you that there
has been a Payment or such earlier time as is requested by the
Company. All fees and expenses of the Accounting Firm shall be borne
solely by the Company. Any determination by the Accounting Firm shall
be binding upon the Company and you.
(b) Definitions. The following terms shall have the following meanings for
purposes of this Part Three.
"Parachute Value" of a Payment shall mean the present value as of the
date of the change of control for purposes of Section 280G of the Code of
the portion of such Payment that constitutes a "parachute payment" under
Section 280G(b)(2), as determined by the Accounting Firm for purposes of
determining whether and to what extent the Excise Tax will apply to such
Payment.
A "Payment" shall mean any payment or distribution in the nature of
compensation (within the meaning of Section 280G(b)(2) of the Code) to or
for your benefit, whether paid or payable pursuant to this letter agreement
or otherwise.
The "Safe Harbor Amount" shall mean 2.99 times your "base amount,"
within the meaning of Section 280G(b)(3) of the Code.
"Value" of a Payment shall mean the economic present value of a
Payment as of the date of the change of control for purposes of Section
280G of the Code, as determined by the Accounting Firm using the discount
rate required by Section 280G(d)(4) of the Code.
PART FOUR - SPECIAL RESTRICTIVE COVENANTS
Any salary/bonus continuation payments to which you become entitled
hereunder as a severance payment shall immediately cease if at any time during
the applicable salary/bonus continuation period, you:
7
(a) own, manage, operate, join, control or participate in the ownership,
management, operation or control of, or be employed by or connected in
any manner with, any enterprise which is engaged in any business
competitive with or similar to that of the Company; provided, however,
that such restriction shall not apply to any passive investment
representing an interest of less than one percent (1%) of an
outstanding class of publicly-traded securities of any corporation or
other enterprise which is not, at the time of such investment, engaged
in a business competitive with the Company's business;
(b) encourage or solicit any of the Company's employees to leave the
Company's employ for any reason or interfere in any other manner with
employment relationships at the time existing between the Company and
its employees; or
(c) solicit any client or customer of the Company, induce any of the
Company's clients, customers, suppliers, vendors or distributors to
terminate their existing business relationships with the Company or
interfere in any other manner with any existing business relationship
between the Company and any client, customer, supplier, vendor,
distributor or other third party.
PART FIVE -- MISCELLANEOUS
1. Termination for Cause.
Should your employment be terminated for Cause, the Company will only be
required to pay you (i) any unpaid compensation earned for services previously
rendered through the date of such termination and (ii) any accrued but unpaid
vacation benefits or sick days, and no benefits will be payable to you under
Part Two of this letter agreement.
2. Death or Permanent Disability.
Should you die or become permanently disabled before receipt of one or more
salary/bonus continuation payments to which you become entitled under this
letter agreement, then those payments will be made to the executors or
administrators of your estate. Should you die or become permanently disabled
before you exercise all your outstanding Options as accelerated hereunder, then
such Options may be exercised, within twelve (12) months after the date of your
Death or Permanent Disability, by the executors or administrators of your estate
or by persons to whom the Options are transferred pursuant to your will or in
accordance with the laws of inheritance. In no event, however, may any such
Option be exercised after the specified expiration date of the option term.
3. General Creditor Status.
All cash payments to which you become entitled hereunder will be paid, when
due, from the general assets of the Company, and no trust fund, escrow
arrangement or other segregated account will be established as a funding vehicle
for such payment. Accordingly, your right (or the right of the personal
8
representatives or beneficiaries of your estate) to receive such cash payments
hereunder will at all times be that of a general creditor of the Company and
will have no priority over the claims of other general creditors.
4. Miscellaneous.
This letter agreement will be binding upon the Company, its successors and
assigns (including, without limitation, the surviving entity in any Change in
Control) and is to be construed and interpreted under the laws of the State of
California. This letter agreement supersedes all prior agreements between you
and the Company relating to the subject of severance benefits payable upon a
change in control or ownership of the Company, and you will not be entitled to
any other severance benefits upon such a termination other than those that are
provided in this letter agreement. This letter may only be amended by written
instrument signed by you and an authorized officer of the Company. If any
provision of this letter agreement as applied to you or the Company or to any
circumstance should be adjudged by a court of competent jurisdiction to be void
or unenforceable for any reason, the invalidity of that provision will in no way
affect (to the maximum extent permissible by law) the application of such
provision under circumstances different from those adjudicated by the court, the
application of any other provision of this letter agreement, or the
enforceability or invalidity of this letter agreement as a whole. Should any
provision of this letter agreement become or be deemed invalid, illegal or
unenforceable in any jurisdiction by reason of the scope, extent or duration of
its coverage, then such provision will be deemed amended to the extent necessary
to conform to applicable law so as to be valid and enforceable or, if such
provision cannot be so amended without materially altering the intention of the
parties, then such provision will be stricken and the remainder of this letter
agreement will continue in full force and effect.
5. No Employment or Service Contract.
Nothing in this letter agreement is intended to provide you with any right
to continue in the employ of the Company (or any subsidiary) for any period of
specific duration or interfere with or otherwise restrict in any way your rights
or the rights of the Company (or any subsidiary), which rights are hereby
expressly reserved by each, to terminate your employment at will or as otherwise
specified in an applicable employment contract.
6. Indemnification Agreement.
Notwithstanding any provision of your Indemnification Agreement with the
Company dated _____________ (the "Indemnification Agreement"), after a Change in
Control (and including after any termination of your employment after a Change
in Control) you shall continue to be entitled to receive all of the benefits
provided under the Indemnification Agreement.
7. Attorneys Fees and Expenses.
In addition to all other amounts payable to you under this letter
agreement, the Company shall pay to you all legal fees and expenses incurred by
you in connection with any dispute arising out of or relating to this letter
agreement or the interpretation thereof (including, without limitation, all such
fees and expenses, if any, incurred in seeking to obtain or enforce any right or
9
benefit provided by this letter agreement, or in connection with any tax audit
or proceeding to the extent attributable to the application of Section 4999 of
the Code to any payment or benefit provided hereunder), regardless of the
outcome of such proceeding; provided, however, that you shall not be entitled to
recover such fees and costs if the court determines that your claim was brought
in bad faith or that your claim was frivolous. Any attorney's fees incurred by
you shall be paid by the Company in advance of the final disposition of such
action or challenge, as such fees and expenses are incurred; provided, however,
that you agree to repay such amounts, net of any income taxes paid or payable by
you with respect to such amounts, if it is ultimately determined by the court
that your claim was brought in bad faith or that your claim was frivolous.
10
Please indicate your acceptance of the foregoing by signing the enclosed
copy of this letter agreement and returning it to the Company.
Very truly yours,
FILENET CORPORATION
By: /s/ Lee D. Roberts .
Lee D. Roberts
Title: Chief Executive Officer
ACCEPTANCE
I hereby agree to all the terms and provisions of the foregoing letter
agreement governing the special benefits to which I may become entitled upon an
involuntary termination of my employment or resignation under certain prescribed
circumstances following a substantial change in control or ownership of the
Company.
Signature: .
Dated: .
11
Exhibit 10.19
CEO SEVERANCE AGREEMENT
The Committee deems it advisable at this time to implement the following
Severance Agreement. Should Executive's employment with the Company terminate by
reason of an Involuntary Termination, then Executive shall become entitled to
receive the following special severance benefits and option acceleration under
this CEO Severance Agreement. Under no circumstances, however, shall Executive
be entitled to this CEO Severance Agreement if Executive's employment is
terminated for Cause or Change in Control.
1. Severance
a. Benefits
(i) Severance Payment. Executive shall be entitled to receive a
cash lump sum severance payment in an amount equal to (A) one (1)
times the annual rate of Base Salary in effect for Executive
immediately before the Involuntary Termination, plus (B) Executive's
Target Bonus for the calendar year in which the Involuntary
Termination occurs if the Company is on target and provided Executive
has completed six (6) months or more of the Business Plan year. If
less than six (6) months completion occurs, then he would be eligible
for 50% of the Target Bonus. The lump sum severance payment shall be
made thirty (30) days following Executive's termination date and shall
be subject to the Company's collection of all applicable income and
employment withholding taxes.
(ii) Health Care Coverage. The Company will make a lump sum
payment to Executive equal to twelve (12) months of the current
monthly Internal Revenue Code Section 4980B medical premium ("COBRA")
for Executive and Executive's eligible dependents. This lump sum
payment will be remitted to Executive thirty (30) days from the date
of Involuntary Termination. It is Executive's responsibility to
complete the necessary documents and make payments directly to the
COBRA administrator to maintain medical coverage throughout the peirod
Executive are eligible for COBRA benefits. Any additional health care
coverage to which Executive and Executive's dependents may be entitled
under COBRA will be at Executive's sole cost and expense.
(iii) Life Insurance Coverage. If currently enrolled in the
Company's Group Universal Life ("GUL") insurance program, the Company
will make a lump sum payment to Executive equal to twelve (12) months
of the current monthly GUL insurance premium. This lump sum payment
will be remitted to Executive thirty (30) days from the date of
Involuntary Termination. It is Executive's responsibility to complete
the necessary documents and make payments directly to the GUL
administrator to maintain coverage.
2. Option Acceleration
a. Monthly Acceleration - Stock Option Plan Grants
Should there occur an Involuntary Termination of Executive's employment,
then the Option, to the extent outstanding at the time but not otherwise fully
exercisable, shall automatically accelerate so that the Option shall immediately
become exercisable for a pro-rata portion of the Option Shares. The pro-rata
portion of the Option Shares will be calculated by dividing the sum of months
since the last option vesting date to the date of Involuntary Termination by 12
and multiplying that result by the Option Shares that would have otherwise
vested as of the next vesting date. The Option shall remain so exercisable until
the lesser of (i) the Expiration Date of the option or (ii) three (3) months
from the date of Involuntary Termination or (iii) twelve (12) months from the
date of Death or Permanent Disability. However, no additional vesting will occur
and all remaining unvested options will be cancelled on the date of Involuntary
Termination.
b. Monthly Acceleration- Non-plan Grants
Should there occur an Involuntary Termination of Executive's employment,
then the Option, to the extent outstanding at the time but not otherwise fully
exercisable, shall automatically accelerate so that the Option shall immediately
become exercisable for a pro-rata portion of the Option Shares. The pro-rata
portion of the Option Shares will be calculated by dividing the sum of months
since the last option vesting date to the date of Involuntary Termination by 12
and multiplying that result by the Option Shares that would have otherwise
vested as of the next vesting date. The Option shall remain so exercisable until
the lesser of (i) the Expiration Date of the option or (ii) three (3) months
from the date of Involuntary Termination or (iii) twelve (12) months from the
date of Death or Permanent Disability. However, no additional vesting will occur
and all remaining unvested options will be cancelled on the date of Involuntary
Termination.
3. Definitions
For purposes of this CEO Severance Agreement, the Committee deems the
following definitions to apply.
a. Base Salary means the annual rate of base salary in effect for
the Executive.
b. Cause means any of the following reasons for which the Company
may terminate Executive's employment hereunder: (i) the willful
failure or refusal by Executive to perform his duties under this
Agreement (other than any such failure attributable to
Executive's incapacity due to physical or mental illness) which
is not cured within ten (10) business days after written notice
from the Company in which there is identified the manner in which
the Company believes that the Executive has not performed such
2
duties and the steps required to cure such failure; (ii)
Executive's conviction of, or entering a plea of nolo contendere
with respect to, a felony; (iii) any intentional misconduct by
Executive which has a materially adverse effect upon the Company,
monetarily or otherwise, or (iv) any unauthorized use or
disclosure of the Company's proprietary information.
c. Executive means the Chief Executive Officer of the Company.
d. Involuntary Termination means the involuntary termination of
Executive's employment by the Company for any reason other than
for Cause or Change In Control. However, an Involuntary
Termination will not be deemed to occur in the event Executive's
employment terminates by reason of his Death or Permanent
disability.
e. Target Bonus means the annual incentive bonus to which the
Executive may become entitled under the Company's Officer Bonus
Plan for one or more calendar years upon the Company's attainment
of the performance milestones designated for each such year and
the Executive's attainment of the personal objectives specified
for him for such year, if any.
4. Moving Expenses
Should Executive elect to move back to the Seattle Washington area, within
six (6) months from the date of Involuntary Termination, the Company will
reimburse Executive up to $15,000 in connection with his moving expenses.
3
CEO EXECUTIVE OFFICER GRANT
ADDENDUM II
TO
STOCK OPTION AGREEMENT
The following provisions are hereby incorporated into, and are hereby made
a part of, that certain Stock Option Agreement(s) (the "Option Agreement") by
and between FileNET Corporation (the "Corporation") and Lee D. Roberts
("Optionee") identified in the attached Stock Option Personnel Summary and such
provisions shall be effective immediately. Each Stock Option Agreement so
identified in attached Stock Option Personnel Summary shall be herein referred
to as an "Option Agreement," and each stock option evidenced by such an Option
Agreement shall be herein referred to as an "Option" under the terms of the
Corporation's 1995 Stock Option Plan, and such provisions shall be effective
concurrently with the date of grant of the Option. All capitalized terms in this
Addendum, to the extent not otherwise defined herein, shall have the meanings
assigned to them in the Option Agreement.
INVOLUNTARY TERMINATION
1. Should there occur an Involuntary Termination of Optionee's Service,
then the Option, to the extent outstanding at the time but not otherwise fully
exercisable, shall automatically accelerate so that the Option shall immediately
become exercisable for a pro-rata portion of the Option Shares. The pro-rata
portion of the Option Shares will be calculated by dividing the sum of the
months since the last option vesting date to the date of Involuntary Termination
by 12 and multiplying that result by the Option Shares that would have otherwise
vested as of the next vesting date. The Option shall remain so exercisable until
the lesser of (i) Expiration Date of the option or (ii) three (3) months from
the date of Involuntary Termination or (iii) twelve (12) months from the date of
Death or Permanent Disability. However, no additional vesting will occur and all
remaining unvested options will be cancelled on the date of Involuntary
Termination.
2. For purposes of this Addendum, the following definitions shall be in
effect:
- An Involuntary Termination means the involuntary termination of
Executive's employment by the Company for any reason other than for
Cause or Change In Control. However, an Involuntary Termination will
not be deemed to occur in the event Executive's employment terminates
by reason of his Death or Permanent disability..
- Cause means any of the following reasons for which the Company may
terminate Executive's employment hereunder: (i) the willful failure or
refusal by Executive to perform his duties under this Agreement (other
than any such failure attributable to Executive's incapacity due to
physical or mental illness) which is not cured within ten (10)
4
business days after written notice from the Company in which there is
identified the manner in which the Company believes that the Executive
has not performed such duties and the steps required to cure such
failure; (ii) Executive's conviction of, or entering a plea of nolo
contendere with respect to, a felony; (iii) any intentional misconduct
by Executive which has a materially adverse effect upon the Company,
monetarily or otherwise, or (iv) any unauthorized use or disclosure of
the Company's proprietary information.
3. The provisions of Paragraphs 1 and 2 of this Addendum shall govern the
period for which the Option is to remain exercisable following the Involuntary
Termination of Optionee's Service and shall supersede any provisions to the
contrary in the Option Agreement.
4. In the event the Option is designated an Incentive Option in the Grant
Notice, then the following terms and conditions shall also apply to the Option:
A. The Option shall cease to qualify for favorable tax treatment as an
Incentive Option if (and to the extent) the Option is exercised for
one or more Option Shares: (i) more than three (3) months after the
date Optionee ceases to be an Employee for any reason other than Death
or Permanent Disability or (ii) more than twelve (12) months after the
date Optionee ceases to be an Employee by reason of Death or Permanent
Disability.
B. Should the Option be accelerated, in accordance with the terms of this
Addendum, upon an Involuntary Termination, then the Option shall
qualify for favorable tax treatment as an Incentive Option only to the
extent the aggregate Fair Market Value (determined at the Grant Date)
of the Common Stock for which the Option first becomes exercisable in
the calendar year in which such Involuntary Termination occurs does
not, when added to the aggregate value (determined as of the
respective date or dates of grant) of the Common Stock or other
securities for which the Option or one or more other Incentive Options
granted to Optionee prior to the Grant Date (whether under the Plan or
any other option plan of the Corporation or any Parent or Subsidiary)
first become exercisable during the same calendar year, exceed One
Hundred Thousand Dollars ($100,000) in the aggregate. Should the
applicable One Hundred Thousand Dollar ($100,000) limitation be
exceeded in the calendar year of such Involuntary Termination, the
Option may nevertheless be exercised for the excess shares in such
calendar year as a Non-Qualified Option.
5
IN WITNESS WHEREOF, FileNET Corporation has caused this Addendum to be
executed by its duly authorized officer as of the Effective Date specified
below.
FILENET CORPORATION
By: ________________________________________
Sam M. Auriemma
Title: Senior Vice President,
Chief Financial Officer
EFFECTIVE DATE: ________________________
6
Exhibit 31.1
Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
I, Lee D. Roberts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FileNet
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 13, 2003
/s/ Lee D. Roberts .
Lee D. Roberts
Chief Executive Officer
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Sam M. Auriemma, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FileNet
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 13, 2003
/s/ Sam M. Auriemma .
Sam M. Auriemma
Chief Financial Officer
2
Exhibit 32.1
Certification of Chief Executive Officer
Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906
of The Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C.ss.1350, as created by Section 906 of the Sarbanes-Oxley
Act of 2002, the undersigned officer of FileNET Corporation (the "Company"),
hereby certifies, to such officer's knowledge, that:
(i) the accompanying Annual Report on Form 10-K of the Company for the
fiscal period ended June 30, 2003 (the "Report") fully complies with the
requirements of Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: August 13, 2003
/s/ Lee D. Roberts .
Lee D. Roberts
Chairman of the Board and
Chief Executive Officer
The foregoing certification is being furnished solely to accompany the Report
pursuant to 18 U.S.C.ss.1350, and is not being filed for purposes of Section 18
of the Securities Exchange Act of 1934, as amended, and is not to be
incorporated by reference into any filing of the Company, whether made before or
after the date hereof, regardless of any general incorporation language in such
filing.
A signed original of this written statement required by Section 906 has been
provided to FileNet Corporation and will be retained by FileNet Corporation and
furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification of Chief Financial Officer
Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906
of The Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C.ss.1350, as created by Section 906 of the Sarbanes-Oxley
Act of 2002, the undersigned officer of FileNET Corporation (the "Company"),
hereby certifies, to such officer's knowledge, that:
(i) the accompanying Annual Report on Form 10-K of the Company for the
fiscal period ended June 30, 2003 (the "Report") fully complies with the
requirements of Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: August 13, 2003
/s/ Sam M. Auriemma .
Sam M. Auriemma
Senior Vice President
and Chief Financial Officer
The foregoing certification is being furnished solely to accompany the Report
pursuant to 18 U.S.C.ss.1350, and is not being filed for purposes of Section 18
of the Securities Exchange Act of 1934, as amended, and is not to be
incorporated by reference into any filing of the Company, whether made before or
after the date hereof, regardless of any general incorporation language in such
filing.
A signed original of this written statement required by Section 906 has been
provided to FileNet Corporation and will be retained by FileNet Corporation and
furnished to the Securities and Exchange Commission or its staff upon request.