14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Filed by the Registrant |X| Filed by a party other than the Registrant | | Check the appropriate box: | | Preliminary proxy statement |X| Definitive proxy statement | | Definitive additional materials | | Soliciting material pursuant to Sec. 240.14a-11(c) or Sec. 240.14a-12 FILENET CORPORATION (Name of Registrant as Specified in its Charter) - ----------------------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of filing fee (Check the appropriate box): |X| No fee required. | | Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: - ----------------------------------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: - ----------------------------------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11(Set forth the amount on which the filing fee is calculated and state how it was determined): - ----------------------------------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: - ----------------------------------------------------------------------------------------------- (5) Total fee paid: - ----------------------------------------------------------------------------------------------- | | Fee paid previously with preliminary materials. - ----------------------------------------------------------------------------------------------- | | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount previously paid: - ----------------------------------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: - ----------------------------------------------------------------------------------------------- (3) Filing party: - ----------------------------------------------------------------------------------------------- (4) Date filed: - -----------------------------------------------------------------------------------------------[FileNET Logo] NOTICE OF ANNUAL MEETING OF STOCKHOLDERS MAY 22, 2002 The 2002 Annual Meeting of Stockholders of FileNET Corporation (the "Company") will be held at 9:00 a.m. Pacific time, on May 22, 2002, at The Mondavi Center, 1570 Scenic Avenue, Costa Mesa, California 92626, for the following purposes: 1. To elect six directors for the ensuing year or until the election and qualification of their respective successors; 2. To approve the 2002 Incentive Award Plan pursuant to which an aggregate of 1,400,000 shares would be available for issuance thereunder; 3. To approve an amendment to the Company's 1998 Employee Stock Purchase Plan to increase the number of shares of Common Stock available for issuance thereunder by an additional 1,100,000 shares, from 1,332,278 to 2,432,278 shares; 4. To ratify the appointment of Deloitte and Touche LLP as the independent accountants of the Company for its year ending December 31, 2002; and 5. To transact such other business as may properly come before the meeting or any postponement or adjournment thereof. Only stockholders of record at the close of business on March 27, 2002, the record date, will be entitled to notice of, and to vote at, the 2002 Annual Meeting and any postponement or adjournment thereof. By Order of the Board of Directors, /s/ Sam A. Auriemma Costa Mesa, California Sam M. Auriemma April 17, 2002 Secretary ALL STOCKHOLDERS ARE INVITED TO ATTEND THE ANNUAL MEETING. WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR REPRESENTATION AT THE ANNUAL MEETING. A POSTAGE-PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. YOU MAY INSTEAD VOTE YOUR PROXY ELECTRONICALLY OR BY TELEPHONE. PLEASE REFER TO PAGE 2 OF THE FOLLOWING PROXY STATEMENT AND THE ENCLOSED VOTING FORM FOR INSTRUCTIONS. YOUR PROXY MAY BE REVOKED AT ANY TIME PRIOR TO THE ANNUAL MEETING. IF YOU DECIDE TO ATTEND THE ANNUAL MEETING AND WISH TO CHANGE YOUR PROXY VOTE, YOU MAY DO SO BY VOTING IN PERSON AT THE ANNUAL MEETING. [FileNET Logo] FileNET Corporation 3565 Harbor Boulevard Costa Mesa, California 92626 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 22, 2002 PROXY STATEMENT SOLICITATION OF PROXIES The accompanying proxy is solicited on behalf of the Board of Directors of FileNET Corporation (the "Company") for use at the Annual Meeting of Stockholders to be held at The Mondavi Center, 1570 Scenic Avenue, Costa Mesa, California 92626, on May 22, 2002 at 9:00 a.m. Pacific time, and at any and all adjournments or postponements thereof (the "Annual Meeting"). All shares represented by each properly executed, unrevoked proxy received in time for the Annual Meeting will be voted in the manner specified therein. If the manner of voting is not specified in an executed proxy received by the Company, the proxy will be voted FOR (i) the election of the six nominees for election to the Board of Directors listed in the proxy; (ii) the approval of the 2002 Incentive Plan, pursuant to which an aggregate of 1,400,000 shares would be available for issuance; (iii) the approval of an amendment to the Company's 1998 Employee Stock Purchase Plan to increase the number of shares of Common Stock available for issuance thereunder by an additional 1,100,000 shares, from 1,332,278 to 2,432,278 shares; and (iv) the ratification of the appointment of Deloitte and Touche LLP as the independent accountants of the Company for its year ending December 31, 2002. Any stockholder has the power to revoke his or her proxy at any time before it is voted. A proxy may be revoked by delivering a written notice of revocation to the Secretary of the Company, by presenting a later-dated proxy executed by the person who executed the prior proxy, or by attendance at the meeting and voting in person by the person who executed the proxy. Attendance at the meeting will not, by itself, revoke a proxy. This proxy statement is being mailed to the Company's stockholders on or about April 17, 2002. The total cost of this solicitation will be borne by the Company. In addition to use of the mails, proxies may be solicited by officers, directors and regular employees of the Company personally by telephone or oral communication. The Company has also retained Corporate Investor Communications, Inc. to assist it in solicitation of proxies, and has agreed to pay approximately $6,000 plus reimbursement of certain expenses for such services. OUTSTANDING SHARES AND VOTING RIGHTS Votes Required Only holders of record of the approximately 35,397,418 shares of the Company's Common Stock outstanding at the close of business on the record date, March 27, 2002, will be entitled to notice of and to vote at the Annual Meeting or any adjournment or postponement thereof. On each matter to be considered at the Annual Meeting, each stockholder will be entitled to cast one vote for each share of the Company's Common Stock held of record by such stockholder on March 27, 2002. In order to constitute a quorum for the conduct of business at the Annual Meeting, a majority of the outstanding shares of the Common Stock of the Company entitled to vote at the Annual Meeting must be present or represented at the Annual Meeting. Pursuant to Delaware law, directors are elected by a plurality vote. The other matters submitted for stockholder approval at the Annual Meeting will be decided by the affirmative vote of a majority of shares present in person or represented by proxy at the Annual Meeting and entitled to vote on such matter. With regard to the election of directors, votes may be cast in favor of or withheld from each nominee; votes that are withheld will be excluded entirely from the vote and will have no effect. Abstentions may be specified on all proposals except the election of directors, and will be counted as present for purposes of determining the existence of a quorum regarding the item on which the abstention is noted and will also be counted for purposes of determining whether stockholder approval of that item has been obtained. Shares that are not voted by the broker who is the record holder of the shares (i.e., broker non-votes) and shares that are not voted in other circumstances in which proxy authority is defective or has been withheld, will be counted for purposes of establishing a quorum but with respect to any matter, those non-voted shares will not be deemed to be entitled to vote for purposes of determining whether stockholder approval of that matter has been obtained and will have no effect on the outcome of such matter. Voting Electronically via the Internet or Telephone If your shares are registered directly with EquiServe you may vote your shares either via the Internet or by calling EquiServe. Specific instructions for voting via the Internet or telephone are set forth on the enclosed proxy card. The Internet and telephone voting procedures are designed to authenticate the stockholder's identity and to allow stockholders to vote their shares and confirm that their instructions have been properly recorded. If your shares are registered in the name of a bank or brokerage firm, you may be eligible to vote your shares electronically over the Internet or by telephone. A large number of banks and brokerage firms are participating in the ADP Investor Communication Services online program. This program provides eligible stockholders who receive a paper copy of the Annual Report and Proxy Statement the opportunity to vote via the Internet or by telephone. If your bank or brokerage firm is participating in ADP's program, your voting form will provide instructions. If your voting form does not reference Internet or telephone information, please complete and return the paper Proxy in the self-addressed postage paid envelope provided. 2 VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF The following table sets forth as of March 27, 2002 the number and percentage of the outstanding shares of the Common Stock of the Company which, according to the information supplied to the Company, are beneficially owned by (i) each person who, to the knowledge of the Company, is the beneficial owner of more than 5% of the Company's outstanding Common Stock, (ii) each person who is currently a director of the Company or is a nominee for election as a director of the Company, (iii) each named executive officer in the Summary Compensation Table that appears below and (iv) all current directors and executive officers of the Company as a group. Except to the extent indicated in the footnotes to the following table, the person or entity listed has sole voting and dispositive power with respect to the shares that are deemed beneficially owned by such person or entity, subject to community property laws, where applicable. Percentage Of Total Outstanding Outstanding Common Stock Name and Address Common Stock Options(1) Beneficially Owned(2) 5% Holders and Directors: Perkins Wolf McDonnell and Co........... 3,237,864 0 9.2% 53 W. Jackson Blvd., Suite 722 Chicago, IL 60604(3) Berger Small Cap Value.................. 2,300,000 0 6.5 210 University Blvd., Suite 900 Denver, CO 80206(4) Merrill Lynch and Co., Inc. ............ 2,231,288 0 6.3 4 World Financial Center New York, NY 10080(5) Directors: Lee D. Roberts(6)....................... 0 642,023 * Theodore J. Smith(7).................... 10,000(7) 138,750 * John C. Savage.......................... 8,564 73,933 * William P. Lyons(8)..................... 2,000 61,500 * L. George Klaus......................... 0 33,000 * Roger S. Siboni......................... 0 14,250 * Named Executive Officers: Sam M. Auriemma......................... 0 84,584 * David D. Despard........................ 200 107,084 * Ron L. Ercanbrack....................... 0 201,668 * Antoine Granatino....................... 0 41,883 * Michael J. Wallrich..................... 1,412 59,262 * All executive officers and directors as a group (20 persons)(9).... 40,688 1,834,251 5.3 * Represents less than 1%. (1) Represents shares of Common Stock that the holder may acquire upon exercise of currently vested options or options which will become vested within 60 days after March 27, 2002. (2) Shares of Common Stock subject to options which are currently exercisable or which will become exercisable within 60 days after March 27, 2002 are deemed to be beneficially owned by the person holding such options for the purpose of computing the percentage of ownership of such person but are not treated as outstanding for the purpose of computing the percentage of any other person. 3 (3) Pursuant to a Schedule 13G filed on February 25, 2002, Perkins Wolf McDonnell and Co. has sole dispositive and sole voting power over 35,584 shares and has shared dispositive and shared voting power over 3,202,280 shares. (4) Pursuant to a Schedule 13G filed on February 14, 2002, Berger Small Cap Value has shared dispositive and shared voting power over 2,300,000 shares. (5) Pursuant to a Schedule 13G filed on February 5, 2002, Merrill Lynch and Co. has shared dispositive and shared voting power over 2,231,288 shares. Merrill Lynch and Co. is a parent holding company. The following asset management subsidiaries hold certain shares of the common stock deemed beneficially owned by Merrill Lynch and Co.: Fund Asset Management, L.P., Merrill Lynch Investment Managers Limited, Merrill Lynch Investment Managers, L.P., and QA Advisor L.L.C. (6) Mr. Roberts is also a Named Executive Officer. (7) Represents shares held by the Theodore J. Smith Family Trust as to which shares Mr. Smith is co-trustee for this trust. (8) Includes 2,000 shares held by the William P. Lyons Family Trust as to which shares Mr. Lyons, as co-trustee for this trust, has shared voting and dispositive power. (9) Includes shares held by the Theodore J. Smith Family Trust and William P. Lyons Family Trust (see footnotes 7 and 8). 4 EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth, as of April 1, 2002, the executive officers of the Company. Name Age Position Lee D. Roberts 49 Chairman of the Board of the Company since December 2000 and Chief Executive Officer since April 1998. Mr. Roberts served as President from May 1997 to October 2000 and as Chief Operating Officer from May 1997 until April 1998. Mr. Roberts has also served as a director of the Company since May 1998. Prior to joining the Company in May 1997, Mr. Roberts was employed by International Business Machines Corporation ("IBM") for over 20 years, serving most recently as General Manager and Vice President, Worldwide Marketing and Sales for the Networking Division of IBM. Mr. Roberts also currently serves on the Board of Directors of Onyx Software. Sam M. Auriemma 49 Senior Vice President, Chief Financial Officer and Secretary of the Company since September 2000. Before joining the Company, Mr. Auriemma served as the Executive Vice President and Chief Financial Officer of Wonderware Corporation, which specializes in providing software solutions for industrial and process automation applications, between April 1996 and September 2000. Martyn D. Christian 40 Senior Vice President, Worldwide Corporate Marketing of the Company since January 2002. From August 2000 to December 2001, Mr. Christian served as Senior Vice President of Worldwide Corporate and Applications Marketing. From November 1998 to August 2000, Mr. Christian served as the Company's Vice President of Solutions Sales and Marketing and from September 1996 to November 1998 he served as Vice President, Marketing Programs. From March 1991 to September 1996, he served in various sales and marketing positions with the Company. David D. Despard 46 Senior Vice President, Worldwide Professional Services of the Company since July 1998. Prior to joining the Company, Mr. Despard served as the Vice President, Customer Services of Wall Data, Inc. from 1995. Frederick P. Dillon 52 Vice President, Worldwide Sales Operations of the Company since January 1999. From December 1997 to January 1999, Mr. Dillon served as Director, Worldwide Sales Operations and from January 1993 to December 1997 he served as Director, Sales Operations. Karl J. Doyle 37 Vice President, Business Development of the Company since August 2000. From October 1998 to August 2000, Mr. Doyle served as the Company's Director of Corporate Strategy. From March 1992 to October 1998, Mr. Doyle was employed in sales and marketing with the Company. Ron L. Ercanbrack 47 President since October 2000. Mr. Ercanbrack also served as Executive Vice President, Worldwide Sales and Marketing of the Company from April 1999 to October 2000. Mr. Ercanbrack served as Senior Vice President, Worldwide Sales from October 1997 until April 1999. From June 1997 to October 1997, Mr. Ercanbrack served as Senior Vice President, International. Prior to joining the Company in June 1997, Mr. Ercanbrack was employed by IBM for over 19 years, serving most recently as Vice President, Worldwide Sales, Channel and OEM for the Networking Hardware Division of IBM. 5 Name Age Position Michael W. Harris 40 Senior Vice President, Products and Strategy of the Company since August 2000. From April 1999 to August 2000, Mr. Harris served as the Company's Vice President, Product Marketing, and from December 1997 to April 1999 he was the Company's Director, Product Marketing. From March 1995 through December 1997, Mr. Harris held several executive management positions with Stac Software, Inc., a provider of storage and communication software utilities. Mr. Harris joined Stac as a result of the acquisition of Rememory Corporation, a storage management software company which he founded in 1993. Mr. Harris was also the President and Chief Executive Officer of Rememory Corporation. William J. Kreidler 57 Senior Vice President, Worldwide Support and Operations of the Company since July 1997. From August 1992 to July 1997, Mr. Kreidler served as Vice President, Operations of the Company. From 1993 to July 1998, he was also responsible for Professional Services. Katharina M. Mueller 36 Vice President, General Counsel sssince April 2002 and Assistant Secretary since August 2000. Acting General Counsel from August 2000 to March 2002. Assistant General Counsel from May 2000 through July 2000. From 1999 to 2000, Ms. Mueller served as in-house counsel at Aprisma Technologies, Inc., a division of Cabletron Systems, Inc. From 1993 to 1998, Ms. Mueller maintained a private practice in the areas of corporate, business litigation and real estate law. Royce Murphy 45 Senior Vice President, Europe, Middle East, and Africa since December 2001. From January 1999 to July 2001, Mr. Murphy was CEO of PeopleDoc Limited. From June 1997 to December 1998, Mr. Murphy served as Vice President and General Manager of Europe, Middle East, and Africa at Eastman Software, a subsidiary of Kodak. Mr. Murphy also held several positions at Hewlett-Packard, including Division Sales and Marketing Manager. Audrey N. Schaeffer 57 Vice President, Human Resources of the Company since January 1993 and Assistant Secretary since April 1988. Michael J. Wallrich 50 Senior Vice President, North America Sales of the Company since September 1999. From January 1996 to September 1999, Mr. Wallrich served as Vice President, Sales, Eastern Region and previously served as District Manager for the Midwest area since joining the Company in 1991. Daniel S. Whelan 44 Vice President and Chief Technology Officer of the Company since May 2000. From January 1994 to May 2000, Mr. Whelan served as a Computer Scientist and Section Manager in the Company's Product Development department. Franz X. Zihlmann 55 Senior Vice President of Software Development of the Company since January 2000. From September 1996 to January 2000, Mr. Zihlmann was the Company's Vice President of Product Development and from January 1991 to September 1996 Mr. Zihlmann was the Vice President, Engineering Systems. 6 EXECUTIVE COMPENSATION The following table sets forth certain information regarding the annual and long-term compensation earned for services rendered in all capacities to the Company for the last three completed fiscal years (i.e., years ended December 31, 1999, 2000, 2001) by the Company's Chief Executive Officer, and (i) each of the other four most highly compensated executive officers of the Company who were serving as executive officers at the end of fiscal year 2001, and (ii) one additional highly compensated executive officer who served as such during fiscal 2001 but not as of the end of fiscal year 2001 (collectively, the "Named Executive Officers"). Summary Compensation Table Long-Term Compensation Annual Compensation Awards Stock All Other Option Compen- Name and Principal Position Year Salary(1) Bonus (Shares) sation(2) Lee D. Roberts 2001 $525,000 $0 400,000 $5,945 Chief Executive Officer, Chairman of 2000 454,875 529,200 80,000 4,876 the Board and Director 1999 419,613 200,000 0 4,228 Ron L. Ercanbrack 2001 375,000 0 45,000 3,586 President 2000 337,420 347,069 240,000 3,173 1999 336,780 150,000 25,000 1,114 Antoine Granatino(3) 2001 293,635 0 16,000 27,364 Senior Vice President, International 2000 289,447 283,941 80,000 20,024 Operations 1999 110,047 55,188 0 9,190 David D. Despard 2001 275,000 0 70,000 5,370 Senior Vice President, Worldwide 2000 274,500 254,800 35,000 4,460 Professional Services 1999 247,394 192,500 25,000 2,369 Sam M. Auriemma(4) 2001 275,000 0 75,000 2,100 Senior Vice President, Chief Financial 2000 82,500 66,624 175,000 2,100 Officer and Secretary Michael J. Wallrich 2001 250,000 0 50,000 3,192 Senior Vice President, 2000 266,000 218,152 0 3,192 The Americas 1999 385,941 0 40,000 1,133 (1) Includes amounts deferred under (a) the Company's Employee Savings and Investment Plan, a tax-qualified plan under Section 401(k) of the Internal Revenue Code, and (b) the Company's Deferred Compensation Plan. (2) For fiscal year 2001, consists of (a) premiums paid by the Company in the amounts of $5,945, $1,486, $3,270 and $1,092 on certain term-life insurance policies maintained for Messrs. Roberts, Ercanbrack, Despard, and Wallrich, respectively, under which such individuals designate their own beneficiaries, and (b) contributions by the Company of $2,100 on behalf of each of Messrs. Ercanbrack, Despard, Auriemma and Wallrich to the Company's Section 401(k) Plan, and (c) a contribution to the Company's defined contribution pension plan maintained in the United Kingdom for Mr. Granatino in the amount of $27,364. During fiscal year 2001, no premiums were paid by the Company for life insurance for either of Messrs. Auriemma or Granatino, and no Company contributions under the Company's Section 401(k) Plan were made on behalf of Mr. Roberts. 7 (3) Mr. Granatino joined the Company as an executive officer in August 1999. Effective as of September 30, 2001, Mr. Granatino ceased to be an executive of the Company, in connection with his termination of employment to be effective as of August 2, 2003. Salary paid in 2001 includes payment of accrued vacation time. (4) Mr. Auriemma joined the Company as an executive officer in September 2000. Option Grants in Last Fiscal Year The following table provides information on option grants made in fiscal year 2001 to the Named Executive Officers. No stock appreciation rights were granted during such year to the Named Executive Officers. Individual Grants Number of % of Total Securities Options Underlying Granted to Potential Realizable Value Options Employees Exercise at Assumed Annual Rates of Granted in Fiscal Price Expiration Stock Price Appreciation for Name (#)(2) Year ($/Sh) Date Option Term(1) 5% 10% Lee D. Roberts......... 200,000 8.3% $23.47 01/02/11 $ 2,952,032 $ 7,481,027 200,000 8.3% 18.45 12/12/11 2,320,621 5,880,910 Ron L. Ercanbrack...... 45,000 1.9% 13.38 07/12/11 378,657 959,592 Antoine Granatino...... 16,000 0.7% 23.47 01/02/11 236,163 598,482 David D. Despard....... 35,000 1.5% 23.47 01/02/11 516,606 1,309,180 35,000 1.5% 13.38 07/12/11 294,511 746,350 Sam M. Auriemma........ 35,000 1.5% 23.47 01/02/11 516,505 1,554,595 40,000 1.7% 13.38 07/12/11 336,584 852,971 Michael J. Wallrich.... 30,000 1.2% 23.47 01/02/11 442,805 1,122,154 20,000 0.8% 13.38 07/12/11 168,292 426,485 (1) The assumed 5% and 10% annual rates of stock price appreciation are for illustrative purposes only. Actual stock prices will vary from time to time based upon market factors and the Company's financial performance. No assurance can be given that such rates will be achieved. Unless the market price of the Common Stock appreciates over the option term, no value will be realized from the option grants made to the Named Executive Officers. (2) Each option was granted under the Company's 1995 Stock Option Plan and, with the exception of the options granted to Mr. Roberts, will become exercisable as to twenty-five percent (25%) of the option shares after twelve (12) months of service with the Company from the grant date and the balance of the shares are exercisable in thirty-six (36) successive equal monthly installments upon completion of each additional month of service thereafter except for options granted to Mr. Roberts which become exercisable in two equal annual installments commencing January 2, 2002 and December 11, 2003, respectively. Options granted to Mr. Roberts in 2001 vest 50% on each of the first and second anniversaries of the date of grant. Each option will become fully exercisable in certain events. Each option has a maximum term of ten years, subject to earlier termination following the optionee's termination of employment. Aggregated Option Exercises in Last Fiscal Year and Year End Option Value The following table sets forth certain information with respect to the Named Executive Officers concerning their exercise of options during 2001 and the unexercised options held by them at the close of such year. No stock appreciation rights were held or exercised by the Named Executive Officers at any time during 2001. Number of Unexercised Value of Unexercised Options at Fiscal In-the-Money Year End Options at Shares (Number of Shares) Fiscal Year End(1) Acquired Value Name on Exercise (#) Realized ($)(2) Exercisable/Unexercisable Exercisable/Unexercisable Lee D. Roberts............ 1,000 $21,840 511,190/479,167 $5,277,522/554,150 Ron L. Ercanbrack......... 76,250 1,088,181 170,417/213,333 968,616/765,703 Antoine Granatino......... 3,450 28,255 36,550/ 56,000 377,196/412,800 David D. Despard.......... 18,752 248,584 91,771/150,729 128,000/598,013 Sam M. Auriemma........... 0 0 54,688/195,312 19,141/322,109 Michael J. Wallrich....... 0 0 48,220/ 73,750 433,881/328,288 (1) Calculated on the basis of the average of the high and low selling prices of the Company's Common Stock on December 31, 2001 ($20.38), the last trading day in 2001, minus the exercise price of the in-the-money option, multiplied by the number of shares subject to the option. (2) The excess of the fair market value of the purchased shares on the date of exercise over the exercise price paid for such shares. 8 Employment Contracts and Change in Control Agreements None of the Company's Named Executive Officers have employment agreements currently in effect with the Company, and the employment of each Named Executive Officer may be terminated at any time at the discretion of the Board of Directors. Change in Control Severance Program In 2001, the Compensation Committee of the Board of Directors reviewed, revised and consolidated the Company's previously approved program concerning severance payments for terminations relating to a change-in-control (the "Change-in-Control Severance Program") for the Company's CEO and certain other executive officers. Under the Change-in-Control Severance Program, each eligible executive officer will be entitled to certain benefits in the event his or her employment with the Company is involuntarily terminated, other than for "Cause" (as defined), or if such executive officer resigns for "Good Reason" (as defined), in either case within 18 months following a "change in control" of the Company (as defined). Mr. Roberts is entitled to receive a cash lump sum payment equal to twelve months of applicable base salary and target bonus (discussed below) plus twelve months of continuation payments of such salary and bonus; Messrs. Ercanbrack and Auriemma are each entitled to receive a cash lump sum payment equal to nine months of the applicable base salary and target bonus plus nine months of continuation payments of such salary and bonus; and all other eligible executive officers are entitled to receive a cash lump sum payment equal to six months of the applicable base salary and target bonus plus six months of continuation payments of such salary and bonus. The cash lump sum and continuation payments to be provided to an eligible executive officer are based upon the monthly equivalent of (A) the annual base salary in effect for such executive officer immediately before the change in control or, if greater, at the time of termination or resignation, plus (B) the annual incentive bonus that such executive officer would have been entitled to receive under the Company's officer bonus plan for the calendar year in which the termination occurs or, if greater, the calendar year in which the change in control occurs, plus the pro-rata portion of the bonus earned by such executive officer during the calendar year in which the change of control occurs. The continuation payments are made at bi-weekly intervals. Each eligible executive officer is also entitled to a lump sum payment equal to 12, 18 or 24 months, depending upon his or her position, of the then-current monthly Internal Revenue Code 4980B medical premium ("COBRA") for 9 that officer and his or her eligible dependents, plus, if applicable, the then-current life insurance premium paid by the Company. Mr. Roberts is entitled to receive a cash lump sum equal to 24 months of medical and life insurance premiums; Mssrs. Ercanbrack and Auriemma are each entitled to receive a cash lump sum equal to 18 months of medical and life insurance premiums; and all other eligible executive officers are each entitled to receive a cash lump sum equal to 12 months of medical and life insurance premiums. In addition, under the Change-in-Control Severance Program, any shares of Common Stock that are then subject to outstanding options held by an eligible executive officer will automatically vest in full on an accelerated basis. CEO Severance Program In October 2001, the Compensation Committee implemented its previously approved CEO Severance Program originally adopted in 1999, by entering into the CEO Severance Agreement with Mr. Roberts, the Company's Chief Executive Officer (the "CEO"). Under this Agreement the CEO would be entitled to receive certain severance payments and option acceleration upon the involuntary termination of the CEO's employment under certain circumstances. The benefits include a cash lump sum severance payment equal to one years of base salary, together with the CEO's target bonus which would otherwise be earned by the CEO for the year of termination but for the occurrence of the termination (which bonus is limited to 50% of the eligible annual award if the CEO has completed less than six months of service during the bonus year). The CEO would also be provided a lump sum payment equal to one year of COBRA benefits, and one year of Group Universal Life insurance premiums. In addition, a pro-rata portion of all unvested option shares would vest, to, in effect, provide for option vesting on a monthly basis through the date of termination. No benefits are payable under this Agreement in the event of the death or Permanent disability of the CEO, or in the event of termination of the CEO's employment for Cause or in connection with a Change in Control. Compensation Committee Interlocks and Insider Participation The Compensation Committee is composed of Messrs. Klaus and Lyons. No member of the Compensation Committee was at any time during 2001, or at any other time, an officer or employee of the Company. No executive officer of the Company served on the board of directors or compensation committee of any entity which has one or more executive officers serving as members of the Company's Board of Directors or Compensation Committee. Compensation Committee Report on Executive Compensation It is the duty of the Compensation Committee of the Company to review and determine the salaries and bonuses of executive officers of the Company, including the Chief Executive Officer, and to establish the general compensation policies for such individuals. The Compensation Committee also has the authority to make discretionary option grants to the Company's executive officers and other employees under the Company's 1995 Stock Option Plan. If the proposed 2002 Incentive Award Plan is approved at this Annual Meeting, the Compensation Committee will have the authority to make discretionary option grants and other awards to the Company's executive officers and other employees. The Compensation Committee believes that the compensation programs for the Company's executive officers should reflect the Company's performance and the value created for the Company's stockholders. In addition, the compensation programs should support the short-term and long-term strategic goals and values of the Company and should reward individual contribution to the Company's success. The Company is engaged in a very competitive industry, and the Company's success depends upon its ability to attract and retain qualified executives through the competitive compensation packages it offers to such individuals. General Compensation Policy. The Compensation Committee's policy is to provide the Company's executive officers with compensation opportunities that are based upon their personal performance, the financial performance of the Company and their contribution to that performance, and which are competitive enough to attract and retain highly skilled individuals. Each executive officer's compensation package is comprised of three elements: (i) base salary that is competitive with the market and reflects individual performance, (ii) annual variable performance awards payable in cash and tied to the Company's 10 achievement of annual financial performance goals and (iii) long-term stock-based incentive awards designed to strengthen the mutuality of interests between the executive officers and the Company's stockholders. As an officer's level of responsibility increases, a greater proportion of his or her total compensation will be dependent upon the Company's financial performance and stock price appreciation. The Company has, at such times in the past as it deemed necessary, retained the services of an independent compensation consulting firm to advise the Compensation Committee as to how the Company's executive compensation compares to that of companies within and outside of its industry. The Company also subscribes to and participates in compensation surveys of the companies in its industry. For fiscal 2001, the Compensation Committee consulted with Westward Pay Strategies ("Westward Pay"), who studied competitive practices with the Company's industries. The principal factors that were taken into account in establishing each executive officer's compensation package for 2001 are described below. However, the Compensation Committee may in its discretion apply entirely different factors, such as different measures of financial performance, for future years. Base Salary. In setting base salaries, Westward Pay and the Compensation Committee reviewed relevant published compensation surveys. The Committee also identified a group of companies for comparative compensation purposes, and it reviews detailed compensation data incorporated into each such company's proxy statements. This group is comprised of approximately 15 companies within the Company's industry. The base salary for each officer reflects the salary levels for comparable positions in the industry and the comparative group of companies, as well as the individual's personal performance and internal alignment considerations. The relative weight given to each factor varies with each individual in the sole discretion of the Compensation Committee. Each executive officer's base salary is adjusted each year on the basis of (i) the Compensation Committee's evaluation of the officer's personal performance for the year and (ii) the competitive marketplace for persons in comparable positions. The Company's performance and profitability may also be a factor in determining the base salaries of executive officers. The Compensation Committee targeted the 75th Percentile of published survey values for base salary for comparable positions for 2001, with salaries ranging generally approximately 27% below to 4% below this target. Annual Incentives. The annual incentive bonus for the Chief Executive Officer is based on a percentage of his base pay (i.e., 60% for 2001) and is adjusted to reflect the actual financial performance of the Company in comparison to the Company's business plan. For example, no bonus is paid if the Company's attainment of the target earnings per share is less than 70% of plan; 100% of the bonus is paid if the Company's attainment of the target goal is 100% of plan and 200% of the bonus is paid if the Company's attainment of the target goal is equal to or greater than 125% of plan. The actual bonus is calculated on a pro rata basis between these points. Most of the other executive officers of the Company are also eligible to receive annual incentive bonuses that are based on a percentage of their base salary (i.e., 25% to 60% for 2001) and are calculated on the basis of the Company's performance to plan as measured in terms of achievement of the Company's target earnings per share. On the basis of the foregoing and the actual earnings per share compared to target, no bonuses were awarded to any of our executive officers for 2001 under our annual incentive bonus program, and no executive officers were awarded quarterly incentive bonuses based on Company sales for 2001. Long Term Incentives. Generally, stock option grants are made annually by the Compensation Committee to each of the Company's executive officers. During 2001, however, grants were made to our executive officers, excluding our Chief Executive Officer, in January and July 2001. The grants made in July 2001 were made in place of regular annual grants to be made in January 2002. Each grant is designed to align the interests of the executive officer with those of the stockholders and provide each individual with a significant incentive to manage the Company from the perspective of an owner with an equity stake in the business. Each grant allows the officer to acquire shares of the Company's Common Stock at a fixed price per share (the market price on the grant date) over a specified period of time (up to ten years). Each option granted in 2001, other than option grants to our Chief Executive Officer, become exercisable in installments equal to 25% of the option shares on the first anniversary of grant, and for the balance of the option shares in 36 successive equal monthly installments thereafter. Accordingly, the options will provide a return to the executive officer only if he or she remains employed by the Company during the vesting periods, and then only if the market price of the shares appreciates over the option term. The size of the option grant to each executive officer, including the Chief Executive Officer, is set by the Compensation Committee at a level that is intended to create a meaningful opportunity for stock ownership based upon the 11 individual's current position with the Company, the individual's personal performance in recent periods and his or her potential for future responsibility and promotion over the option term. The Compensation Committee also takes into account the number of unvested options held by the executive officer and considers the potential impact that a grant can have on an executive's motivation and future performance with the desire to maintain an appropriate level of equity incentive for that individual. The relevant weight given to each of these factors varies from individual to individual. CEO Compensation. In setting the total compensation payable to Mr. Roberts, who served as the Company's Chief Executive Officer for 2001, the Compensation Committee sought to make his compensation competitive with other companies in the comparison group and the surveyed values, while at the same time assuring that a significant percentage of his total compensation package was tied to Company performance, as measured in terms of the achievement of the Company's target earnings per share. The Compensation Committee established Mr. Roberts' base salary for the year 2001 with the objective of maintaining his base salary at a competitive level when compared with the base salary levels in effect for similarly situated chief executive officers. It is the Compensation Committee's intent to provide Mr. Roberts with a level of stability and certainty each year and not have this particular component of compensation affected to any significant degree by Company performance factors. For the year 2001, Mr. Roberts' base salary was set above the median but below the 75th percentile of the base salary levels of other chief executive officers at the surveyed companies. The balance of Mr. Roberts' targeted cash compensation package for the year 2001 was primarily dependent upon corporate performance. Based upon actual earnings per share compared to targeted earnings per share, Mr. Roberts was not awarded a cash bonus for 2001. The Compensation Committee made two grants of options covering 200,000 shares to Mr. Roberts, one in January 2001 and the second in December 2001, in recognition of his personal performance and leadership role in the Company. The second grant in December 2001 was made instead of the expected January 2002 grant. All of these options vest 50% on each of the second and third anniversary of the grant date and are intended to tie a significant portion of his total compensation to stockholder value since the value of those grants will depend upon the future appreciation in the market price of the Company's Common Stock. Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the Internal Revenue Code disallows a tax deduction to publicly held companies for compensation paid to certain of their executive officers, to the extent that compensation exceeds $1 million per covered officer in any year. The limitation applies only to compensation which is not considered to be performance-based. The non-performance based compensation paid in cash to the Company's executive officers for 2001 did not exceed the $1 million limit per officer. The option grants made in 2001 were made under the 1995 Stock Option Plan, and structured so that any compensation would not be subject to the $1 million limitation, and the compensation deemed paid in connection with the exercise of those options will qualify as performance-based compensation which will not be subject to the $1 million limitation. The Company's 2002 Incentive Award Plan, which the stockholders are being asked to approve at this Annual Meeting (See Proposal 2) has been structured so that any compensation deemed paid in connection with the exercise of option grants made under that plan with an exercise price equal to the fair market value of the option shares on the grant date will qualify as performance-based compensation and not be subject to the $1 million limitation. It also is designed to provide the Company with the opportunity to make cash and equity awards that would satisfy the requirements for performance-based compensation under Section 162(m) of the Internal Revenue Code. It is the opinion of the Compensation Committee that the executive compensation policies and plans provide the necessary total remuneration program to properly align the Company's performance and the interests of the Company's stockholders through the use of competitive and equitable executive compensation in a balanced and reasonable manner, for both the short and long-term. Submitted by the Compensation Committee of the Company's Board of Directors: William P. Lyons L. George Klaus 12 Notwithstanding anything to the contrary set forth in any of the Company's previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, which might incorporate future filings made by the Company under those statutes, neither the preceding Compensation Committee Report on Compensation, nor the Stock Price Performance Graph will be incorporated by reference into any of those prior filings, nor will such report or graph be incorporated by reference into any future filings made by the Company under those statutes. Stock Price Performance Graph The following graph compares the five-year cumulative total stockholder return on the Company's Common Stock against the cumulative total return of the Nasdaq Stock Market Index and the Nasdaq Computer and Data Processing Services Index for the period from December 31, 1996 to December 31, 2001. FILENET CORPORATION PERFORMANCE COMPARATIVE 5-YEAR CUMLATIVE TOTAL REUTRN Measurement Period FILENET NASDAQ NASDAQ (Fiscal year covered) CORPORATION STOCK MARKET CandDPS INDEX Measurement Point 12/31/96 $100.00 $100.00 $100.00 FYE 12/31/97 $ 94.00 $123.00 $123.00 FYE 12/31/98 $ 72.00 $172.00 $220.00 FYE 12/31/99 $159.00 $312.00 $464.00 FYE 12/31/00 $170.00 $193.00 $223.00 FYE 12/31/01 $127.00 $153.00 $179.00 ASSUMES $100 INVESTED ON DECEMBER 31, 1996 ASSUMES DIVIDENDS REINVESTED YEAR ENDED DECEMBER 31, 2001 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors, executive officers and persons who own more than 10% of a registered class of the Company's equity securities to file initial reports of ownership and reports of changes in ownership with the SEC and the Nasdaq National Market. Such persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of copies of such forms received with respect to the year 2001 and the written representations received from certain reporting persons that no other reports were required, the Company believes that all directors, executive officers and persons who own more than 10% of the Company's Common Stock have complied with the reporting requirements of Section 16(a). 13 Proposal 1 ELECTION OF DIRECTORS The Company's stockholders are being asked to elect six directors for the ensuing year or until the election and qualification of their respective successors. Directors are elected at each Annual Meeting of Stockholders and hold office until their successors are duly elected and qualified at the next Annual Meeting of Stockholders. Pursuant to the Company's Bylaws and a resolution adopted by a majority of the authorized number of directors, the authorized number of members of the Board of Directors has been set at six. The following table sets forth certain information concerning the nominees for election to the Board of Directors: Name, Age, Principal Occupation or Position, and Directorships of Other Publicly Year Became Owned Companies Director L. George Klaus, 61, Chairman, President and Chief Executive Officer of Epicor Software Corporation (formerly Platinum Software Corporation) since February 1996. Mr. Klaus currently serves as a director of Epicor Software. 1998 William P. Lyons, 57, President, Chief Executive Officer and a director of NeuVis Inc., an Internet Rapid Application Development (I-Rad) company since January 2001. From February 1998 to January 2001, Mr. Lyons served as President, Chief Executive Officer and a director of Finjan Software, Inc. 1992 Lee D. Roberts, 49, Chairman of the Board of the Company since December 2000 and Chief Executive Officer since April 1998. Mr. Roberts served as President from May 1997 to October 2000 and as Chief Operating Officer from May 1997 until April 1998. Mr. Roberts has also served as a director of the Company since May 1998. Prior to joining the Company in May 1997, Mr. Roberts was employed by IBM for over 20 years, serving most recently as General Manager and Vice President, Worldwide Marketing and Sales for the Networking Division of IBM. Mr. Roberts also currently serves as a director of Onyx Software. 1998 John C. Savage, 54, Managing Partner of Alliant Partners, an investment banking firm, since June 1998. From 1990 to July 1998, Mr. Savage served as Managing Partner of Glenwood Capital Partners and Managing Director of its successor, Redwood Partners, LLC, both venture buy-out firms. 1982 Roger S. Siboni, 47, President, Chief Executive Officer and a director of Epiphany, Inc. since August 1998. From October 1996 to August 1998, Mr. Siboni was Deputy Chairman and Chief Operating Officer of KPMG Peat Marwick LLP, a member firm of KPMG International. From 1993 to October 1996, Mr. Siboni was Managing Partner of KPMG Peat Marwick LLP, Information, Communication and Entertainment practice. Mr. Siboni currently serves as a director of Cadence Design Systems, Inc. 1998 Theodore J. Smith, 72, Chairman of the Board of the Company from its inception in 1982 to December 2000. Mr. Smith served as the Chief Executive Officer of the Company since its inception in 1982 to April 1998, and President of the Company from 1982 to May 1997. Mr. Smith is currently a director of Intershop Communications, A.G. 1982 Except as otherwise indicated, during the past five years each of the nominees has held the same position with the same entities as listed above. 14 The Board of Directors held ten meetings during the year ended December 31, 2001. Mr. Siboni attended six of the meetings of the Board of Directors (i.e., 60%). All of the other directors attended or participated in at least 75% of the aggregate number of meetings of the Board of Directors. Each director (including Mr. Siboni) attended at least 75% of the aggregate number of meetings of those committees of the Board of Directors on which such person served, which were held during such period. The Company has standing Audit, Compensation and Nominating Committees. The Audit Committee currently consists of three directors, Messrs. Lyons, Savage and Siboni, each of whom is independent (as defined in Rule 4200(a)(15) of the National Association of Securities Dealers' listing standards). The Audit Committee held five meetings during the year ended December 31, 2001. The Audit Committee's responsibilities include recommending the selection of the Company's independent public accountants to the Board of Directors, as well as reviewing (i) the scope and results of the audit engagement with the independent public accountants and management, (ii) the adequacy of the Company's internal accounting control procedures, (iii) the independence of the independent public accountants, and (iv) the range of audit and non-audit fees charged by the independent public accountants. The Board of Directors of the Company adopted an Audit Committee charter in December 2000. During 2001, Messrs. Lyons and Klaus comprised the Compensation Committee. The Compensation Committee held five meetings during the year ended December 31, 2001. The Compensation Committee reviews and approves executive salaries, considers awards to be granted under the Company's officer bonus plan, has the exclusive authority to make stock option grants under the Company's option plans to our executive officers and performs other related functions upon request of the Board of Directors. Either the Compensation Committee or the full Board of Directors may award option grants to all other eligible individuals. In addition, in December 1999, the Board of Directors appointed Mr. Roberts as the sole member of a Special Stock Option Committee which has separate but concurrent authority with the Compensation Committee to make discretionary option grants to eligible individuals, other than executive officers and non-employee Board members, subject to a limitation of 20,000 shares per individual employee grant. The Special Stock Option Committee acted by written consent on 13 occasions during 2001. The Nominating Committee was formed in December of 2001 and held no meetings. The Nominating Committee consists of Messrs. Siboni and Smith. Board Compensation and Benefits Each director who is not an employee of the Company is reimbursed for actual expenses incurred in attending Board meetings. In addition, each non-employee director received the following compensation for his Board service during 2001: (i) an annual retainer fee of $24,000; (ii) a fee of $3,000 for each Board meeting attended; and (iii) a fee of $2,000 for each Committee meeting attended which was not held on the same day as a Board meeting. At the 2001 Annual Stockholders Meeting held on May 16, 2001, Messrs. Lyons, Klaus, Savage, Smith and Siboni each received, upon their reelection to the Board, a stock option to purchase 7,000 shares of the Company's Common Stock under the Automatic Option Grant Program in effect for non-employee Board members under the 1995 Stock Option Plan. Each option has an exercise price of $14.39 per share, representing the fair market value per share of Common Stock on the grant date. Each option vests in four successive equal annual installments on the anniversary of option grant date, subject to the optionee's continued service on the Board. The option has a maximum term of ten years measured from the grant date, subject to earlier termination following the optionee's cessation of Board service. If the proposed 2002 Incentive Award Plan is approved by the stockholders at this Annual Meeting (see Proposal 2) each independent director reelected to the Board at the Annual Meeting will receive an option grant for 7,000 shares of the Company's Common Stock under the 2002 Incentive Award Plan, with an exercise price equal to the fair market value of our common stock on the date of grant. The proposed 2002 Incentive Award Plan continues the automatic grant program that the Company had in effect under its 1995 Stock Option Plan, as amended and restated. 15 Required Vote for Approval and Recommendation of the Board of Directors Directors will be elected by an affirmative vote of a plurality of the shares of voting stock present and entitled to vote, in person or by proxy, at the Annual Meeting. Abstentions or broker non-votes as to the election of directors will not affect the election of the candidates receiving the plurality of votes. Unless instructed to the contrary, the shares represented by the proxies will be voted FOR the election of the six nominees named above as directors. Although it is anticipated that each nominee will be able to serve as a director, should any nominee become unavailable to serve, the proxies will be voted for such other person or persons as may be designated by the Company's Board of Directors. As of the date of this Proxy Statement, the Board of Directors is not aware of any nominee who is unable or will decline to serve as a director. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF ALL SIX NOMINEES NAMED ABOVE. 16 Proposal 2 Approval of the 2002 Incentive Award Plan The Board is submitting for stockholder approval the 2002 Incentive Award Plan (the "2002 Incentive Plan"). On March 28, 2002, the Board approved and adopted the 2002 Incentive Plan, subject to approval by the stockholders of the Company. The 2002 Incentive Plan provides for an aggregate of 1,400,000 shares that may be issued under the plan, of which only 140,000 shares may be issued as Restricted Stock. The 2002 Incentive Plan serves as a successor to the Company's 1995 Stock Option Plan as there remain only 99,470 shares as of March 27, 2002 shares available for grant under the 1995 Stock Option Plan. The Board of Directors has determined that it is advisable to continue to provide stock-based incentive compensation to the Company's officers, directors, consultants and employees thereby continuing to align the interests of such individuals with those of the stockholders, and that awards under the 2002 Incentive Plan are an effective means of providing such compensation. In addition, the 2002 Incentive Plan gives the Compensation Committee the ability to qualify cash and non-cash compensation paid to executive officers as performance-based compensation, thereby preserving the Company's ability to take a deduction with respect to such compensation. General Nature of the 2002 Incentive Award Plan The principal purposes of the 2002 Incentive Plan are to provide incentives for independent directors, consultants and key employees of the Company and its subsidiaries to further the growth, development and financial success of the Company by personally benefiting through the ownership of Company stock, and to obtain and retain the services of such individuals who are considered essential to the long range success of the Company through the grant or issuance of options, restricted stock, stock appreciation rights, performance awards, dividend equivalents, deferred stock and stock payments (collectively, "Awards"). The principal features of the 2002 Incentive Plan are summarized below, but the summary is qualified in its entirety by reference to the 2002 Incentive Plan itself, which is included as Appendix A to this Proxy Statement. Shares Reserved Under the 2002 Incentive Plan, the aggregate number of shares of Common Stock that may be issued upon the exercise of options or any other Award is 1,400,000 shares; provided that only 140,000 shares may be issued as Restricted Stock. Additionally, the 2002 Incentive Plan limits the number of Awards that may be granted to any one individual during any calendar year to 400,000 shares and the amount of performance awards is limited to $750,000 per employee during any calendar year. On March 27, 2002, the average of the high and low price of a share of the Company's Common Stock on the Nasdaq Stock Market was $17.66. The shares of Common Stock available for issuance under the 2002 Incentive Plan may be either previously authorized and unissued shares or treasury shares. The 2002 Incentive Plan provides for appropriate adjustments in the number and kind of shares subject to the 2002 Incentive Plan and to outstanding Awards thereunder in the event of a stock split, stock dividend and certain other types of transactions. Available for future issuance under the Plan are (i) shares subject to expired, exchanged or canceled Options; (ii) shares subject to restricted stock or other Awards which are forfeited by the Participant or repurchased by the Company; (iii) shares subject to Awards which terminate without payment being made; and (iv) shares delivered by the Participant or withheld by the Company upon exercise or purchase of any Award in payment of the exercise or purchase price of such Award or any related tax-withholding obligation. 17 Administration The 2002 Incentive Plan is generally administered by the Compensation Committee, consisting of at least two members of the Board who are both "non-employee" directors for purposes of Section 16-b of the Exchange Act and "outside directors" under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code. However, with respect to grants under the 2002 Incentive Plan to independent directors, the Board as a whole shall administer the 2002 Incentive Plan. The Compensation Committee, however, has the power to delegate authority for administration of the Plan as to Awards made to certain employees to a committee comprised of one or more of our executive officers. The Committee, the subcommittee and the Board are collectively referred to as the "Administrator" herein. The Administrator is authorized to determine the individuals who will receive Awards (the "Participants"), when they will receive Awards, the number of shares to be subject to each Award, whether Options are to be incentive stock options or non-qualified stock options and whether an Award is to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Internal Revenue Code; the price of the Awards granted, payment terms, payment method, vesting requirements, including any specific performance goals and any Performance Criteria (as defined) to be used, any vesting acceleration provisions and the expiration date applicable to each Award. The Administrator is also authorized to adopt, amend and rescind rules relating to the administration of the 2002 Incentive Plan. Eligibility Awards under the 2002 Incentive Plan may be granted to employees of the Company or any of its present or future subsidiaries, consultants to the Company and Independent Directors. More than one Award may be granted to an employee, consultant or Independent Directors. Awards Under the 2002 Incentive Plan The 2002 Incentive Plan provides that the Committee may grant options (both incentive stock options ("ISOs") within the meaning of Section 422 of the Internal Revenue Code and options which do not qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code ("NSOs" or "non-qualified options") and restricted stock. Each Award grant will be set forth in a separate agreement with the person receiving the Award and will indicate the type, terms and conditions of the Award. For purposes of the 2002 Incentive Plan, "fair market value" means the average of the high and low selling prices of a share of Common Stock as of a given date. Nonqualified Stock Options. Nonqualified Stock Options provide for the right to purchase Common Stock at a specified price which may not be less than 85% of the fair market value of our common stock on the date of grant, and usually will become exercisable (in the discretion of the Committee) in one or more installments after the grant date. NSOs may be granted for any term not exceeding ten years after the grant date, as specified by the Committee. Incentive Stock Options. Incentive Stock Options ("ISOs") will be designed to comply with the provisions of the Internal Revenue Code and will be subject to certain restrictions contained in the Internal Revenue Code. Among such restrictions, ISOs must have an exercise price not less than the fair market value of a share of Common Stock on the date of grant, may only be granted to employees, must expire within a specified period of time following the optionee's termination of employment, and must be exercised within ten years after the date of grant; but may be subsequently modified to disqualify them from treatment as ISOs. In the case of an ISO granted to an individual who owns (or is deemed to own) at least 10% of the total combined voting power of all classes of stock of the Company, the 2002 Incentive Plan provides that the exercise price must be at least 110% of the fair market value of a share of Common Stock on the date of grant and the ISO must expire no later than the fifth anniversary of the date of its grant. The aggregate fair market value (determined at the time of grant) of shares with respect to which an ISO (as defined herein) is first exercisable by an optionee (i.e., "vests") during any calendar year cannot exceed $100,000. 18 Automatic Grant of Options to Independent Directors. The 2002 Incentive Plan provides for automatic grants to Independent Directors of NSOs to purchase 7,000 shares on the date of each annual meeting of stockholders at which the Independent Director is reelected to the Board, commencing with the 2002 Annual Meeting of Stockholders. Additionally, during the term of the 2002 Incentive Plan, the Plan automatically grants to any person who is initially elected or appointed to the Board after May 22, 2002 and who is an Independent Director at the time of such initial election or appointment (1) an option to purchase 25,000 shares on the date of such initial election or appointment and (2) an option to purchase 7,000 shares on the date of each annual meeting of stockholders at which the Independent Director is elected to the Board, provided such person has served as an Independent Director for at least 6 months prior to the annual meeting of stockholders. Options automatically granted to Independent Directors have an exercise price equal to the fair market value of our common stock on the date of grant, and vest in equal annual installments of 25% from the date of grant, subject to accelerated vesting upon the happening of certain events including any change in control or corporate transactions (as defined). The Independent Director shall have until the earlier of (i) ten months following option grant date or (ii) 12 months following cessation of Board Service, to exercise his or her vested options. The Board may also grant options to Independent Directors from time to time, on such terms as the Board deems appropriate. Restricted Stock. Restricted stock may be sold to Participants at various prices or granted in connection with the performance of services and made subject to such restrictions as may be determined by the Administrator. Restricted stock, typically, may be repurchased by the Company at the original purchase price or otherwise subject to forfeiture, if the conditions or restrictions are not met. In general, restricted stock may not be sold, or otherwise transferred or hypothecated, until restrictions are removed or expire. Purchasers of restricted stock, unlike recipients of options, will have voting rights and will receive dividends prior to the time the restrictions lapse. To the extent that the Administrator determines that it is desirable for a grant of restricted stock to qualify as "performance based" under Internal Revenue Code Section 162(m), such grant of restricted stock shall be subject to vesting only upon attainment of performance goals, which are pre-established by the Administrator. Such performance goals may be based upon any of the following business criteria with respect to the Company, any subsidiary or any division or operating unit thereof, as the Administrator may determine: (1) net income; (2) pre-tax income; (3) operating income; (4) cash flow; (5) earnings per share; (6) return on equity; (7) return on invested capital or assets; (8) cost reductions or savings; (9) funds from operations; (10) appreciation in the fair market value of Common Stock; or (11) earnings before any one or more of interest, taxes, depreciation or amortization (the "Performance Criteria"). Stock Appreciation Rights. A Stock Appreciation Right ("SAR") may be granted in connection and simultaneously with the grant of an option, or with respect to a previously granted option, or independent of an option. The Administrator determines the terms and conditions of a Stock Appreciation Right A coupled SAR is related to a particular option, is granted for no more than the number of shares subject to the simultaneously or previously granted option, and is exercisable only when and to the extent that the Participant may exercise the related option. An independent SAR is unrelated to any option, and has terms (including the number of shares of common stock covered and the vesting installments) that are set by the Administrator. Payment for SARs may be in cash, common stock or a combination of both, as determined by the Administrator. Deferred Stock. Deferred stock may be awarded to Participants, typically without payment of consideration, but subject to vesting conditions based upon a vesting schedule or performance criteria established by the Administrator. Unlike restricted stock, deferred stock will not be issued until the deferred stock award has vested, and recipients of deferred stock generally will have no voting or dividend rights prior to the time the vesting conditions are satisfied. Performance Awards. The value of a Performance Award may be linked either to the Performance Criteria specified in the 2002 Incentive Plan or to any other performance criteria determined appropriate by the Administrator. In making such determinations, the Administrator considers, among other factors, the Participant's contributions, responsibilities and other compensation received. The maximum amount of cash bonuses that may be paid as a Performance Award is limited to $750,000 per calendar year per person. Dividend Equivalents. Dividend Equivalents are based on the dividend declared on our common stock and are credited as of dividend payment dates, as specified in the 2002 Incentive Plan. Such Dividend Equivalents are converted to cash or additional shares of our common stock by such formula, at such time and subject to such limitations as may be determined by the Administrator. 19 Stock Payments. The number of shares for Stock Payments awarded under the 2002 Incentive Plan is determined by the Administrator and may be linked to the market value, book value, net profits or other measure of the value of common stock or other specific Performance Criteria determined to be appropriate by the Administrator. Payment for Shares The exercise price for all options may be paid in full in cash at the time of exercise, or if permitted by the Committee in its discretion (1) by delay in payment for up to 30 days, (2) by delivery of Common Stock owned by the Participant for at least six months, or the surrender of shares of common stock then issuable upon exercise of the option, in each case having a fair market value on the date of exercise equal to the aggregate exercise price of the exercised option; (3) by a full recourse promissory note bearing interest at a market rate of interest; (4) by an irrevocable instruction to a broker to deliver to the Company sale or loan proceeds to pay for all of the Common Stock acquired by exercising the options and any tax withholding obligations resulting from such exercise, (5) by delivery of other property of any kind which constitutes good and valuable consideration, or (6) any combination of the foregoing. In the discretion of the Administrator, restricted stock awards may be made for a purchase price or in consideration of performance of prior services for the Company or any subsidiary. Amendment and Termination The Administrator may terminate the Plan at any time. The Administrator may also amend the Plan wholly or in part at any time, however, the board of directors must obtain stockholder approval in order to (i) increase the number of shares of common stock subject to the Plan or the maximum number of shares of common stock which may be awarded to any individual during any calendar year, except for any increase or other change due to stock dividends, split-ups, consolidations, recapitalizations, reorganization or like events; or (ii) amend the Plan in a manner that requires stockholder approval under applicable law. Amendments of the 2002 Incentive Plan will not, without the consent of the Participant, affect such person's rights under an Award previously granted, unless the Award itself otherwise expressly so provides. No Awards may be granted under the 2002 Incentive Plan after February 13, 2012. The Board may terminate the 2002 Incentive Plan at any time prior to such date with respect to the shares that are not then subject to Awards. Termination of the 2002 Incentive Plan will not affect the rights and obligations of any Participant with respect to Awards granted before termination. Terms of Awards The dates on which options or other Awards under the 2002 Incentive Plan first become exercisable and on which they expire will be set forth in individual Award agreements setting forth the terms of the Awards. These Agreements generally will provide that options and other Awards expire upon termination of the Participant's employment, although the Administrator may provide that such options or other Awards continue to be exercisable following a termination, or because of the grantee's retirement, death, disability or otherwise. Similarly, restricted stock granted under the 2002 Incentive Plan which has not vested generally will be subject to repurchase by the Company in the event of the grantee's termination of employment, although the Administrator may make exceptions, based on the reason for termination, or on other factors. In the event of certain stated events in the 2002 Incentive Plan which may affect the Company, such as merger, consolidation, liquidation, dissolution or sale of all or substantially all the assets of the Company, the Administrator in its sole discretion may take certain actions with respect to Awards under the 2002 Incentive Plan, including acceleration of the exercisability of any options or the vesting in any restrictions on restricted stock, the purchase of outstanding Awards, the substitution, assumption or replacement of any awards, and other similar adjustments to facilitate any such transactions. The Administrator may also provide that all Awards shall cease to be outstanding following such events. In consideration of the granting of a stock option or shares of restricted stock, the Participant must agree in the written agreement embodying such Award to remain in the employ of or to continue to be of service to, the Company or a 20 subsidiary. No Award under the 2002 Incentive Plan may be assigned or transferred by the Participant, except by will or the laws of intestate succession, or, with the consent of the Administrator, pursuant to a Domestic Relations Order or to certain family member trusts without consideration therefore. Miscellaneous Provisions In the event that the outstanding shares of Common Stock of the Company are changed into or exchanged for a different number or kind of shares of capital stock or other securities of the Company by reason of merger, reorganization, consolidation, recapitalization, reclassification, stock split, reverse stock split, stock dividend, combination of shares, or otherwise, the number and kind of shares covered by the 2002 Incentive Plan, the maximum number of shares that may be granted during any calendar year, the number and kind of shares covered by, and exercise or purchase price of, each outstanding option and other award, and other limitations on shares applicable under the 2002 Incentive Plan shall be proportionately adjusted. The 2002 Incentive Plan must be approved by the stockholders within twelve months of the date of its adoption. Awards under the 2002 Incentive Plan may be granted prior to such approval, provided that such Awards may not vest or become exercisable prior to the stockholders' approval of the 2002 Incentive Plan, and that if such approval is not received within the twelve-month period, all such Awards shall become null and void. Plan Benefits If the 2002 Incentive Plan is approved by the stockholders, then each Independent Director as of the date of the Annual Meeting, shall receive automatically effective as of the date of the Annual Meeting, options covering 7,000 shares of common stock with an exercise price equal to the fair market value of the common stock on the date of grant, and shall vest 25% per year from the date of grant, subject to continued service on the Board. Certain Federal Income Tax Consequences The federal income tax consequences of the 2002 Incentive Plan under current federal income tax law are summarized in the following discussion which deals with the general tax principles applicable to the 2002 Incentive Plan, and is intended for general information only. In addition, the tax consequences described below are subject to the limitations of Internal Revenue Code Section 162(m), as discussed in further detail below. Alternative minimum tax and other federal taxes and foreign, state and local income taxes are not discussed, and may vary depending on individual circumstances and from locality to locality. Nonqualified Stock Options. For federal income tax purposes, the recipient of NSOs granted under the 2002 Incentive Plan will not have taxable income upon the grant of the option, nor will the Company then be entitled to any deduction. Generally, upon exercise of NSOs the optionee will realize ordinary income, and the Company will be entitled to a deduction, in an amount equal to the difference between the option exercise price and the fair market value of the stock at the date of exercise. Incentive Stock Options. An optionee generally will not recognize taxable income upon either the grant or exercise of an ISO. However, the amount by which the fair market value of the shares at the time of exercise exceeds the exercise price will be an "item of tax preference" for the optionee. Generally, upon the sale or other taxable disposition of the shares of Common Stock acquired upon exercise of an ISO, the optionee will recognize income taxable as capital gains in an amount equal to the excess, if any, of the amount realized in such disposition over the option exercise price, provided that no disposition of the shares has taken place within either (a) two years from the date of grant of the ISO or (b) one year from the date of exercise. If the shares of Common Stock are sold or otherwise disposed of before the end of the one-year and two-year periods specified above, the difference between the ISO exercise price and the fair market value of the shares on the date of exercise generally will be taxable as ordinary income; the balance of the amount realized from such disposition, if any, generally will be taxed as capital gain. If the shares of Common Stock are disposed of before the expiration of the one-year and two-year periods and the amount realized is less than the fair market value of the shares at the date of exercise, the optionee's ordinary income generally is limited to the excess, if any, of the amount realized in such disposition over the option exercise price paid. The Company (or other employer corporation) generally will 21 be entitled to a tax deduction with respect to an ISO only to the extent the optionee has ordinary income upon sale or other disposition of the shares of Common Stock. An Option will only qualify as an incentive stock option to the extent that the aggregate fair market value of the shares with respect to which the Option becomes exercisable for the first time in any calendar year is equal to or less than $100,000. For purposes of this rule, the fair market value of shares shall be determined as of the date the incentive stock option is granted. To the extent an incentive stock option is exercisable for shares in excess of this $100,000 limitation, the excess shares shall be taxable under the rules for "Non-Qualified Stock Options," described above. Restricted Stock and Deferred Stock. A Participant to whom restricted or deferred stock is issued will not have taxable income upon issuance and we will not then be entitled to a deduction, unless in the case of restricted stock an election is made under Section 83(b) of the Internal Revenue Code. However, when restrictions on shares of restricted stock lapse, such that the shares are no longer subject to repurchase by us, the Participant will realize ordinary income and we will be entitled to a deduction in an amount equal to the fair market value of the shares at the date such restrictions lapse, less the purchase price therefor. Similarly, when deferred stock vests and is issued to the Participant, the Participant will realize ordinary income and we will be entitled to a deduction in an amount equal to the fair market value of the shares at the date of issuance. If an election is made under Section 83(b) with respect to restricted stock, the employee will realize ordinary income at the date of issuance equal to the difference between the fair market value of the shares at that date less the purchase price therefore and we will be entitled to a deduction in the same amount. The Internal Revenue Code does not permit a Section 83(b) election to be made with respect to deferred stock. Stock Appreciation Rights. No taxable income is generally recognized by the Participant upon the receipt of an SAR, but upon exercise of the SAR the fair market value of the shares (or cash in lieu of shares) received generally will be taxable as ordinary income to the Participant in the year of such exercise. The Company generally will be entitled to a compensation deduction for the same amount that the Participant recognizes as ordinary income. Dividend Equivalents. A recipient of a dividend equivalent award will not realize taxable income at the time of grant, and we will not be entitled to a deduction at that time. When a dividend equivalent is paid, the Participant will recognize ordinary income, and we will be entitled to a corresponding deduction. Performance Awards. A Participant who has been granted a performance award will not realize taxable income at the time of grant, and we will not be entitled to a deduction at that time. When an award is paid, whether in cash or common shares, the Participant will have ordinary income, and we will be entitled to a corresponding deduction. Stock Payments. A Participant who receives a stock payment in lieu of a cash payment that would otherwise have been made will be taxed as if the cash payment has been received, and we will have a deduction in the same amount. Section 162(m). Under Internal Revenue Code Section 162(m), in general, income tax deductions of publicly-traded companies may be limited to the extent total compensation (including base salary, annual bonus, stock option exercises and nonqualified benefits paid in 1994 and thereafter) for certain executive officers exceeds $1 million in any one taxable year. However, under Internal Revenue Code Section 162(m), the deduction limit does not apply to certain "performance-based" compensation established by an independent compensation committee which conforms to certain restrictive conditions stated under the Internal Revenue Code and related regulations. The 2002 Incentive Plan has been structured with the intent that Awards granted under the 2002 Incentive Plan may meet the requirements for "performance-based" compensation and Internal Revenue Code Section 162(m). To the extent granted, a fair market value exercise price, options granted under the 2002 Incentive Plan are intended to qualify as "performance-based" under Section 162(m) of the Internal Revenue Code. Restricted Stock granted under the 2002 Incentive Plan may qualify as "performance-based" under Internal Revenue Code Section if it vests based solely upon the Performance Criteria. 22 Required Vote for Approval and Recommendation of the Board of Directors The affirmative vote of a majority of the shares present in person or by proxy at the Annual Meeting, and entitled to vote, is required to approve the 2002 Incentive Plan. Abstentions on this proposal will be counted for purposes of determining the total number of shares that voted on the proposal and thus will have the effect of a vote against the proposal. Shares that are not voted by the broker who is the record holder of the shares (i.e., broker non-votes) and shares that are not voted in other circumstances in which proxy authority is defective or has been withheld, will not be deemed to be entitled to vote for purposes of determining whether stockholder approval of this proposal has been obtained and will have no effect on the outcome of this proposal. THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR APPROVAL OF THE 2002 INCENTIVE AWARD PLAN. 23 Proposal 3 APPROVAL OF AMENDMENT TO THE 1998 EMPLOYEE STOCK PURCHASE PLAN The Company's stockholders are being asked to approve an amendment to the 1998 Employee Stock Purchase Plan (the "Purchase Plan") that will increase the number of shares of Common Stock issuable under the Purchase Plan by an additional 1,100,000 shares, from 1,332,278 to 2,432,278 shares. As of March 27, 2002, 373,150 shares remain available for grant under the Purchase Plan. The purpose of the share increase is to ensure that the Company will continue to have a sufficient reserve of Common Stock available under the Purchase Plan to provide eligible employees of the Company and its participating affiliates with the opportunity to acquire a proprietary interest in the Company through participation in a payroll-deduction based employee stock purchase program designed to operate in compliance with Section 423 of the Internal Revenue Code. The Purchase Plan was adopted by the Board of Directors on March 17, 1998 and became effective on October 1, 1998 (the "Effective Date"). The amendment to the Purchase Plan that is the subject of this Proposal was adopted by the Board on March 28, 2002. The following is a summary of the principal features of the Purchase Plan, as most recently amended. The summary, however, does not purport to be a complete description of all the provisions of the Purchase Plan. Any stockholder of the Company who wishes to obtain a copy of the actual plan document may do so upon written request to the Corporate Secretary at the Company's principal executive offices in Costa Mesa, California. Share Reserve The maximum number of shares of the Company's Common Stock available for issuance over the term of the Purchase Plan may not exceed 2,432,278 shares, which includes the 1,100,000-share increase for which stockholder approval is sought under this Proposal. This share reserve is also be used to fund all stock purchases under the International Employee Stock Purchase Plan which the Company has established for the employees of its foreign subsidiaries. The provisions of the International Employee Stock Purchase Plan are substantially the same as those in effect for the Purchase Plan, except for certain modifications that were made to satisfy legal or regulatory requirements of the applicable foreign jurisdictions. In the event any change is made to the outstanding shares of Common Stock by reason of any recapitalization, stock dividend, stock split, combination of shares, exchange of shares or other change in corporate structure effected without the Company's receipt of consideration, appropriate adjustments will be made to (i) the class and maximum number of securities issuable in the aggregate under the Purchase Plan, including the class and maximum number of securities issuable per Participant or in the aggregate on any one purchase date, and (ii) the class and maximum number of securities subject to each outstanding purchase right and the purchase price payable per share thereunder. Administration The Purchase Plan is currently administered by the Compensation Committee of the Board of Directors. Such committee, as Plan Administrator, has full authority to adopt such rules and procedures as it may deem necessary for proper plan administration and to interpret the provisions of the Purchase Plan. All costs and expenses incurred in plan administration will be paid by the Company without charge to Participants. Offering Periods Shares will be issued through a series of successive six-month offering periods. Each Participant is granted a purchase right to purchase shares of Common Stock on the first day of each offering period under the Purchase Plan in which he or she participates. Offering periods under the Purchase Plan run from the first business day of May to the last business day of October each year 24 and from the first business day of November each year to the last business day of April in the immediately succeeding year. Each purchase right entitles the Participant to purchase the whole number of shares of Common Stock obtained by dividing the Participant's payroll deductions for the offering period by the purchase price in effect for such offering period. Each purchase right is automatically exercised and the shares so purchased are issued, as of the closing day of each offering period. Eligibility Any individual who customarily works for more than twenty (20) hours per week and more than five (5) months per calendar year in the employ of the Company or any participating affiliate will be eligible to participate in one or more offering periods. An eligible employee may only join an offering period by submitting the appropriate forms to the Company on or before the start date of that period. No new forms need to be submitted to continue participation under the Purchase Plan. Participating affiliates include any parent or subsidiary corporations of the Company, whether now existing or hereafter organized, which elect, with the approval of the Plan Administrator, to extend the benefits of the Purchase Plan to their eligible employees. As of March 27, 2002, approximately 818 employees, including four executive officers, were eligible to participate in the Purchase Plan. Purchase Provisions Each Participant authorizes periodic payroll deductions in any multiple of one percent (1%) of his or her cash earnings, up to a maximum of ten percent (10%). A Participant may not increase his or her rate of payroll deduction for an offering period after the start of that period, but he or she may decrease the rate once per offering period. On the last business day of each offering period, the accumulated payroll deductions of each Participant will automatically be applied to the purchase of whole shares of Common Stock at the purchase price in effect for that offering period. Purchase Price The purchase price per share at which Common Stock is purchased by a Participant for each offering period is equal to eighty-five percent (85%) of the lower of (i) the fair market value per share of Common Stock on the start date of that offering period or (ii) the fair market value per share of Common Stock on the last day of that offering period. The fair market value per share of Common Stock on any relevant date is the average of the high and low selling prices per share on such date on the Nasdaq National Market. On March 27, 2002, the fair market value per share of Common Stock determined on such basis was $17.66. Special Limitations The Purchase Plan imposes certain limitations upon a Participant's rights to acquire Common Stock, including the following limitations: - No purchase right may be granted to any individual who owns stock (including stock purchasable under any outstanding options) possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its affiliates. - No purchase right granted to a Participant may permit such individual to purchase Common Stock at a rate greater than $25,000 worth of such Common Stock (valued at the time such purchase right is granted) for each calendar year the purchase right remains outstanding at any time. 25 - No Participant may purchase more than 800 shares of Common Stock on any one purchase date (e.g., the last day of an offering period). - No more than 170,000 shares of Common Stock may be purchased in the aggregate by all Participants on any one purchase date (e.g., the last day of an offering period). The Plan Administrator will have the discretionary authority, exercisable prior to the start of any offering period, to increase or decrease the 800-share and 170,000-share limitations to be in effect for the number of shares purchasable per Participant or in the aggregate by all Participants on each purchase date during that offering period. Termination of Purchase Rights A Participant's purchase right will immediately terminate upon such Participant's loss of eligible employee status, and his or her accumulated payroll deductions for the offering period in which the purchase right terminates will be promptly refunded, without interest. A Participant may withdraw from an offering period at any time prior to the last fifteen (15) days of an offering period and elect to have his or her accumulated payroll deductions for the offering period in which such withdrawal occurs either refunded without interest or applied to the purchase of shares of Common Stock on the next purchase date. Stockholder Rights No Participant will have any stockholder rights with respect to the shares of Common Stock covered by his or her purchase right until the shares are actually purchased on the last day of the offering period. No adjustment will be made for dividends, distributions or other rights for which the record date is prior to the date of such purchase. Shares when issued are deposited to a Company-designated brokerage account maintained for each Participant. Assignability No purchase right or other interest of a Participant under the Purchase Plan is assignable or transferable and may be exercised only by the Participant. Acquisition Should the Company be acquired by merger or asset sale during an offering period, all outstanding purchase rights will automatically be exercised immediately prior to the effective date of such acquisition. The purchase price will be equal to eighty-five (85%) of the lower of (i) the fair market value per share of Common Stock on the start date of that offering period or (ii) the fair market value per share of Common Stock immediately prior to such acquisition. The limitation on the maximum number of shares purchasable in the aggregate on any one purchase date will not apply to the share purchases effected in connection with such acquisition. Amendment and Termination The Purchase Plan will terminate upon the earliest to occur of (i) October 31, 2008, (ii) the date on which all available shares are issued or (iii) the date on which all outstanding purchase rights are exercised in connection with an acquisition of the Company. The Board of Directors may at any time alter, suspend or discontinue the Purchase Plan. However, the Board of Directors may not, without stockholder approval, (i) increase the number of shares issuable under the Purchase Plan, except in connection with certain changes in the Company's capital structure, (ii) alter the purchase price formula so as to reduce the purchase price or (iii) modify the requirements for eligibility to participate in the Purchase Plan. 26 Certain Federal Income Tax Consequences The Purchase Plan is intended to be an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue Code. Under a plan that so qualifies, no taxable income will be recognized by a Participant, and no deductions will be allowable to the Company, in connection with the grant or the exercise of a purchase right under the plan. Taxable income will not be recognized until there is a sale or other disposition of the shares acquired under the Purchase Plan or in the event the Participant should die while still owning the purchased shares. If the Participant sells or otherwise disposes of the purchased shares within two (2) years after the start date of the offering period in which such shares were acquired or within one (1) year after the actual purchase date of those shares, then the Participant will recognize ordinary income in the year of sale or disposition equal to the amount by which the fair market value of the shares on the purchase date exceeded the purchase price paid for those shares, and the Company will be entitled to an income tax deduction, for the taxable year in which such sale or disposition occurs, equal in amount to such excess. If the Participant sells or disposes of the purchased shares more than two (2) years after the start date of the offering period in which such shares were acquired and more than one (1) one year after the actual purchase date of those shares, then the Participant will recognize ordinary income in the year of sale or disposition equal to the lesser of (i) the amount by which the fair market value of the shares on the sale or disposition date exceeded the purchase price paid for those shares or (ii) fifteen percent (15%) of the fair market value of the shares on the start date of the offering period, and any additional gain upon the disposition will be taxed as a long-term capital gain. The Company will not be entitled to any income tax deduction with respect to such sale or disposition. If the Participant still owns the purchased shares at the time of death, the lesser of (i) the amount by which the fair market value of the shares on the date of death exceeds the purchase price or (ii) fifteen percent (15%) of the fair market value of the shares on the start date of the offering period in which those shares were acquired will constitute ordinary income in the year of death. Required Vote for Approval and Recommendation of the Board of Directors The affirmative vote of a majority of the Company's voting stock present or represented and entitled to vote at the Annual Meeting is required for approval of the amendment to the Purchase Plan providing for a 1,100,000 share increase under the Purchase Plan. Abstentions on this proposal will be counted for purposes of determining the total number of shares that voted on the proposal and thus will have the effect of a vote against the proposal. Shares that are not voted by the broker who is the record holder of the shares (i.e., broker non-votes) and shares that are not voted in other circumstances in which proxy authority is defective or has been withheld, will not be deemed to be entitled to vote for purposes of determining whether stockholder approval of this proposal has been obtained and will have no effect on the outcome of this proposal. Should stockholder approval not be obtained, then the 1,100,000 share increase will not be implemented, and any purchase rights granted on the basis of that increase would immediately terminate. No additional purchase rights will be granted on the basis of such share increase, and the Purchase Plan will terminate once the existing share reserve has been issued. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDMENT TO THE PURCHASE PLAN. 27 AUDIT COMMITTEE REPORT The following is the report of the Audit Committee with respect to FileNET Corporation's audited financial statements for the year ended December 31, 2001, which include the consolidated balance sheets of the Company as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2001, and the notes thereto. The information contained in this report shall not be deemed to be "soliciting material" or to be "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference in such filing. Review with Management. The Audit Committee has reviewed and discussed the Company's audited financial statements with management. Review and Discussions with Independent Accountants. The Audit Committee has discussed with Deloitte and Touche LLP, the Company's independent accountants, the matters required to be discussed by SAS 61 (Codification of Statements on Accounting Standards) which includes, among other items, matters related to the conduct of the audit of the Company's financial statements. The Audit Committee has also received written disclosures and the letter from Deloitte and Touche LLP required by Independence Standards Board Standard No. 1 (which relates to the accountant's independence from the Company and its related entities) and has discussed with Deloitte and Touche LLP their independence from the Company. Conclusion. Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the Company's audited financial statements be included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Submitted by the Audit Committee of the Company's Board of Directors: John C. Savage William P. Lyons Roger S. Siboni Notwithstanding anything to the contrary set forth in any of the Company's previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, which might incorporate future filings made by the Company under those statutes, the preceding Audit Committee Report will not be incorporated by reference into any of those prior filings, nor will such report be incorporated by reference into any future filings made by the Company under those statutes. FEES BILLED TO US BY DELOITTE AND TOUCHE LLP DURING 2001 Audit Fees. The aggregate fees billed by Deloitte and Touche LLP, the member firms of Deloitte Tomatsu, and their respective affiliates (collectively, "Deloitte") for professional services rendered for the audit of the Company's annual financial statements for 2001 and for the review of the financial statements included in the Company's Quarterly Reports on Form 10-Q for 2001 were approximately $305,118. Financial Information Systems Design and Implementation Fees. The Company did not engage Deloitte to provide services regarding financial information systems design and implementation during the year ended December 31, 2001. All Other Fees. The aggregate fees billed by Deloitte for professional services rendered to the Company, other than the services described above under "Audit Fees", for the year ended December 31, 2001 were approximately $399,780 and can be subcategorized as follows: 28 Attestation Fees. The aggregate fees for attestation services rendered by Deloitte for matters such as consents related to SEC and other registration statements, audits of employee benefit plans, statutory audits, and consultation on accounting standards or transactions was approximately $141,834. Other Fees. The aggregate fees for all other services rendered by Deloitte such as consultation related to tax planning and compliance and improving business and operational processes was approximately $257,946. The audit committee has considered whether the provision of non-audit services is compatible with maintaining the principal accountant's independence. RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS The firm of Deloitte and Touche LLP, the Company's independent accountants for the year ended December 31, 2001, was selected by the Board of Directors, upon recommendation of the Audit Committee, to act in the same capacity for the year ending December 31, 2002. Neither the firm nor any of its members has any relationship with the Company or any of its affiliates except in the firm's capacity as the Company's auditor. In the event that the stockholders do not approve the selection of Deloitte and Touche LLP, the appointment of the independent accountants will be reconsidered by the Board of Directors. Even if the selection is ratified, the Board of Directors in its discretion may direct the appointment of a different independent accounting firm at any time during the year if the Board of Directors believes that such a change would be in the best interests of the Company and its stockholders. Representatives of Deloitte and Touche LLP are expected to be present at the Annual Meeting and will have the opportunity to make statements if they so desire and respond to appropriate questions from the stockholders. Stockholder Ratification The affirmative vote of a majority of the Company's voting stock present or represented and entitled to vote at the Annual Meeting is required for ratification of the appointment of Deloitte and Touche LLP to serve as the Company's independent accounts for 2002. Abstentions on this proposal will be counted for purposes of determining the total number of shares that voted on the proposal and thus will have the effect of a vote against the proposal. Shares that are not voted by the broker who is the record holder of the shares (i.e., broker non-votes) and shares that are not voted in other circumstances in which proxy authority is defective or has been withheld, will not be deemed to be entitled to vote for purposes of determining whether stockholder approval of this proposal has been obtained and will have no effect on the outcome of this proposal. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF DELOITTE AND TOUCHE LLP AS THE COMPANY'S INDEPENDENT ACCOUNTANTS. STOCKHOLDER PROPOSALS FOR 2003 ANNUAL MEETING It is currently contemplated that the Company's 2003 Annual Meeting of Stockholders will be held on or about May 21, 2003. In the event that a stockholder desires to have a proposal considered for presentation at the 2003 Annual Meeting of Stockholders, and inclusion in the proxy statement and form of proxy used in connection with such meeting, the proposal must be forwarded in writing to the Corporate Secretary of the Company so that it is received no later than December 18, 2002. Any such proposal must comply with the requirements of the Company's Bylaws and Rule 14a-8 promulgated under the Exchange Act. If a stockholder, rather than including a proposal in the Company's proxy statement as discussed above, commences his or her own proxy solicitation for the 2003 Annual Meeting of Stockholders or seeks to nominate a candidate for election or propose business for consideration at such meeting, the Company must receive notice of such proposal no later than December 18, 2002. If the notice is not received by such date, it will be considered untimely under Rule 14a-4(c) 29 promulgated under the Exchange Act, and the Company will have discretionary voting authority under proxies solicited for the 2003 Annual Meeting of Stockholders with respect to such proposal, if presented at the meeting. Proposals and notices should be directed to the attention of the Corporate Secretary, FileNET Corporation, 3565 Harbor Boulevard, Costa Mesa, California 92626. OTHER MATTERS As of the date of this Proxy Statement, the Board of Directors knows of no other matters that may be presented for consideration at the Annual Meeting. However, if any other matter is presented properly for consideration and action at the Annual Meeting, or any adjournment or postponement thereof, it is intended that the Proxies will be voted with respect thereto in accordance with the best judgment and in the discretion of the proxy holders. April 17, 2002 By Order of the Board of Directors, /s/ Sam A. Auriemma Sam M. Auriemma Secretary 30 APPENDIX A THE 2002 INCENTIVE AWARD PLAN OF FILENET CORPORATION FileNET Corporation, a Delaware corporation, has adopted the 2002 Incentive Award Plan of FileNET Corporation, (the "Plan"), effective May 22, 2002 ("Effective Date"), for the benefit of its eligible employees, consultants and directors. The purposes of the Plan are as follows: (1) To provide an additional incentive for directors, key Employees and Consultants (as such terms are defined below) to further the growth, development and financial success of the Company by personally benefiting through the ownership of Company stock and/or rights which recognize such growth, development and financial success. (2) To enable the Company to obtain and retain the services of directors, key Employees and Consultants considered essential to the long range success of the Company by offering them an opportunity to own stock in the Company and/or rights which will reflect the growth, development and financial success of the Company. ARTICLE I. DEFINITIONS Wherever the following terms are used in the Plan they shall have the meanings specified below, unless the context clearly indicates otherwise. The singular pronoun shall include the plural where the context so indicates. 1.1. "Administrator" shall mean the entity that conducts the general administration of the Plan as provided herein. With reference to the administration of the Plan with respect to Options granted to Independent Directors, the term "Administrator" shall refer to the Board. With reference to the administration of the Plan with respect to any other Award, the term "Administrator" shall refer to the Committee, unless the Board has assumed the authority for administration of the Plan generally as provided in Section 10.1 or the Committee has delegated its authority to administer the Plan as provided in Section 10.5, in which events "Administrator" shall refer to the Board or such delegated sub-committee, as applicable. 1.2. "Award" shall mean an Option, a Restricted Stock award, a Performance Award, a Dividend Equivalents award, a Deferred Stock award, a Stock Payment award or a Stock Appreciation Right which may be awarded or granted under the Plan (collectively, "Awards"). 1.3. "Award Agreement" shall mean a written agreement executed by an authorized officer of the Company and the Holder, which shall contain such terms and conditions with respect to an Award as the Administrator shall determine, consistent with the Plan. 1.4. "Award Limit" shall mean 400,000 shares of Common Stock, as adjusted pursuant to Section 11.3; provided, however, that solely with respect to Performance Awards granted pursuant to Section 8.2(b), Award Limit shall mean Seven Hundred Fifty Thousand Dollars ($750,000). 1.5. "Board" shall mean the Board of Directors of the Company. 1.6. "Change in Control" shall mean a change in ownership or control of the Company effected through any of the following transactions: 1 (a) Any person or related group of persons (other than the Company or a person that, prior to such transaction, directly or indirectly controls, is controlled by, or is under common control with, the Company) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities possessing more than 50% of the total combined voting power of the Company's outstanding securities pursuant to a tender or exchange offer made directly to the Company's stockholders which the Board does not recommend such stockholders accept; or (b) There is a change in the composition of the Board over a period of 36 consecutive months (or less) such that a majority of the Board members (rounded up to the nearest whole number) ceases, by reason of one or more proxy contests for the election of Board members, to be comprised of individuals who either (i) have been Board members continuously since the beginning of such period, or (ii) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved by the Board; or 1.7. "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.8. "Committee" shall mean the Compensation Committee of the Board, or another committee or subcommittee of the Board, appointed as provided in Section 10.1. 1.9. "Common Stock" shall mean the common stock of the Company, par value $0.01 per share. 1.10. "Company" shall mean FileNET Corporation, a Delaware corporation. 1.11. "Consultant" shall mean any consultant or adviser if: (a) The consultant or adviser renders bona fide services to the Company; (b) The services rendered by the consultant or adviser are not in connection with the offer or sale of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for the Company's securities; and (c) The consultant or adviser is a natural person who has contracted directly with the Company to render such services. 1.12. "Corporate Transaction" shall mean: (a) The stockholders of the Company approve a merger or consolidation of the Company with any other corporation (or other entity), other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 25% of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control; or (b) The stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets.] 1.13. "Deferred Stock" shall mean Common Stock awarded under Article VIII of the Plan. 1.14. "Director" shall mean a member of the Board. 2 1.15. "Dividend Equivalent" shall mean a right to receive the equivalent value (in cash or Common Stock) of dividends paid on Common Stock, awarded under Article VIII of the Plan. 1.16. "DRO" shall mean a domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. 1.17. "Effective Date" shall mean May 22, 2002. 1.18. "Employee" shall mean any officer or other employee (as defined in accordance with Section 3401(c) of the Code) of the Company, or of any corporation that is a Subsidiary. 1.19. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 1.20. "Fair Market Value" of a share of Common Stock as of a given date shall be (a) the average of the high and low selling prices of a share of Common Stock on the principal exchange or the Nasdaq Stock Market on which shares of Common Stock are then trading, if any (or as reported on any composite index which includes such principal exchange), on such date, or if shares were not traded on such date, then on the next preceding date on which a trade occurred, or (b) if Common Stock is not traded on an exchange or the Nasdaq Stock Market, but is quoted on Nasdaq or a successor quotation system, the average of the closing representative bid and asked prices for the Common Stock on such date as reported by Nasdaq or such successor quotation system, or (c) if Common Stock is not publicly traded on an exchange and not quoted on Nasdaq or a successor quotation system, the Fair Market Value of a share of Common Stock as established by the Administrator acting in good faith. 1.21. "Holder" shall mean a person who has been granted or awarded an Award. 1.22. "Incentive Stock Option" shall mean an option which conforms to the applicable provisions of Section 422 of the Code and which is designated as an Incentive Stock Option by the Administrator. 1.23. "Independent Director" shall mean a member of the Board who is not an Employee of the Company. 1.24. "Non-Qualified Stock Option" shall mean an Option that is not designated as an Incentive Stock Option by the Administrator. 1.25. "Option" shall mean a stock option granted under Article IV of the Plan. An Option granted under the Plan shall, as determined by the Administrator, be either a Non-Qualified Stock Option or an Incentive Stock Option; provided, however, that Options granted to Independent Directors and Consultants shall be Non-Qualified Stock Options. 1.26. "Performance Award" shall mean a cash bonus, stock bonus or other performance or incentive award that is paid in cash, Common Stock or a combination of both, awarded under Article VIII of the Plan. 1.27. "Performance Criteria" shall mean the following business criteria with respect to the Company, any Subsidiary or any division or operating unit: (a) net income, (b) pre-tax income, (c) operating income, (d) cash flow, (e) earnings per share, (f) return on equity, (g) return on invested capital or assets, (h) cost reductions or savings, (i) funds from operations, (j) appreciation in the fair market value of Common Stock, and (k) earnings before any one or more of the following items: interest, taxes, depreciation or amortization each as determined in accordance with generally accepted accounting principles or subject to such adjustments as may be specified by the Committee with respect to a Performance Award. 1.28. "Permanent Disability" shall mean, for purposes of Awards granted to Independent Directors, the inability of the Holder to perform his usual duties as a Board member by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve months or more. 1.29. "Plan" shall mean the 2002 Incentive Award Plan of FileNET Corporation, as amended and/or restated from time to time. 3 1.30. "Restricted Stock" shall mean Common Stock awarded under Article VII of the Plan. 1.31. "Rule 16b-3" shall mean Rule 16b-3 promulgated under the Exchange Act, as such Rule may be amended from time to time. 1.32. "Section 162(m) Participant" shall mean any key Employee designated by the Administrator as a key Employee whose compensation for the fiscal year in which the key Employee is so designated or a future fiscal year may be subject to the limit on deductible compensation imposed by Section 162(m) of the Code. 1.33. "Securities Act" shall mean the Securities Act of 1933, as amended. 1.34. "Stock Appreciation Right" shall mean a stock appreciation right granted under Article IX of the Plan. 1.35. "Stock Payment" shall mean (a) a payment in the form of shares of Common Stock, or (b) an option or other right to purchase shares of Common Stock, as part of a deferred compensation arrangement, made in lieu of all or any portion of the compensation, including without limitation, salary, bonuses and commissions, that would otherwise become payable to a key Employee or Consultant in cash, awarded under Article VIII of the Plan. 1.36. "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 1.37. "Substitute Award" shall mean an Option granted under this Plan upon the assumption of, or in substitution for, outstanding equity awards previously granted by a company or other entity in connection with a corporate transaction, such as a merger, combination, consolidation or acquisition of property or stock; provided, however, that in no event shall the term "Substitute Award" be construed to refer to an award made in connection with the cancellation and repricing of an Option. 1.38. "Termination of Consultancy" shall mean the time when the engagement of a Holder as a Consultant to the Company or a Subsidiary is terminated for any reason, with or without cause, including, but not by way of limitation, by resignation, discharge, death or retirement, but excluding terminations where there is a simultaneous commencement of employment with the Company or any Subsidiary. The Administrator, in its absolute discretion, shall determine the effect of all matters and questions relating to Termination of Consultancy, including, but not by way of limitation, the question of whether a Termination of Consultancy resulted from a discharge for good cause, and all questions of whether a particular leave of absence constitutes a Termination of Consultancy. Notwithstanding any other provision of the Plan, the Company or any Subsidiary has an absolute and unrestricted right to terminate a Consultant's service at any time for any reason whatsoever, with or without cause, except to the extent expressly provided otherwise in writing. 1.39. "Termination of Directorship" shall mean the time when a Holder who is an Independent Director ceases to be a Director for any reason, including, but not by way of limitation, a termination by resignation, failure to be elected, death or retirement. The Board, in its sole and absolute discretion, shall determine the effect of all matters and questions relating to Termination of Directorship with respect to Independent Directors. 1.40. "Termination of Employment" shall mean the time when the employee-employer relationship between a Holder and the Company or any Subsidiary is terminated for any reason, with or without cause, including, but not by way of limitation, a termination by resignation, discharge, death, disability or retirement; but excluding (a) terminations where there is a simultaneous reemployment or continuing employment of a Holder by the Company or any Subsidiary, (b) at the discretion of the Administrator, terminations which result in a temporary severance of the employee-employer relationship, and (c) at the discretion of the Administrator, terminations which are followed by the simultaneous establishment of a consulting relationship by the Company or a Subsidiary with the former employee. The Administrator, in its absolute discretion, shall determine the effect of all matters and questions relating to Termination of Employment, including, but not by way of limitation, the question 4 of whether a Termination of Employment resulted from a discharge for good cause, and all questions of whether a particular leave of absence constitutes a Termination of Employment; provided, however, that, with respect to Incentive Stock Options, unless otherwise determined by the Administrator in its discretion, a leave of absence, change in status from an employee to an independent contractor or other change in the employee-employer relationship shall constitute a Termination of Employment if, and to the extent that, such leave of absence, change in status or other change interrupts employment for the purposes of Section 422(a)(2) of the Code and the then applicable regulations and revenue rulings under said Section. ARTICLE II. SHARES SUBJECT TO PLAN 2.1. Shares Subject to Plan. (a) The shares of stock subject to Awards shall be Common Stock, initially shares of the Company's Common Stock. Subject to adjustment as provided in Section 11.3, the aggregate number of such shares which may be issued upon exercise of such Options or rights or upon any other Awards under the Plan shall not exceed One Million Three Hundred and Fifty Thousand (1,400,000) shares, and the aggregate number of shares that may be issued as Restricted Stock shall not exceed One Hundred and Thirty-Five Thousand (140,000) shares. The shares of Common Stock issuable upon exercise of such Options or rights or upon any other Awards may be either previously authorized but unissued shares or treasury shares. (b) The maximum number of shares which may be subject to Awards granted under the Plan to any individual in any calendar year shall not exceed the Award Limit. 2.2 Add-back of Options and Other Awards. If any Option, or other right to acquire shares of Common Stock under any other Award under the Plan, expires or is canceled without having been fully exercised, or is exercised in whole or in part for cash as permitted by the Plan, the number of shares subject to such Option or other right but as to which such Option or other right was not exercised prior to its expiration, cancellation or exercise may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Furthermore, any shares subject to Awards which are adjusted pursuant to Section 11.3 and become exercisable with respect to shares of stock of another corporation shall be considered cancelled and may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Shares of Common Stock which are delivered by the Holder or withheld by the Company upon the exercise of any Award under the Plan, in payment of the exercise price thereof or tax withholding thereon, may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. If any shares of Restricted Stock are surrendered by the Holder or repurchased by the Company pursuant to Section 7.4 or 7.5 hereof, such shares may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Notwithstanding the provisions of this Section 2.2, no shares of Common Stock may again be optioned, granted or awarded if such action would cause an Incentive Stock Option to fail to qualify as an incentive stock option under Section 422 of the Code. ARTICLE III. GRANTING OF AWARDS 3.1. Award Agreement. Each Award shall be evidenced by an Award Agreement. Award Agreements evidencing Awards intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. Award Agreements evidencing Incentive Stock Options shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 422 of the Code. 3.2. Provisions Applicable to Section 162(m) Participants. (a) The Administrator, in its discretion, may determine whether an Award is to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code. 5 (b) Notwithstanding anything in the Plan to the contrary, the Administrator may grant any Award to a Section 162(m) Participant, including Restricted Stock the restrictions with respect to which lapse upon the attainment of performance goals which are related to one or more of the Performance Criteria and any performance or incentive award described in Article VIII that vests or becomes exercisable or payable upon the attainment of performance goals which are related to one or more of the Performance Criteria. (c) To the extent necessary to comply with the performance-based compensation requirements of Section 162(m)(4)(C) of the Code, with respect to any Award granted under Articles VII and VIII which may be granted to one or more Section 162(m) Participants, no later than ninety (90) days following the commencement of any fiscal year in question or any other designated fiscal period or period of service (or such other time as may be required or permitted by Section 162(m) of the Code), the Administrator shall, in writing, (i) designate one or more Section 162(m) Participants, (ii) select the Performance Criteria applicable to the fiscal year or other designated fiscal period or period of service, (iii) establish the various performance targets, in terms of an objective formula or standard, and amounts of such Awards, as applicable, which may be earned for such fiscal year or other designated fiscal period or period of service, and (iv) specify the relationship between Performance Criteria and the performance targets and the amounts of such Awards, as applicable, to be earned by each Section 162(m) Participant for such fiscal year or other designated fiscal period or period of service. Following the completion of each fiscal year or other designated fiscal period or period of service, the Administrator shall certify in writing whether the applicable performance targets have been achieved for such fiscal year or other designated fiscal period or period of service. In determining the amount earned by a Section 162(m) Participant, the Administrator shall have the right to reduce (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Administrator may deem relevant to the assessment of individual or corporate performance for the fiscal year or other designated fiscal period or period of service. (d) Furthermore, notwithstanding any other provision of the Plan or any Award which is granted to a Section 162(m) Participant and is intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as performance-based compensation as described in Section 162(m)(4)(C) of the Code, and the Plan shall be deemed amended to the extent necessary to conform to such requirements. 3.3. Limitations Applicable to Section 16 Persons. Notwithstanding any other provision of the Plan, the Plan, and any Award granted or awarded to any individual who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by applicable law, the Plan and Awards granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such applicable exemptive rule. 3.4. Consideration. In consideration of the granting of an Award under the Plan, the Holder shall agree, in the Award Agreement, to remain in the employ of (or to consult for or to serve as an Independent Director of, as applicable) the Company or any Subsidiary for a period of at least one year (or such shorter period as may be fixed in the Award Agreement or by action of the Administrator following grant of the Award) after the Award is granted (or, in the case of an Independent Director, until the next annual meeting of stockholders of the Company). 3.5. At-Will Employment. Nothing in the Plan or in any Award Agreement hereunder shall confer upon any Holder any right to continue in the employ of, or as a Consultant for, the Company or any Subsidiary, or as a director of the Company, or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Holder at any time for any reason whatsoever, with or without cause, except to the extent expressly provided otherwise in a written employment agreement between the Holder and the Company and any Subsidiary. 6 ARTICLE IV. GRANTING OF OPTIONS TO EMPLOYEES, CONSULTANTS AND INDEPENDENT DIRECTORS 4.1. Eligibility. Any Employee or Consultant selected by the Administrator pursuant to Section 4.4(a)(i) shall be eligible to be granted an Option. Each Independent Director of the Company shall be eligible to be granted Options at the times and in the manner set forth in Section 4.5. 4.2. Disqualification for Stock Ownership. No person may be granted an Incentive Stock Option under the Plan if such person, at the time the Incentive Stock Option is granted, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any then existing Subsidiary or parent corporation (within the meaning of Section 422 of the Code) unless such Incentive Stock Option conforms to the applicable provisions of Section 422 of the Code. 4.3. Qualification of Incentive Stock Options. No Incentive Stock Option shall be granted to any person who is not an Employee. 4.4. Granting of Options to Employees and Consultants. (a) The Administrator shall from time to time, in its absolute discretion, and subject to applicable limitations of the Plan: (i) Determine which Employees are key Employees and select from among the key Employees or Consultants (including Employees or Consultants who have previously received Awards under the Plan) such of them as in its opinion should be granted Options; (ii) Subject to the Award Limit, determine the number of shares to be subject to such Options granted to the selected key Employees or Consultants; (iii) Subject to Section 4.3, determine whether such Options are to be Incentive Stock Options or Non-Qualified Stock Options and whether such Options are to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code; and (iv) Determine the terms and conditions of such Options, consistent with the Plan; provided, however, that the terms and conditions of Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall include, but not be limited to, such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. (b) Upon the selection of a key Employee or Consultant to be granted an Option, the Administrator shall instruct the Secretary of the Company to issue the Option and may impose such conditions on the grant of the Option as it deems appropriate. (c) Any Incentive Stock Option granted under the Plan may be modified by the Administrator, with the consent of the Holder, to disqualify such Option from treatment as an "incentive stock option" under Section 422 of the Code. 4.5. Automatic Granting of Options to Independent Directors. During the term of the Plan, each person who is an Independent Director as of the Effective Date automatically shall be granted an Option to purchase 7,000 shares of Common Stock (subject to adjustment as provided in Section 11.3) on the date of each annual meeting of stockholders at which the Independent Director is reelected to the Board, commencing with the 2002 Annual Meeting of Stockholders. During the term of the Plan, a person who is initially elected or appointed to the Board after the Effective Date and who is an Independent Director at the time of such initial election or appointment automatically shall be granted (x) an Option to purchase 25,000 shares of Common Stock (subject to adjustment as provided in Section 11.3) on the date of such initial election or appointment, and (y) an Option to purchase 7,000 shares of Common Stock (subject to adjustment as provided in Section 11.3) on the date of each annual meeting of stockholders 7 after such initial election or appointment, at which the Independent Director is reelected to the Board, provided such individual has served as an Independent Director for at least six months prior to the date of such annual meeting of stockholders. Members of the Board who are employees of the Company who subsequently retire from the Company and remain on the Board will not receive an initial Option grant pursuant to clause (x) of the preceding sentence, but to the extent that they are otherwise eligible, will receive, after retirement from employment with the Company, Options as described in clause (y) of the preceding sentence. Certain material terms of the Options granted pursuant to this Section 4.5 are set forth in Section 5.4. All the foregoing Option grants authorized by this Section 4.5 are subject to stockholder approval of the Plan. 4.6. Discretionary Granting of Options to Independent Directors. The Board may from time to time, in its absolute discretion, and subject to applicable limitations of the Plan: (a) Select from among the Independent Directors (including Independent Directors who have previously received Options under the Plan) such of them as in its opinion should be granted Options; (b) Subject to the Award Limit, determine the number of shares to be subject to such Options granted to the selected Independent Directors; (c) Subject to the provisions of Article 5, determine the terms and conditions of such Options, consistent with the Plan. 4.7. Options in Lieu of Cash Compensation. Options may be granted under the Plan to Employees and Consultants in lieu of cash bonuses which would otherwise be payable to such Employees and Consultants and to Independent Directors in lieu of directors' fees which would otherwise be payable to such Independent Directors, pursuant to such policies which may be adopted by the Administrator from time to time. ARTICLE V. TERMS OF OPTIONS 5.1 Option Price. The price per share of the shares subject to each Option granted to Employees and Consultants shall be set by the Administrator; provided, however, that such price shall be no less than 85% of the Fair Market Value of a share of Common Stock on the date the Option is granted and: (a) In the case of Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code, such price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted; (b) In the case of Incentive Stock Options such price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted (or the date the Option is modified, extended or renewed for purposes of Section 424(h) of the Code); (c) In the case of Incentive Stock Options granted to an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation thereof (within the meaning of Section 422 of the Code), such price shall not be less than 110% of the Fair Market Value of a share of Common Stock on the date the Option is granted (or the date the Option is modified, extended or renewed for purposes of Section 424(h) of the Code). 5.2 Option Term. The term of an Option granted to an Employee or consultant shall be set by the Administrator in its discretion; provided, however, that, the term shall not be more than ten years from the date the Option is granted, or five years from the date the Incentive Stock Option is granted if the Incentive Stock Option is granted to an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation thereof (within the meaning of Section 422 of the Code). Except as limited by requirements of Section 422 of the Code and regulations and rulings thereunder applicable to Incentive Stock Options, the Administrator may extend 8 the term of any outstanding Option in connection with any Termination of Employment or Termination of Consultancy of the Holder, or amend any other term or condition of such Option relating to such a termination. 5.3 Option Vesting. (a) The period during which the right to exercise, in whole or in part, an Option granted to an Employee or a Consultant vests in the Holder shall be set by the Administrator and the Administrator may determine that an Option may not be exercised in whole or in part for a specified period after it is granted. At any time after grant of an Option, the Administrator may, in its sole and absolute discretion and subject to whatever terms and conditions it selects, accelerate the period during which an Option granted to an Employee or Consultant vests. (b) No portion of an Option granted to an Employee or Consultant which is unexercisable at Termination of Employment or Termination of Consultancy, as applicable, shall thereafter become exercisable, except as may be otherwise provided by the Administrator either in the Award Agreement or by action of the Administrator following the grant of the Option. (c) To the extent that the aggregate Fair Market Value of stock with respect to which "incentive stock options" (within the meaning of Section 422 of the Code, but without regard to Section 422(d) of the Code) are exercisable for the first time by a Holder during any calendar year (under the Plan and all other incentive stock option plans of the Company and any parent or subsidiary corporation, within the meaning of Section 422 of the Code) of the Company, exceeds $100,000, such Options shall be treated as Non-Qualified Stock Options to the extent required by Section 422 of the Code. The rule set forth in the preceding sentence shall be applied by taking Options into account in the order in which they were granted. For purposes of this Section 5.3(c), the Fair Market Value of stock shall be determined as of the time the Option with respect to such stock is granted. 5.4 Terms of Options Automatically Granted to Independent Directors Pursuant to Section 4.5. Options granted to an Independent Director pursuant to Section 4.5 shall be subject to the following terms and conditions: (a) The exercise price per share shall equal 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted. (b) The Options shall become exercisable in cumulative annual installments of 25% on each of the first, second, third and fourth anniversaries of the date of Option grant, except that any Option granted to an Independent Director shall become immediately exercisable in full upon the Termination of Directorship due to death or Permanent Disability of the Independent Director. (c) Subject to Section 6.6, the term of each Option granted to an Independent Director shall be ten years from the date the Option is granted. (d) No portion of an Option which is unexercisable at Termination of Directorship shall thereafter become exercisable. (e) Each vested Option may be exercised until the earlier of (i) the expiration of the Option term or (ii) 12 months following the Independent Director's cessation of service on the Board for any reason. 5.5 Substitute Awards. Notwithstanding the foregoing provisions of this Article V to the contrary, in the case of an Option that is a Substitute Award, the price per share of the shares subject to such Option may be less than the Fair Market Value per share on the date of grant, provided, that the excess of: (a) The aggregate Fair Market Value (as of the date such Substitute Award is granted) of the shares subject to the Substitute Award; over 9 (b) The aggregate exercise price thereof; does not exceed the excess of: (c) The aggregate fair market value (as of the time immediately preceding the transaction giving rise to the Substitute Award, such fair market value to be determined by the Administrator) of the shares of the predecessor entity that were subject to the grant assumed or substituted for by the Company; over (d) The aggregate exercise price of such shares. ARTICLE VI. EXERCISE OF OPTIONS 6.1. Partial Exercise. An exercisable Option may be exercised in whole or in part. However, an Option shall not be exercisable with respect to fractional shares and the Administrator may require that, by the terms of the Option, a partial exercise be with respect to a minimum number of shares. 6.2. Manner of Exercise. All or a portion of an exercisable Option shall be deemed exercised upon delivery of all of the following to the Secretary of the Company or his or her office: (a) A notice complying with the applicable rules established by the Administrator stating that the Option, or a portion thereof, is exercised. (b) Such representations and documents as the Administrator, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act and any other federal or state securities laws or regulations. The Administrator may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer notices to agents and registrars; (c) In the event that the Option shall be exercised pursuant to Section 11.1 by any person or persons other than the Holder, appropriate proof of the right of such person or persons to exercise the Option; and (d) Full cash payment to the of the Company for the shares with respect to which the Option, or portion thereof, is exercised. However, the Administrator may, in its discretion, (i) allow a delay in payment up to 30 days from the date the Option, or portion thereof, is exercised; (ii) allow payment, in whole or in part, through the delivery of shares of Common Stock which have been owned by the Holder for at least six months, duly endorsed for transfer to the Company with a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof; (iii) allow payment, in whole or in part, through the surrender of shares of Common Stock then issuable upon exercise of the Option having a Fair Market Value on the date of Option exercise equal to the aggregate exercise price of the Option or exercised portion thereof; (iv) allow payment, in whole or in part, through the delivery of property of any kind which constitutes good and valuable consideration; (v) allow payment, in whole or in part, through the delivery of a full recourse promissory note bearing interest (at no less than such rate as shall then preclude the imputation of interest under the Code) and payable upon such terms as may be prescribed by the Administrator; (vi) allow payment, in whole or in part, through the delivery of a notice that the Holder has placed a market sell order with a broker with respect to shares of Common Stock then issuable upon exercise of the Option, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the Option exercise price, provided that payment of such proceeds is then made to the Company upon settlement of such sale; or (vii) allow payment through any combination of the consideration provided in the foregoing subparagraphs (ii), (iii), (iv), (v) and (vi). In the case of a promissory note, the Administrator may also prescribe the form of such note and the security to be given for such note. 10 The Option may not be exercised, however, by delivery of a promissory note or by a loan from the Company when or where such loan or other extension of credit is prohibited by law. 6.3. Conditions to Issuance of Stock Certificates. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which such class of stock is then listed; (b) The completion of any registration or other qualification of such shares under any state or federal law, or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body which the Administrator shall, in its absolute discretion, deem necessary or advisable; (c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Administrator shall, in its absolute discretion, determine to be necessary or advisable; (d) The lapse of such reasonable period of time following the exercise of the Option as the Administrator may establish from time to time for reasons of administrative convenience; and (e) The receipt by the Company of full payment for such shares, including payment of any applicable withholding tax, which in the discretion of the Administrator may be in the form of consideration used by the Holder to pay for such shares under Section 6.2(d). 6.4. Rights as Stockholders. Holders shall not be, nor have any of the rights or privileges of, stockholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until certificates representing such shares have been issued by the Company to such Holders. 6.5. Ownership and Transfer Restrictions. The Administrator, in its absolute discretion, may impose such restrictions on the ownership and transferability of the shares purchasable upon the exercise of an Option as it deems appropriate. Any such restriction shall be set forth in the respective Award Agreement and may be referred to on the certificates evidencing such shares. The Holder shall give the Company prompt notice of any disposition of shares of Common Stock acquired by exercise of an Incentive Stock Option within (a) two years from the date of granting (including the date the Option is modified, extended or renewed for purposes of Section 424(h) of the Code) such Option to such Holder, or (b) one year after the transfer of such shares to such Holder. 6.6. Limitations on Exercise of Options Granted to Independent Directors. No Option granted to an Independent Director may be exercised to any extent by anyone after the first to occur of the following events: (a) The expiration of twelve months from the date of the Holder's Termination of Directorship; or (b) The expiration of ten years from the date the Option was granted. 6.7. Additional Limitations on Exercise of Options. Holders may be required to comply with any timing or other restrictions with respect to the settlement or exercise of an Option, including a window-period limitation, as may be imposed in the discretion of the Administrator. 11 ARTICLE VII. AWARD OF RESTRICTED STOCK 7.1. Eligibility. Subject to the Award Limit, Restricted Stock may be awarded to any Employee who the Administrator determines is a key Employee or any Consultant who the Administrator determines should receive such an Award. 7.2. Award of Restricted Stock. (a) The Administrator may from time to time, in its absolute discretion: (i) Determine which Employees are key Employees and select from among the key Employees or Consultants (including Employees or Consultants who have previously received other awards under the Plan) such of them as in its opinion should be awarded Restricted Stock; and (ii) Determine the purchase price, if any, and other terms and conditions applicable to such Restricted Stock, consistent with the Plan. (b) The Administrator shall establish the purchase price, if any, and form of payment for Restricted Stock; provided, however, that such purchase price shall be no less than the par value of the Common Stock to be purchased, unless otherwise permitted by applicable state law. In all cases, legal consideration shall be required for each issuance of Restricted Stock. (c) Upon the selection of a key Employee or Consultant to be awarded Restricted Stock, the Administrator shall instruct the Secretary of the Company to issue such Restricted Stock and may impose such conditions on the issuance of such Restricted Stock as it deems appropriate. 7.3. Rights as Stockholders. Subject to Section 7.4, upon delivery of the shares of Restricted Stock to the escrow holder pursuant to Section 7.6, the Holder shall have, unless otherwise provided by the Administrator, all the rights of a stockholder with respect to said shares, subject to the restrictions in his or her Award Agreement, including the right to receive all dividends and other distributions paid or made with respect to the shares; provided, however, that in the discretion of the Administrator, any extraordinary distributions with respect to the Common Stock shall be subject to the restrictions set forth in Section 7.4. 7.4. Restriction. All shares of Restricted Stock issued under the Plan (including any shares received by holders thereof with respect to shares of Restricted Stock as a result of stock dividends, stock splits or any other form of recapitalization) shall, in the terms of each individual Award Agreement, be subject to such restrictions as the Administrator shall provide, which restrictions may include, without limitation, restrictions concerning voting rights and transferability and restrictions based on duration of employment with the Company, Company performance and individual performance; provided, however, that, unless the Administrator otherwise provides in the terms of the Award Agreement or otherwise, no share of Restricted Stock granted to a person subject to Section 16 of the Exchange Act shall be sold, assigned or otherwise transferred until at least six months and one day have elapsed from the date on which the Restricted Stock was issued, and provided, further, that, except with respect to shares of Restricted Stock granted to Section 162(m) Participants and intended to be "performance-based" compensation under Section 162(m) of the Code, by action taken after the Restricted Stock is issued, the Administrator may, on such terms and conditions as it may determine to be appropriate, remove any or all of the restrictions imposed by the terms of the Award Agreement. Restricted Stock may not be sold or encumbered until all restrictions are terminated or expire. If no consideration was paid by the Holder upon issuance, a Holder's rights in unvested Restricted Stock shall lapse, and such Restricted Stock shall be surrendered to the Company without consideration, upon Termination of Employment or, if applicable, upon Termination of Consultancy with the Company; provided, however, that the Administrator in its sole and absolute discretion may provide that such rights shall not lapse in the event of a Termination of Employment following a "change of ownership or control" (within the meaning of Treasury Regulation Section 1.162-27(e)(2)(v) or any successor regulation thereto) of the Company or because of the Holder's death or disability; provided, further, 12 except with respect to shares of Restricted Stock granted to Section 162(m) Participants, the Administrator in its sole and absolute discretion may provide that no such lapse or surrender shall occur in the event of a Termination of Employment, or a Termination of Consultancy, without cause or following any Change in Control of the Company or because of the Holder's retirement, or otherwise. 7.5. Repurchase of Restricted Stock. The Administrator shall provide in the terms of each individual Award Agreement that the Company shall have the right to repurchase from the Holder the Restricted Stock then subject to restrictions under the Award Agreement immediately upon a Termination of Employment or, if applicable, upon a Termination of Consultancy between the Holder and the Company, at a cash price per share equal to the price paid by the Holder for such Restricted Stock; provided, however, that the Administrator in its sole and absolute discretion may provide that no such right of repurchase shall exist in the event of a Termination of Employment following a "change of ownership or control" (within the meaning of Treasury Regulation Section 1.162-27(e)(2)(v) or any successor regulation thereto) of the Company or because of the Holder's death or disability; provided, further, that, except with respect to shares of Restricted Stock granted to Section 162(m) Participants, the Administrator in its sole and absolute discretion may provide that no such right of repurchase shall exist in the event of a Termination of Employment or a Termination of Consultancy without cause or following any Change in Control of the Company or because of the Holder's retirement, or otherwise. 7.6. Escrow. The Secretary of the Company or such other escrow holder as the Administrator may appoint shall retain physical custody of each certificate representing Restricted Stock until all of the restrictions imposed under the Award Agreement with respect to the shares evidenced by such certificate expire or shall have been removed. 7.7. Legend. In order to enforce the restrictions imposed upon shares of Restricted Stock hereunder, the Administrator shall cause a legend or legends to be placed on certificates representing all shares of Restricted Stock that are still subject to restrictions under Award Agreements, which legend or legends shall make appropriate reference to the conditions imposed thereby. 7.8. Section 83(b) Election. If a Holder makes an election under Section 83(b) of the Code, or any successor section thereto, to be taxed with respect to the Restricted Stock as of the date of transfer of the Restricted Stock rather than as of the date or dates upon which the Holder would otherwise be taxable under Section 83(a) of the Code, the Holder shall deliver a copy of such election to the Company immediately after filing such election with the Internal Revenue Service. ARTICLE VIII. PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS, DEFERRED STOCK, STOCK PAYMENTS 8.1. Eligibility. Subject to the Award Limit, one or more Performance Awards, Dividend Equivalents, awards of Deferred Stock and/or Stock Payments may be granted to any Employee whom the Administrator determines is a key Employee or any Consultant whom the Administrator determines should receive such an Award. 8.2. Performance Awards. (a) Any key Employee or Consultant selected by the Administrator may be granted one or more Performance Awards. The value of such Performance Awards may be linked to any one or more of the Performance Criteria or other specific performance criteria determined appropriate by the Administrator, in each case on a specified date or dates or over any period or periods determined by the Administrator. In making such determinations, the Administrator shall consider (among such other factors as it deems relevant in light of the specific type of award) the contributions, responsibilities and other compensation of the particular key Employee or Consultant. (b) Without limiting Section 8.2(a), the Administrator may grant Performance Awards to any 162(m) Participant in the form of a cash bonus payable upon the attainment of objective performance goals which are established by the Administrator and relate to one or more of the Performance Criteria, in each case on a specified date or dates or over any period or periods determined by the Administrator. Any such bonuses paid to 162(m) Participants shall be based upon objectively determinable bonus 13 formulas established in accordance with the provisions of Section 3.2. The maximum amount of any Performance Award payable to a 162(m) Participant under this Section 8.2(b) shall not exceed the Award Limit with respect to any calendar year of the Company. Unless otherwise specified by the Administrator at the time of grant, the Performance Criteria payable to a Section 162(m) Participant shall be determined on the basis of generally accepted accounting principles. 8.3. Dividend Equivalents. (a) Any key Employee or Consultant selected by the Administrator may be granted Dividend Equivalents based on the dividends declared on Common Stock, to be credited as of dividend payment dates, during the period between the date a Stock Appreciation Right, Deferred Stock or Performance Award is granted, and the date such Stock Appreciation Right, Deferred Stock or Performance Award is exercised, vests or expires, as determined by the Administrator. Such Dividend Equivalents shall be converted to cash or additional shares of Common Stock by such formula and at such time and subject to such limitations as may be determined by the Administrator. (b) Any Holder of an Option who is an Employee or Consultant selected by the Administrator may be granted Dividend Equivalents based on the dividends declared on Common Stock, to be credited as of dividend payment dates, during the period between the date an Option is granted, and the date such Option is exercised, vests or expires, as determined by the Administrator. Such Dividend Equivalents shall be converted to cash or additional shares of Common Stock by such formula and at such time and subject to such limitations as may be determined by the Administrator. (c) Any Holder of an Option who is an Independent Director selected by the Board may be granted Dividend Equivalents based on the dividends declared on Common Stock, to be credited as of dividend payment dates, during the period between the date an Option is granted and the date such Option is exercised, vests or expires, as determined by the Board. Such Dividend Equivalents shall be converted to cash or additional shares of Common Stock by such formula and at such time and subject to such limitations as may be determined by the Board. (d) Dividend Equivalents granted with respect to Options intended to be qualified performance-based compensation for purposes of Section 162(m) of the Code shall be payable, with respect to pre-exercise periods, regardless of whether such Option is subsequently exercised. 8.4. Stock Payments. Any key Employee or Consultant selected by the Administrator may receive Stock Payments in the manner determined from time to time by the Administrator. The number of shares shall be determined by the Administrator and may be based upon the Performance Criteria or other specific performance criteria determined appropriate by the Administrator, determined on the date such Stock Payment is made or on any date thereafter. 8.5. Deferred Stock. Any key Employee or Consultant selected by the Administrator may be granted an award of Deferred Stock in the manner determined from time to time by the Administrator. The number of shares of Deferred Stock shall be determined by the Administrator and may be linked to the Performance Criteria or other specific performance criteria determined to be appropriate by the Administrator, in each case on a specified date or dates or over any period or periods determined by the Administrator. Common Stock underlying a Deferred Stock award will not be issued until the Deferred Stock award has vested, pursuant to a vesting schedule or performance criteria set by the Administrator. Unless otherwise provided by the Administrator, a Holder of Deferred Stock shall have no rights as a Company stockholder with respect to such Deferred Stock until such time as the Award has vested and the Common Stock underlying the Award has been issued. 8.6. Term. The term of a Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment shall be set by the Administrator in its discretion. 14 8.7. Exercise or Purchase Price. The Administrator may establish the exercise or purchase price of a Performance Award, shares of Deferred Stock or shares received as a Stock Payment; provided, however, that such price shall not be less than the par value of a share of Common Stock, unless otherwise permitted by applicable state law. 8.8. Exercise Upon Termination of Employment, Termination of Consultancy or Termination of Directorship. A Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment is exercisable or payable only while the Holder is an Employee, Consultant or Independent Director, as applicable; provided, however, that the Administrator in its sole and absolute discretion may provide that the Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment may be exercised or paid subsequent to a Termination of Employment following a "change of control or ownership" (within the meaning of Section 1.162-27(e)(2)(v) or any successor regulation thereto) of the Company; provided, further, that except with respect to Performance Awards granted to Section 162(m) Participants, the Administrator in its sole and absolute discretion may provide that Performance Awards may be exercised or paid following a Termination of Employment or a Termination of Consultancy without cause, or following a Change in Control of the Company, or because of the Holder's retirement, death or disability, or otherwise. 8.9. Form of Payment. Payment of the amount determined under Section 8.2 or 8.3 above shall be in cash, in Common Stock or a combination of both, as determined by the Administrator. To the extent any payment under this Article VIII is effected in Common Stock, it shall be made subject to satisfaction of all provisions of Section 6.3. ARTICLE IX. STOCK APPRECIATION RIGHTS 9.1. Grant of Stock Appreciation Rights. A Stock Appreciation Right may be granted to any key Employee or Consultant selected by the Administrator. A Stock Appreciation Right may be granted (a) in connection and simultaneously with the grant of an Option, (b) with respect to a previously granted Option, or (c) independent of an Option. A Stock Appreciation Right shall be subject to such terms and conditions not inconsistent with the Plan as the Administrator shall impose and shall be evidenced by an Award Agreement. 9.2. Coupled Stock Appreciation Rights. (a) A Coupled Stock Appreciation Right ("CSAR") shall be related to a particular Option and shall be exercisable only when and to the extent the related Option is exercisable. (b) A CSAR may be granted to the Holder for no more than the number of shares subject to the simultaneously or previously granted Option to which it is coupled. (c) A CSAR shall entitle the Holder (or other person entitled to exercise the Option pursuant to the Plan) to surrender to the Company unexercised a portion of the Option to which the CSAR relates (to the extent then exercisable pursuant to its terms) and to receive from the Company in exchange therefor an amount determined by multiplying the difference obtained by subtracting the Option exercise price from the Fair Market Value of a share of Common Stock on the date of exercise of the CSAR by the number of shares of Common Stock with respect to which the CSAR shall have been exercised, subject to any limitations the Administrator may impose. 9.3. Independent Stock Appreciation Rights. (a) An Independent Stock Appreciation Right ("ISAR") shall be unrelated to any Option and shall have a term set by the Administrator. An ISAR shall be exercisable in such installments as the Administrator may determine. An ISAR shall cover such number of shares of Common Stock as the Administrator may determine; provided, however, that unless the Administrator otherwise provides in the terms of the ISAR or otherwise, no ISAR granted to a person subject to Section 16 of the Exchange Act shall be 15 exercisable until at least six months have elapsed from (but excluding) the date on which the Option was granted. The exercise price per share of Common Stock subject to each ISAR shall be set by the Administrator. An ISAR is exercisable only while the Holder is an Employee or Consultant; provided, that the Administrator may determine that the ISAR may be exercised subsequent to Termination of Employment or Termination of Consultancy without cause, or following a Change in Control of the Company, or because of the Holder's retirement, death or disability, or otherwise. (b) An ISAR shall entitle the Holder (or other person entitled to exercise the ISAR pursuant to the Plan) to exercise all or a specified portion of the ISAR (to the extent then exercisable pursuant to its terms) and to receive from the Company an amount determined by multiplying the difference obtained by subtracting the exercise price per share of the ISAR from the Fair Market Value of a share of Common Stock on the date of exercise of the ISAR by the number of shares of Common Stock with respect to which the ISAR shall have been exercised, subject to any limitations the Administrator may impose. 9.4. Payment and Limitations on Exercise. (a) Payment of the amounts determined under Section 9.2(c) and 9.3(b) above shall be in cash, in Common Stock (based on its Fair Market Value as of the date the Stock Appreciation Right is exercised) or a combination of both, as determined by the Administrator. To the extent such payment is effected in Common Stock it shall be made subject to satisfaction of all provisions of Section 6.3 above pertaining to Options. (b) Holders of Stock Appreciation Rights may be required to comply with any timing or other restrictions with respect to the settlement or exercise of a Stock Appreciation Right, including a window-period limitation, as may be imposed in the discretion of the Administrator. ARTICLE X. ADMINISTRATION 10.1. Compensation Committee. The Compensation Committee (or another committee or a subcommittee of the Board assuming the functions of the Committee under the Plan) shall consist solely of two or more Independent Directors appointed by and holding office at the pleasure of the Board, each of whom is both a "non-employee director" as defined by Rule 16b-3 and an "outside director" for purposes of Section 162(m) of the Code. Appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee may be filled by the Board. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan except with respect to matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee. Notwithstanding the foregoing, the full Board, acting by a majority of its members in office, shall conduct the general administration of the Plan with respect to Awards granted to Independent Directors. 10.2. Duties and Powers of the Administrator. It shall be the duty of the Administrator to conduct the general administration of the Plan in accordance with its provisions. The Administrator shall have the power to interpret the Plan and the Award Agreements, and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith, to interpret, amend or revoke any such rules and to amend any Award Agreement provided that the rights or obligations of the Holder of the Award that is the subject of any such Award Agreement are not affected adversely. Any such grant or award under the Plan need not be the same with respect to each Holder. Any such interpretations and rules with respect to Incentive Stock Options shall be consistent with the provisions of Section 422 of the Code. 10.3. Majority Rule; Unanimous Written Consent. The Administrator shall act by a majority of its members in attendance at a meeting at which a quorum is present or by a memorandum or other written instrument signed by all members of the Administrator. 16 10.4. Compensation; Professional Assistance; Good Faith Actions. Members of the Administrator shall receive such compensation, if any, for their services as members as may be determined by the Board. All expenses and liabilities, which members of the Administrator incur in connection with the administration of the Plan, shall be borne by the Company. The Administrator may, with the approval of the Board, employ attorneys, consultants, accountants, appraisers, brokers or other persons. The Administrator, the Company and the Company's officers and Directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Administrator or the Board in good faith shall be final and binding upon all Holders, the Company and all other interested persons. No members of the Administrator or Board shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or Awards, and all members of the Administrator and the Board shall be fully protected by the Company in respect of any such action, determination or interpretation. 10.5. Delegation of Authority to Grant Awards. The Committee may, but need not, delegate from time to time some or all of its authority to grant Awards under the Plan and administer the Plan as to such Awards to a committee consisting of one or more members of the Committee or of one or more officers of the Company; provided, however, that the Committee may not delegate its authority to grant Awards to individuals (a) who are subject on the date of the grant to the reporting rules under Section 16(a) of the Exchange Act, (b) who are Section 162(m) Participants, or (c) who are officers of the Company who are delegated authority by the Committee hereunder. Any delegation hereunder shall be subject to the restrictions and limits that the Committee specifies at the time of such delegation of authority and may be rescinded at any time by the Committee. At all times, any committee appointed under this Section 10.5 shall serve in such capacity at the pleasure of the Committee. ARTICLE XI. MISCELLANEOUS PROVISIONS 11.1. Transferability of Awards. (a) Except as provided in Section 11.1(b): (i) No Award under the Plan may be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution or, subject to the consent of the Administrator, pursuant to a DRO, unless and until such Award has been exercised, or the shares underlying such Award have been issued, and all restrictions applicable to such shares have lapsed. (ii) No Award or interest or right therein shall be liable for the debts, contracts or engagements of the Holder or his or her successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect, except to the extent that such disposition is permitted by the preceding sentence. (iii) During the lifetime of the Holder, only he or she may exercise an Option or other Award (or any portion thereof) granted to him or her under the Plan, unless it has been disposed of with the consent of the Administrator pursuant to a DRO. After the death of the Holder, any exercisable portion of an Option or other Award may, prior to the time when such portion becomes unexercisable under the Plan or the applicable Award Agreement, be exercised by his or her personal representative or by any person empowered to do so under the deceased Holder's will or under the then applicable laws of descent and distribution. (b) Notwithstanding Section 11.1(a), the Administrator, in its sole discretion, may determine to permit a Holder to transfer an Option to any one or more Permitted Transferees (as defined below), subject to the following terms and conditions: 17 (i) an Option transferred to a Permitted Transferee shall not be assignable or transferable by the Permitted Transferee other than by will or the laws of descent and distribution; (ii) an Option which is transferred to a Permitted Transferee shall continue to be subject to all the terms and conditions of the Option as applicable to the original Holder (other than the ability to further transfer the Option); and (iii) the Holder and the Permitted Transferee shall execute any and all documents requested by the Administrator, including, without limitation documents to (A) confirm the status of the transferee as a Permitted Transferee, (B) satisfy any requirements for an exemption for the transfer under applicable federal and state securities laws and (C) evidence the transfer. For purposes of this Section 11.1(b), "Permitted Transferee" shall mean, with respect to a Holder, any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the Holder's household (other than a tenant or employee), a trust in which these persons (or the Holder) control the management of assets, and any other entity in which these persons (or the Holder) own more than fifty percent of the voting interests, or any other transferee specifically approved by the Administrator after taking into account any state or federal tax or securities laws applicable to transferable Options." 11.2. Amendment, Suspension or Termination of the Plan. Except as otherwise provided in this Section 11.2, the Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Administrator. However, without approval of the Company's stockholders given within 12 months before or after the action by the Administrator, no action of the Administrator may, except as provided in Section 11.3, increase the limits imposed in Section 2.1 on the maximum number of shares which may be issued under the Plan. No amendment, suspension or termination of the Plan shall, without the consent of the Holder, alter or impair any rights or obligations under any Award theretofore granted or awarded, unless the Award itself otherwise expressly so provides. No Awards may be granted or awarded during any period of suspension or after termination of the Plan, and in no event may any Incentive Stock Option be granted under the Plan after the first to occur of the following events: (a) The expiration of ten years from the date the Plan is adopted by the Board; or (b) The expiration of ten years from the date the Plan is approved by the Company's stockholders under Section 11.4. 11.3. Changes in Common Stock or Assets of the Company, Acquisition or Liquidation of the Company and Other Corporate Events. (a) Subject to Section 11.3(e), in the event that the Administrator determines that any dividend or other distribution (whether in the form of cash, Common Stock, other securities or other property), recapitalization, reclassification, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, liquidation, dissolution, or sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company, or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other similar corporate transaction or event, in the Administrator's sole discretion, affects the Common Stock such that an adjustment is determined by the Administrator to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to an Award, then the Administrator shall, in such manner as it may deem equitable, adjust any or all of: (i) The number and kind of shares of Common Stock (or other securities or property) with respect to which Awards may be granted or awarded (including, but not limited to, adjustments of the limitations in Section 2.1 on the maximum number and kind of shares which may be issued and adjustments of the Award Limit); 18 (ii) The number and kind of shares of Common Stock (or other securities or property) subject to outstanding Awards; and (iii) The grant or exercise price with respect to any Award. (b) Subject to Section 11.3(c) and 11.3(e), in the event of any transaction or event described in Section 11.3(a), any Change in Control, any Corporate Transaction or any unusual or nonrecurring transactions or events affecting the Company, any affiliate of the Company, or the financial statements of the Company or any affiliate, or of changes in applicable laws, regulations or accounting principles, the Administrator, in its sole and absolute discretion, and on such terms and conditions as it deems appropriate, either by the terms of the Award or by action taken prior to the occurrence of such transaction or event and either automatically or upon the Holder's request, is hereby authorized to take any one or more of the following actions whenever the Administrator determines that such action is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any Award under the Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations or principles: (i) To provide for either the purchase of any such Award for an amount of cash equal to the amount that could have been attained upon the exercise of such Award or realization of the Holder's rights had such Award been currently exercisable or payable or fully vested or the replacement of such Award with other rights or property selected by the Administrator in its sole discretion; (ii) To provide that the Award cannot vest, be exercised or become payable after such event; (iii) To provide that such Award shall be exercisable as to all shares covered thereby, notwithstanding anything to the contrary in Section 5.3 or 5.4 or the provisions of such Award; (iv) To provide that such Award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; and (v) To make adjustments in the number and type of shares of Common Stock (or other securities or property) subject to outstanding Awards, and in the number and kind of outstanding Restricted Stock or Deferred Stock and/or in the terms and conditions of (including the grant or exercise price), and the criteria included in, outstanding options, rights and awards and options, rights and awards which may be granted in the future. (vi) To provide that, for a specified period of time prior to such event, the restrictions imposed under an Award Agreement upon some or all shares of Restricted Stock or Deferred Stock may be terminated, and, in the case of Restricted Stock, some or all shares of such Restricted Stock may cease to be subject to repurchase under Section 7.5 or forfeiture under Section 7.4 after such event. (c) In the event of a Change in Control or a Corporate Transaction each Option granted to an Independent Director shall be exercisable as to all shares covered thereby upon such Change in Control or during the five days immediately preceding the consummation of such Corporate Transaction and subject to such consummation, notwithstanding anything to the contrary in Section 5.4 or the vesting schedule of such Options. In the event of a Change in Control, each Option granted to an Independent Director shall remain exercisable for such fully-vested option shares until the expiration or sooner termination of the Option term. In the event of a Corporate Transaction, to the extent that the Board does not have the ability under Rule 16b-3 to take or to refrain from taking the discretionary actions set forth in Section 11.3(b)(ii) above, no Option granted to an Independent Director may be exercised following such Corporate Transaction unless such 19 Option is, in connection with such Corporate Transaction, either assumed by the successor or survivor corporation (or parent or subsidiary thereof) or replaced with a comparable right with respect to shares of the capital stock of the successor or survivor corporation (or parent or subsidiary thereof). (d) Subject to Sections 11.3(e), 3.2 and 3.3, the Administrator may, in its discretion, include such further provisions and limitations in any Award, agreement or certificate, as it may deem equitable and in the best interests of the Company. (e) With respect to Awards which are granted to Section 162(m) Participants and are intended to qualify as performance-based compensation under Section 162(m)(4)(C), no adjustment or action described in this Section 11.3 or in any other provision of the Plan shall be authorized to the extent that such adjustment or action would cause such Award to fail to so qualify under Section 162(m)(4)(C), or any successor provisions thereto. No adjustment or action described in this Section 11.3 or in any other provision of the Plan shall be authorized to the extent that such adjustment or action would cause the Plan to violate Section 422(b)(1) of the Code. Furthermore, no such adjustment or action shall be authorized to the extent such adjustment or action would result in short-swing profits liability under Section 16 or violate the exemptive conditions of Rule 16b-3 unless the Administrator determines that the Award is not to comply with such exemptive conditions. The number of shares of Common Stock subject to any Award shall always be rounded to the next whole number. (f) The existence of the Plan, the Award Agreement and the Awards granted hereunder shall not affect or restrict in any way the right or power of the Company or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 11.4. Approval of Plan by Stockholders. The Plan will be submitted for the approval of the Company's stockholders within 12 months after the date of the Board's initial adoption of the Plan. Awards may be granted or awarded prior to such stockholder approval, provided that such Awards shall not be exercisable nor shall such Awards vest prior to the time when the Plan is approved by the stockholders, and provided further that if such approval has not been obtained at the end of said twelve-month period, all Awards previously granted or awarded under the Plan shall thereupon be canceled and become null and void. In addition, if the Board determines that Awards other than Options or Stock Appreciation Rights which may be granted to Section 162(m) Participants should continue to be eligible to qualify as performance-based compensation under Section 162(m)(4)(C) of the Code, the Performance Criteria must be disclosed to and approved by the Company's stockholders no later than the first stockholder meeting that occurs in the fifth year following the year in which the Company's stockholders previously approved the Performance Criteria. 11.5. Tax Withholding. The Company shall be entitled to require payment in cash or deduction from other compensation payable to each Holder of any sums required by federal, state or local tax law to be withheld with respect to the issuance, vesting, exercise or payment of any Award. The Administrator may in its discretion and in satisfaction of the foregoing requirement allow such Holder to elect to have the Company withhold shares of Common Stock otherwise issuable under such Award (or allow the return of shares of Common Stock) having a Fair Market Value equal to the sums required to be withheld. Notwithstanding any other provision of the Plan, the number of shares of Common Stock which may be withheld with respect to the issuance, vesting, exercise or payment of any Award (or which may be repurchased from the Holder of such Award within six months after such shares of Common Stock were acquired by the Holder from the Company) in order to satisfy the Holder's federal and state income and payroll tax liabilities with respect to the issuance, vesting, exercise or payment of the Award shall be limited to the number of shares which have a Fair Market Value on the date of withholding or repurchase equal to the aggregate amount of such liabilities based on the minimum statutory withholding rates for federal and state tax income and payroll tax purposes that are applicable to such supplemental taxable income. 20 11.6. Loans. The Administrator may, in its discretion, extend one or more loans to key Employees in connection with the exercise or receipt of an Award granted or awarded under the Plan, or the issuance of Restricted Stock or Deferred Stock awarded under the Plan. The terms and conditions of any such loan shall be set by the Administrator. 11.7. Forfeiture Provisions. Pursuant to its general authority to determine the terms and conditions applicable to Awards under the Plan, the Administrator shall have the right to provide, in the terms of Awards made under the Plan, or to require a Holder to agree by separate written instrument, that (a)(i) any proceeds, gains or other economic benefit actually or constructively received by the Holder upon any receipt or exercise of the Award, or upon the receipt or resale of any Common Stock underlying the Award, must be paid to the Company, and (ii) the Award shall terminate and any unexercised portion of the Award (whether or not vested) shall be forfeited, if (b)(i) a Termination of Employment, Termination of Consultancy or Termination of Directorship occurs prior to a specified date, or within a specified time period following receipt or exercise of the Award, or (ii) the Holder at any time, or during a specified time period, engages in any activity in competition with the Company, or which is inimical, contrary or harmful to the interests of the Company, as further defined by the Administrator or (iii) the Holder incurs a Termination of Employment, Termination of Consultancy or Termination of Directorship for cause. 11.8. Effect of Plan Upon Options and Compensation Plans. The adoption of the Plan shall not affect any other compensation or incentive plans in effect for the Company or any Subsidiary. Nothing in the Plan shall be construed to limit the right of the Company (a) to establish any other forms of incentives or compensation for Employees, Directors or Consultants of the Company or any Subsidiary, or (b) to grant or assume options or other rights or awards otherwise than under the Plan in connection with any proper corporate purpose including but not by way of limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, partnership, limited liability company, firm or association. 11.9. Compliance with Laws. The Plan, the granting and vesting of Awards under the Plan and the issuance and delivery of shares of Common Stock and the payment of money under the Plan or under Awards granted or awarded hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities law and federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under the Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all applicable legal requirements. To the extent permitted by applicable law, the Plan and Awards granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such laws, rules and regulations. 11.10. Titles. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. 11.11. Governing Law. The Plan and any agreements hereunder shall be administered, interpreted and enforced under the internal laws of the State of California without regard to conflicts of laws thereof. * * * I hereby certify that the foregoing Plan was duly adopted by the Board of Directors of FileNet Corporation on March 28, 2002. I hereby certify that the foregoing Plan was approved by the stockholders of FileNet Corporation on May 22, 2002. Executed on this ____ day of May 2002. Secretary 21 APPENDIX B FILENET CORPORATION 1998 EMPLOYEE STOCK PURCHASE PLAN (As Amended and Restated Effective as of May 1, 2002) I. PURPOSE OF THE PLAN This Employee Stock Purchase Plan is intended to promote the interests of FileNET Corporation by providing eligible employees with the opportunity to acquire a proprietary interest in the Corporation through participation in a payroll-deduction based employee stock purchase plan designed to qualify under Section 423 of the Code. This Plan shall serve as the successor to the Corporation's existing 1988 Employee Stock Purchase Plan (the "Predecessor Plan"), and no further shares of Common Stock will be issued under the Predecessor Plan from and after the Effective Date. Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix. All share numbers in this Plan reflect the 2-for-1 split of the Common Stock effected on June 12, 1998. II. ADMINISTRATION OF THE PLAN The Plan Administrator shall have full authority to interpret and construe any provision of the Plan and to adopt such rules and regulations for administering the Plan as it may deem necessary in order to comply with the requirements of Code Section 423. Decisions of the Plan Administrator shall be final and binding on all parties having an interest in the Plan. III. STOCK SUBJECT TO PLAN A. The stock purchasable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares of Common Stock purchased on the open market. The maximum number of shares of Common Stock which may be issued over the term of the Plan and the International Plan shall not exceed Two Million Four Hundred Thirty Two Thousand Two Hundred Seventy-Eight (2,432,278) shares in the aggregate and shall be limited to the following components: (i) the actual number of shares of Common Stock remaining for issuance under the Predecessor Plan on the Effective Date (Ninety Two Thousand Two Hundred Seventy Eight (92,278) shares) plus (ii) an additional Three Hundred Thousand (300,000) shares of Common Stock approved by the stockholders at the 1998 Annual Meeting in connection with the implementation of the Plan plus (iii) an additional increase of Three Hundred Thousand (300,000) shares authorized by the Board on March 22, 1999 and approved by the stockholders at the 1999 Annual Meeting, (iv) an additional increase of Three Hundred Forty Thousand (340,000) shares authorized by the Board on March 20, 2000 and approved by the stockholders at 1 the 2000 Annual Meeting, plus (v) an additional increase of Three Hundred Thousand (300,000) shares authorized by the Board on March 28, 2001 and approved by the stockholders at the 2001 Annual Meeting, plus (vi) an additional increase of One Million One Hundred Thousand (1,100,000) shares authorized by the Board on March 28, 2002 and subject to stockholder approval at the 2002 Annual Meeting. B. 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 maximum number and class of securities issuable under the Plan and the International Plan, (ii) the maximum number and class of securities purchasable per Participant on any one Purchase Date, (iii) the maximum number and class of securities purchasable by all Participants in the aggregate on any one Purchase Date and (iv) the number and class of securities and the price per share in effect under each outstanding purchase right in order to prevent the dilution or enlargement of benefits thereunder. IV. PURCHASE PERIODS A. Shares of Common Stock shall be offered for purchase under the Plan through a series of successive purchase periods until such time as (i) the maximum number of shares of Common Stock available for issuance under the Plan shall have been purchased or (ii) the Plan shall have been sooner terminated. B. Each purchase period shall have a duration of six (6) months. Purchase periods shall run from the first business day in May to the last business day in October each year and from the first business day in November each year to the last business day in April of the following year. V. ELIGIBILITY A. Each individual who is an Eligible Employee on the start date of any purchase period shall be eligible to participate in the Plan for that purchase period. B. To participate in the Plan for a particular purchase period, the Eligible Employee must complete the enrollment form prescribed by the Plan Administrator and file such form with the Plan Administrator (or its designate) on or before the start date of the purchase period. VI. PAYROLL DEDUCTIONS A. The payroll deduction authorized by the Participant for purposes of acquiring shares of Common Stock under the Plan may be any multiple of one percent (1%) of the Cash Earnings paid to the Participant during each purchase period, up to a maximum of ten percent (10%). The deduction rate so authorized shall continue in effect for the entire purchase period and for each subsequent purchase period the Participant remains in the Plan. The Participant may not increase his or her rate of payroll deduction during a purchase period, but may 2 effect such increase as of the start date of any subsequent purchase period following the filing of a new payroll deduction authorization with the Plan Administrator. However, the Participant may, at any time during the purchase period, reduce his or her rate of payroll deduction to become effective as soon as possible after filing the appropriate form with the Plan Administrator. The Participant may not, however, effect more than one (1) such reduction per purchase period. B. Payroll deductions shall begin on the first pay day following the start date of the purchase period and shall (unless sooner terminated by the Participant) continue through the pay day ending with or immediately prior to the last day of the purchase period. The amounts so collected shall be credited to the Participant's book account under the Plan, but no interest shall be paid on the balance from time to time outstanding in such account. The amounts collected from the Participant shall not be required to be held in any segregated account or trust fund and may be commingled with the general assets of the Corporation and used for general corporate purposes. C. Payroll deductions shall automatically cease upon the termination of the Participant's purchase right in accordance with the provisions of the Plan. D. The Participant's acquisition of Common Stock under the Plan on any Purchase Date shall neither limit nor require the Participant's acquisition of Common Stock on any subsequent Purchase Date. VII. PURCHASE RIGHTS A. Grant of Purchase Right. A Participant shall be granted a separate purchase right on the start date of each purchase period in which he or she participates. The purchase right shall provide the Participant with the right to purchase shares of Common Stock on the Purchase Date upon the terms set forth below. The Participant shall execute a stock purchase agreement embodying such terms and such other provisions (not inconsistent with the Plan) as the Plan Administrator may deem advisable. Under no circumstances shall purchase rights be granted under the Plan to any Eligible Employee if such individual would, immediately after the grant, own (within the meaning of Code Section 424(d)) or hold outstanding options or other rights to purchase, stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Corporation or any Corporate Affiliate. B. Exercise of the Purchase Right. Each purchase right shall be automatically exercised on the Purchase Date, and shares of Common Stock shall accordingly be purchased on behalf of each Participant on such date. The purchase shall be affected by applying the Participant's payroll deductions for the purchase period ending on such Purchase Date to the purchase of shares of Common Stock at the purchase price in effect for that purchase period. C. Purchase Price. The purchase price per share at which Common Stock will be purchased on the Participant's behalf on each Purchase Date shall be equal to 3 eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of Common Stock on the start date of the purchase period or (ii) the Fair Market Value per share of Common Stock on that Purchase Date. D. Number of Purchasable Shares. The number of shares of Common Stock purchasable by a Participant on each Purchase Date shall be the number of whole shares obtained by dividing the amount collected from the Participant through payroll deductions during the purchase period ending with that Purchase Date by the purchase price in effect for that period. However, the maximum number of shares of Common Stock purchasable per Participant on any one Purchase Date shall not exceed eight hundred (800) shares, subject to periodic adjustments in the event of certain changes in the Corporation's capitalization. In addition, the maximum number of shares of Common Stock purchasable by all Participants in the aggregate on any one Purchase Date under the Plan and the International Plan shall not exceed One Hundred Seventy Thousand (170,000) shares, subject to periodic adjustments in the event of certain changes in the Corporation's capitalization. However, the Plan Administrator shall have the discretionary authority, exercisable prior to the start of any purchase period under the Plan, to increase or decrease the limitations to be in effect for the number of shares purchasable per Participant and in the aggregate by all Participants on the Purchase Date in effect for that period. E. Excess Payroll Deductions. Any payroll deductions not applied to the purchase of shares of Common Stock on any Purchase Date because they are not sufficient to purchase a whole share of Common Stock shall be held for the purchase of Common Stock on the next Purchase Date. However, any payroll deductions not applied to the purchase of Common Stock by reason of the limitation on the maximum number of shares purchasable by the Participant on the Purchase Date or the limitation on the maximum number of shares purchasable in the aggregate on the Purchase Date by all Participants shall be promptly refunded. F. Termination of Purchase Right. The following provisions shall govern the termination of outstanding purchase rights: (i) A Participant may, at any time prior to the last fifteen (15) days of the purchase period, terminate his or her outstanding purchase right by filing the appropriate form with the Plan Administrator (or its designate), and no further payroll deductions shall be collected from the Participant with respect to the terminated purchase right. Any payroll deductions collected during the purchase period in which such termination occurs shall, at the Participant's election, be immediately refunded or held for the purchase of shares on the next Purchase Date. If no such election is made at the time the purchase right is terminated, then the payroll deductions collected with respect to the terminated right shall be refunded as soon as possible. (ii) The termination of such purchase right shall be irrevocable, and the Participant may not subsequently rejoin the purchase period for which the terminated purchase right was granted. In order to resume participation in any subsequent purchase period, such individual must re-enroll in the 4 Plan (by making a timely filing of the prescribed enrollment forms) before the start date of the new purchase period. (iii) Should the Participant cease to remain an Eligible Employee for any reason (including death, disability or change in status) while his or her purchase right remains outstanding, then that purchase right shall immediately terminate, and all of the Participant's payroll deductions for the purchase period in which the purchase right so terminates shall be immediately refunded. However, should the Participant cease to remain in active service by reason of an approved unpaid leave of absence, then the Participant shall have the right, exercisable up until the last business day of the purchase period in which such leave commences, to (a) withdraw all the payroll deductions collected to date on his or her behalf during such purchase period or (b) have such funds held for the purchase of shares on the next scheduled Purchase Date. In no event, however, shall any further payroll deductions be collected on the Participant's behalf during such leave. Upon the Participant's return to active service (i) within ninety (90) days after the start of the leave or (ii) prior to the expiration of any longer period during his or her re-employment rights are guaranteed by law or contract, his or her payroll deductions under the Plan shall automatically resume at the rate in effect at the time the leave began. G. Corporate Transaction. Each outstanding purchase right shall automatically be exercised, immediately prior to the effective date of any Corporate Transaction, by applying the payroll deductions of each Participant for the purchase period in which such Corporate Transaction occurs to the purchase of whole shares of Common Stock at a purchase price per share equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of Common Stock on the start date of the purchase period in which such Corporate Transaction occurs or (ii) the Fair Market Value per share of Common Stock immediately prior to the effective date of such Corporate Transaction. However, the applicable limitation on the number of shares of Common Stock purchasable per Participant shall continue to apply to any such purchase, but not the limitation on the aggregate number of shares purchasable by all Participants. The Corporation shall use its best efforts to provide at least ten (10) days prior written notice of the occurrence of any Corporate Transaction, and Participants shall, following the receipt of such notice, have the right to terminate their outstanding purchase rights prior to the effective date of the Corporate Transaction. H. Proration of Purchase Rights. Should the total number of shares of Common Stock which are to be purchased pursuant to outstanding purchase rights on any particular date exceed either (i) the number of shares then available for issuance under the Plan or (ii) the maximum number of shares purchasable by all Participants (and all participants in the International Plan) in the aggregate on that Purchase Date, then the Plan Administrator shall make a pro-rata allocation of the available shares on a uniform and nondiscriminatory basis, and the payroll deductions of each Participant (and each participant in the 5 International Plan), to the extent in excess of the aggregate purchase price payable for the Common Stock pro-rated to such individual, shall be refunded. I. Assignability. The purchase right shall be exercisable only by the Participant and shall not be assignable or transferable by the Participant. J. Stockholder Rights. A Participant shall have no stockholder rights with respect to the shares subject to his or her outstanding purchase right until the shares are purchased on the Participant's behalf in accordance with the provisions of the Plan and the Participant has become a holder of record of the purchased shares. VIII. ACCRUAL LIMITATIONS A. No Participant shall be entitled to accrue rights to acquire Common Stock pursuant to any purchase right outstanding under this Plan if and to the extent such accrual, when aggregated with (i) rights to purchase Common Stock accrued under any other purchase right granted under this Plan and (ii) similar rights accrued under other employee stock purchase plans (within the meaning of Code Section 423) of the Corporation or any Corporate Affiliate, would otherwise permit such Participant to purchase more than Twenty-Five Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate Affiliate (determined on the basis of the Fair Market Value of such stock on the date or dates such rights are granted) for each calendar year such rights are at any time outstanding. B. For purposes of applying such accrual limitations, the following provisions shall be in effect: (i) The right to acquire Common Stock under each outstanding purchase right shall accrue on the Purchase Date in effect for the purchase period for which such right is granted. (ii) No right to acquire Common Stock under any outstanding purchase right shall accrue to the extent the Participant has already accrued in the same calendar year the right to acquire Common Stock under one (1) or more other purchase rights at a rate equal to Twenty-Five Thousand Dollars ($25,000) worth of Common Stock (determined on the basis of the Fair Market Value per share on the date or dates of grant) for each calendar year such rights were at any time outstanding. C. If by reason of such accrual limitations, any purchase right of a Participant does not accrue for a particular purchase period, then the payroll deductions which the Participant made during that purchase period with respect to such purchase right shall be promptly refunded. D. In the event there is any conflict between the provisions of this Article and one or more provisions of the Plan or any instrument issued thereunder, the provisions of this Article shall be controlling. 6 IX. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan was adopted by the Board on March 17, 1998 and approved by the Corporation's stockholders at the 1998 Annual Meeting held on May 15, 1998. The Plan shall become effective on the Effective Date. However, no purchase rights granted under the Plan shall be exercised, and no shares of Common Stock shall be issued hereunder, until the Corporation shall have complied with all applicable requirements of the 1933 Act (including the registration of the shares of Common Stock issuable under the Plan on a Form S-8 registration statement filed with the Securities and Exchange Commission), all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock is listed for trading and all other applicable requirements established by law or regulation. B. The Plan was amended and restated on March 22, 1999 (the "1999 Restatement") to increase the number of shares of Common Stock authorized for issuance under the Plan and the International Plan by an additional Three Hundred Thousand (300,000) shares. The increase was approved by the stockholders at the 1999 Annual Meeting. No purchase rights were granted, and no shares were issued, on the basis of the Three Hundred Thousand (300,000)-share increase authorized by the 1999 Restatement until such increase was approved by the stockholders at the 1999 Annual Meeting. C. The Plan was amended and restated on March 20, 2000 (the "2000 Restatement") to increase the number of shares of Common Stock authorized for issuance under the Plan and the International Plan by an additional Three Hundred Forty Thousand (340,000) shares. The share increase was approved by the stockholders at the 2000 Annual Meeting. No purchase rights were granted, and no shares were issued, on the basis of the Three Hundred Forty Thousand (340,000)-share increase authorized by the 2000 Restatement until the increase had been so approved by the stockholders. D. The Plan was amended and restated on March 28, 2001 (the "2001 Restatement") to increase the number of shares of Common Stock authorized for issuance under the Plan and the International Plan by an additional Three Hundred Thousand (300,000) shares, subject to stockholder approval at the 2001 Annual Meeting. No purchase rights were granted, and no shares were issued, on the basis of the Three Hundred Thousand (300,000) share increase authorized by the 2001 Restatement until such increase was approved by the stockholders at the 2001 Annual Meeting. E. The Plan was amended and restated on March 28, 2002 (the "2002 Restatement") to increase the number of shares of Common Stock authorized for issuance under the Plan and the International Plan by an additional One Million One Hundred Thousand (1,100,000) shares, subject to stockholder approval at the 2002 Annual Meeting. No purchase rights shall be granted, and no shares shall be issued, on the basis of the One Million One Hundred Thousand (1,100,000) share increase authorized by the 2002 Restatement until the share increase has been approved by the stockholders at the 2002 Annual Meeting. 7 F. Unless sooner terminated by the Board, the Plan shall terminate upon the earliest to occur of (i) the last business day in October 2008, (ii) the date on which all shares available for issuance under the Plan (and the International Plan) shall have been sold pursuant to purchase rights exercised under the Plan (and the International Plan) or (iii) the date on which all purchase rights are exercised in connection with a Corporate Transaction. No further purchase rights shall be granted or exercised, and no further payroll deductions shall be collected, under the Plan following such termination. X. AMENDMENT OF THE PLAN The Board may alter, amend, suspend or discontinue the Plan at any time to become effective immediately following the close of any purchase period. However, the Board may not, without the approval of the Corporation's stockholders, (i) increase the number of shares of Common Stock issuable under the Plan, except for permissible adjustments in the event of certain changes in the Corporation's capitalization, (ii) alter the purchase price formula so as to reduce the purchase price payable for the shares of Common Stock purchasable under the Plan, or (iii) modify the requirements for eligibility to participate in the Plan. XI. GENERAL PROVISIONS A. All costs and expenses incurred in the administration of the Plan shall be paid by the Corporation. B. Nothing in the Plan shall confer upon the Participant any right to continue in the employ of the Corporation or any Corporate Affiliate for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Corporate Affiliate employing such person) or of the Participant, which rights are hereby expressly reserved by each, to terminate such person's employment at any time for any reason, with or without cause. C. The provisions of the Plan shall be governed by the laws of the State of California without resort to that State's conflict-of-laws rules. 8 Schedule A Corporations Participating in Employee Stock Purchase Plan FileNET Corporation, a Delaware corporation APPENDIX The following definitions shall be in effect under the Plan: A. Board shall mean the Corporation's Board of Directors. B. Cash Earnings shall mean the (i) base salary payable to a Participant by one or more Participating Companies during such individual's period of participation in one or more purchase periods under the Plan plus (ii) all overtime payments, bonuses, commissions and other incentive-type payments received during such period. Such Cash Earnings shall be calculated before deduction of (A) any income or employment tax withholdings or (B) any pre-tax contributions made by the Participant to any Code Section 401(k) salary deferral plan or any Code Section 125 cafeteria benefit program now or hereafter established by the Corporation or any Corporate Affiliate. However, Cash Earnings shall not include any contributions (other than Code Section 401(k) or Code Section 125 contributions) made on the Participant's behalf by the Corporation or any Corporate Affiliate to any employee benefit or welfare plan now or hereafter established. C. Code shall mean the Internal Revenue Code of 1986, as amended. D. Common Stock shall mean the Corporation's common stock. E. Corporate Affiliate shall mean any parent or subsidiary corporation of the Corporation (as determined in accordance with Code Section 424), whether now existing or subsequently established. 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 fifty percent (50%) or more 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 assets of the Corporation in complete liquidation or dissolution of the Corporation. G. Corporation shall mean FileNET Corporation, a Delaware corporation and any corporate successor to all or substantially all of the assets or voting stock of FileNET Corporation which shall by appropriate action adopt the Plan. H. Effective Date shall mean the October 1, 1998 effective date of the Plan. I. Eligible Employee shall mean any person who is employed by a Participating Corporation on a basis under which he or she is regularly expected A-1 to render more than twenty (20) hours of service per week for more than five (5) months per calendar year for earnings considered wages under Code Section 3401(a). J. 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 those prices are reported by the National Association of Securities Dealers on the Nasdaq National Market and published in The Wall Street Journal. If there are no selling prices 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 of the 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 those prices are officially quoted in the composite tape of transactions on such exchange and published in The Wall Street Journal. If there are no selling prices 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. K. International Plan shall mean the FileNET Corporation International Employee Stock Purchase Plan. L. 1933 Act shall mean the Securities Act of 1933, as amended. M. Participant shall mean any Eligible Employee of a Participating Corporation who is actively participating in the Plan. N. Participating Corporation shall mean the Corporation and such Corporate Affiliate or Affiliates as may be authorized from time to time by the Board to extend the benefits of the Plan to their Eligible Employees. The Participating Corporations in the Plan as of the Effective Date are listed in attached Schedule A. O. Plan shall mean the Corporation's Employee Stock Purchase Plan, as set forth in this document. P. Plan Administrator shall mean the committee of two (2) or more non-employee Board members appointed by the Board to administer the Plan. Q. Predecessor Plan shall mean the Corporation's 1988 Employee Stock Purchase Plan. R. Purchase Date shall mean the last business day of each purchase period. The initial Purchase Date shall be April 30, 1999. A-2 S. Stock Exchange shall mean either the American Stock Exchange or the New York Stock Exchange. A-3 APPENDIX C APPENDIX C FILENET CORPORATION INTERNATIONAL EMPLOYEE STOCK PURCHASE PLAN (As Amended and Restated Effective as of May 1, 2002) I. PURPOSE OF THE PLAN This Plan is intended to promote the interests of the Corporation by providing eligible employees of the Corporation's Foreign Subsidiaries with the opportunity to acquire a proprietary interest in the Corporation through the purchase of shares of the Corporation's Common Stock at periodic intervals. Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix. All share numbers in this restatement reflect the 2-for-1 split of Common Stock effected on June 12, 1998. II. ADMINISTRATION OF THE PLAN The Plan Administrator shall have full authority to interpret and construe any provision of the Plan and to adopt such rules and regulations for administering the Plan, as it may deem necessary. Decisions of the Plan Administrator shall be final and binding on all parties having an interest in the Plan. III. STOCK SUBJECT TO PLAN A. The stock purchasable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares of Common Stock purchased on the open market. The maximum number of shares of Common Stock which may be issued over the term of the Plan and the U.S. Plan shall be limited to Two Million Four Hundred Thirty Two Thousand Two Hundred Seventy-Eight (2,432,278) shares and shall consist of the following: (i) the actual number of shares of Common Stock remaining for issuance under the Predecessor Plan on the Effective Date (92,278 shares) plus (ii) an additional Three Hundred Thousand (300,000) shares of Common Stock effected on May 15, 1998, plus (iii) an additional Three Hundred Thousand (300,000) shares of Common Stock effected on May 20, 1999, plus (iv) an additional Three Hundred Forty Thousand (340,000) shares of Common Stock effected on May 18, 2000, plus (v) an additional Three Hundred Thousand (300,000) shares of Common Stock effected on May 16, 2001, plus (vi) an additional One Million One Hundred Thousand (1,100,000) shares of Common Stock effected on March 28, 2002 and subject to stockholder approval at the 2002 Annual Meeting. B. 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 maximum number and class of securities issuable under the Plan and the U.S. Plan, (ii) the maximum number and class of securities purchasable per Participant on any one Purchase Date, (iii) the maximum number and class of 1 securities purchasable by all Participants in the aggregate on any one Purchase Date and (iv) the number and class of securities and the price per share in effect under each outstanding purchase right in order to prevent the dilution or enlargement of benefits thereunder. IV. PURCHASE PERIODS A. Shares of Common Stock shall be offered for purchase under the Plan through a series of successive purchase periods until such time as (i) the maximum number of shares of Common Stock available for issuance under the Plan shall have been purchased or (ii) the Plan shall have been sooner terminated. B. Each purchase period shall have a duration of six (6) months. Purchase periods shall run from the first business day in May to the last business day in October each year and from the first business day in November each year to the last business day in April of the following year. V. ELIGIBILITY A. Each individual who is an Eligible Employee on the start date of any purchase period shall be eligible to participate in the Plan for that purchase period. B. To participate in the Plan for a particular purchase period, the Eligible Employee must complete the enrollment forms prescribed by the Plan Administrator and file such forms with the Plan Administrator (or its designate) on or before the start date of the purchase period. VI. PAYROLL DEDUCTIONS A. Except to the extent otherwise provided in the Plan (or any addendum thereto) or authorized by the Plan Administrator, the purchase price for the shares of Common Stock acquired under the Plan shall be paid from accumulated payroll deductions authorized by the Participant. B. The payroll deduction authorized by the Participant for purposes of acquiring shares of Common Stock under the Plan may be any multiple of one percent (1%) of the Cash Earnings paid to the Participant during each purchase period, up to a maximum of ten percent (10%). The payroll deduction authorized by the Participant shall be collected in the currency in which paid by the Foreign Subsidiary. The payroll deductions collected during each purchase period shall be converted into U.S. Dollars on the Purchase Date for that purchase period on the basis of the exchange rate in effect on that date. The Plan Administrator shall have the absolute discretion to determine the applicable exchange rate to be in effect for each Purchase Date by any reasonable method that may be based on the exchange rate actually available in the ordinary course of business on such date. Any changes or fluctuations in the exchange rate at which the payroll deductions collected on the Participant's behalf are converted into U.S. Dollars on each Purchase Date shall be borne solely by the Participant. 2 C. The rate of payroll deduction so authorized by the Participant shall continue in effect for the entire purchase period and for each subsequent purchase period that the Participant remains in the Plan. The Participant may not increase his or her rate of payroll deduction during a purchase period, but may affect such increase as of the start date of any subsequent purchase period following the filing of a new payroll deduction authorization with the Plan Administrator. However, the Participant may, at any time during the purchase period, reduce his or her rate of payroll deduction to become effective as soon as possible after filing the appropriate form with the Plan Administrator. The Participant may not, however, effect more than one (1) such reduction per purchase period. D. Payroll deductions shall begin on the first payday following the start date of the purchase period and shall (unless sooner terminated by the Participant) continue through the payday ending with or immediately prior to the last day of the purchase period. The amounts so collected shall be credited to the Participant's book account under the Plan, initially in the currency in which paid by the Foreign Subsidiary until converted into U.S. Dollars on the applicable Purchase Date. Except to the extent otherwise provided by the Plan (including any addendum thereto) or by the Plan Administrator, no interest shall be paid on the balance from time to time outstanding in any book account and the amounts collected from the Participant shall not be required to be held in any segregated account or trust fund and may be commingled with the general assets of the Corporation and used for general corporate purposes. E. Payroll deductions shall automatically cease upon the termination of the Participant's purchase right in accordance with the provisions of the Plan. F. The Participant's acquisition of Common Stock under the Plan on any Purchase Date shall neither limit nor require the Participant's acquisition of Common Stock on any subsequent Purchase Date. VII. PURCHASE RIGHTS A. Grant of Purchase Right. A Participant shall be granted a separate purchase right on the start date of each purchase period in which he or she participates. The purchase right shall provide the Participant with the right to purchase shares of Common Stock on the Purchase Date upon the terms set forth below. The Participant shall execute such document or documents embodying such terms and such other provisions (not inconsistent with the Plan) as the Plan Administrator may deem advisable. Under no circumstances shall purchase rights be granted under the Plan to any Eligible Employee if such individual would, immediately after the grant, own (within the meaning of Code Section 424(d)) or hold outstanding options or other rights to purchase, stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Corporation or any Corporate Affiliate. B. Exercise of the Purchase Right. Each purchase right shall be automatically exercised on the Purchase Date, and shares of Common Stock shall 3 accordingly be purchased on behalf of each Participant on such date. The purchase shall be affected by applying the Participant's payroll deductions (as converted into U.S. Dollars) for the purchase period ending on such Purchase Date to the purchase of shares of Common Stock at the purchase price in effect for that purchase period. C. Purchase Price. The U.S. Dollar purchase price per share at which Common Stock will be purchased on the Participant's behalf on each Purchase Date shall be equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of Common Stock on the start date of the purchase period or (ii) the Fair Market Value per share of Common Stock on that Purchase Date. D. Number of Purchasable Shares. The number of shares of Common Stock purchasable by a Participant on each Purchase Date shall be the number of whole shares obtained by dividing the amount collected from the Participant through payroll deductions (as converted into U.S. Dollars) during the purchase period ending with that Purchase Date by the purchase price in effect for that period. However, the maximum number of shares of Common Stock purchasable per Participant on any one Purchase Date shall not exceed Eight Hundred (800) shares, subject to periodic adjustments in the event of certain changes in the Corporation's capitalization. In addition, the maximum number of shares of Common Stock purchasable by all Participants in the aggregate on any one Purchase Date under the Plan and the U.S. Plan shall not exceed One Hundred Seventy Thousand (170,000) shares, subject to periodic adjustments in the event of certain changes in the Corporation's capitalization. E. Excess Payroll Deductions. Any payroll deductions not applied to the purchase of shares of Common Stock on any Purchase Date because they are not sufficient to purchase a whole share of Common Stock shall be held for the purchase of Common Stock on the next Purchase Date. However, any payroll deductions not applied to the purchase of Common Stock by reason of the limitation on the maximum number of shares purchasable by the Participant on the Purchase Date or the limitation on the maximum number of shares purchasable in the aggregate on the Purchase Date by all Participants shall be promptly refunded in the currency in which payroll (from which such deductions were made) was paid to the Participant by the Foreign Subsidiary. F. Termination of Purchase Right. The following provisions shall govern the termination of outstanding purchase rights: (i) A Participant may, at any time prior to the last fifteen (15) days of the purchase period, terminate his or her outstanding purchase right by filing the appropriate form with the Plan Administrator (or its designate), and no further payroll deductions shall be collected from the Participant with respect to the terminated purchase right. Any payroll deductions collected during the purchase period in which such termination occurs shall, at the Participant's election, be immediately refunded in the currency in which payroll (from which such deductions were made) was paid to the Participant by the Foreign Subsidiary or held for the purchase of shares on the next Purchase Date. If no such election is made at the time 4 the purchase right is terminated, then the payroll deductions collected with respect to the terminated right shall be refunded as soon as possible. (ii) The termination of such purchase right shall be irrevocable, and the Participant may not subsequently rejoin the purchase period for which the terminated purchase right was granted. In order to resume participation in any subsequent purchase period, such individual must re-enroll in the Plan (by making a timely filing of the prescribed enrollment forms) before the start date of the new purchase period. (iii) Should the Participant cease to remain an Eligible Employee for any reason (including death, disability or change in status) while his or her purchase right remains outstanding, then that purchase right shall immediately terminate, and all of the Participant's payroll deductions for the purchase period in which the purchase right so terminates shall be immediately refunded in the currency in which payroll (from which such deductions were made) was paid to the Participant by the Foreign Subsidiary. However, should the Participant cease to remain in active service by reason of an approved unpaid leave of absence, then the Participant shall have the right, exercisable up until the last business day of the purchase period in which such leave commences, to (a) withdraw all the payroll deductions collected to date on his or her behalf during such purchase period or (b) have such funds held for the purchase of shares on the next scheduled Purchase Date. In no event, however, shall any further payroll deductions be collected on the Participant's behalf during such leave. Upon the Participant's return to active service (i) within ninety (90) days after the start of the leave or (ii) prior to the expiration of any longer period during which his or her re-employment rights are guaranteed by law or contract, his or her payroll deductions under the Plan shall automatically resume at the rate in effect at the time the leave began. G. Transfer of Employment. In the event that a Participant who is an Eligible Employee of a Foreign Subsidiary is transferred and becomes an Eligible Employee of the Corporation during a purchase period under the Plan, such individual shall continue to remain a Participant in the Plan and payroll deductions shall continue to be collected until the next Purchase Date as if the Participant had remained an Eligible Employee of the Foreign Subsidiary. In the event that an employee of the Corporation who is a participant in the U.S. Plan is transferred and becomes an Eligible Employee of a Foreign Subsidiary during a purchase period in effect under the U.S. Plan, such individual shall automatically become a Participant under the Plan for the duration of the purchase period in effect at that time under the Plan and the balance in such individual's book account maintained under the U.S. Plan shall be transferred as a balance to a book account opened for such individual under the Plan. Such balance, together with all other payroll deductions collected from such individual by the Foreign Subsidiary for the remainder of the purchase period under the Plan (as converted into U.S. Dollars), shall be applied on the next Purchase Date to the purchase of Common Stock under the Plan. 5 H. Corporate Transaction. Each outstanding purchase right shall automatically be exercised, immediately prior to the effective date of any Corporate Transaction, by applying the payroll deductions of each Participant for the purchase period in which such Corporate Transaction occurs, as converted into U.S. Dollars on the basis of the exchange rate in effect as determined by the Plan Administrator at the time of the Corporate Transaction, to the purchase of whole shares of Common Stock at a purchase price per share equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of Common Stock on the start date of the purchase period in which such Corporate Transaction occurs or (ii) the Fair Market Value per share of Common Stock immediately prior to the effective date of such Corporate Transaction. However, the applicable limitation on the number of shares of Common Stock purchasable per Participant shall continue to apply to any such purchase, but not the limitation on the aggregate number of shares purchasable by all Participants. The Corporation shall use its best efforts to provide at least ten (10) days prior written notice of the occurrence of any Corporate Transaction, and Participants shall, following the receipt of such notice, have the right to terminate their outstanding purchase rights prior to the effective date of the Corporate Transaction. I. Proration of Purchase Rights. Should the total number of shares of Common Stock which are to be purchased pursuant to outstanding purchase rights on any particular date exceed either (i) the number of shares then available for issuance under the Plan and the U.S. Plan or (ii) the maximum number of shares purchasable by all Participants (and all participants in the U.S. Plan) in the aggregate on that Purchase Date, then the Plan Administrator shall make a pro-rata allocation of the available shares on a uniform and nondiscriminatory basis, and the payroll deductions of each Participant (and each participant in the U.S. Plan), to the extent in excess of the aggregate purchase price payable for the Common Stock pro-rated to such individual, shall be refunded in the currency in which payroll (from which such deductions were made) was paid to the Participant by the Foreign Subsidiary. J. Assignability. The purchase right shall be exercisable only by the Participant and shall not be assignable or transferable by the Participant. K. Stockholder Rights. A Participant shall have no stockholder rights with respect to the shares subject to his or her outstanding purchase right until the shares are purchased on the Participant's behalf in accordance with the provisions of the Plan and the Participant has become a holder of record of the purchased shares. VIII. ACCRUAL LIMITATIONS A. No Participant shall be entitled to accrue rights to acquire Common Stock pursuant to any purchase right outstanding under this Plan if and to the extent such accrual, when aggregated with (i) rights to purchase Common Stock accrued under any other purchase right granted under this Plan and (ii) similar rights accrued under other employee stock purchase plans (within the meaning of Code Section 423) of the Corporation or any Corporate Affiliate, would otherwise permit such Participant to purchase more than Twenty-Five Thousand U.S. Dollars (U.S.$25,000) worth of stock of the Corporation or any Corporate Affiliate 6 (determined on the basis of the Fair Market Value of such stock on the date or dates such rights are granted) for each calendar year such rights are at any time outstanding. B. For purposes of applying such accrual limitations, the following provisions shall be in effect: (i) The right to acquire Common Stock under each outstanding purchase right shall accrue on the Purchase Date in effect for the purchase period for which such right is granted. (ii) No right to acquire Common Stock under any outstanding purchase right shall accrue to the extent the Participant has already accrued in the same calendar year the right to acquire Common Stock under one (1) or more other purchase rights at a rate equal to Twenty-Five Thousand U.S. Dollars (U.S.$25,000) worth of Common Stock (determined on the basis of the Fair Market Value per share on the date or dates of grant) for each calendar year such rights were at any time outstanding. C. If by reason of such accrual limitations, any purchase right of a Participant does not accrue for a particular purchase period, then the payroll deductions which the Participant made during that purchase period with respect to such purchase right shall be promptly refunded in the currency in which payroll (from which such deductions were made) was paid to the Participant by the Foreign Subsidiary. D. In the event there is any conflict between the provisions of this Article and one or more provisions of the Plan or any instrument issued thereunder, the provisions of this Article shall be controlling. IX. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan was adopted by the Board on July 31, 1998 and shall become effective on the Effective Date. No purchase rights granted under the Plan shall be exercised, and no shares of Common Stock shall be issued hereunder, until the Corporation shall have complied with all applicable requirements of the 1933 Act (including the registration of the shares of Common Stock issuable under the Plan on a Form S-8 registration statement filed with the Securities and Exchange Commission), all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock is listed for trading and all other applicable requirements established by law or regulation. B. Unless sooner terminated by the Board, the Plan shall terminate upon the earliest to occur of (i) the last business day in October 2008, (ii) the date on which all shares available for issuance under the Plan and the U.S. Plan shall have been sold pursuant to purchase rights exercised under the Plan and the U.S. Plan or (iii) the date on which all purchase rights are exercised in connection with a Corporate Transaction. No further purchase rights shall be granted or exercised, and no further payroll deductions shall be collected, under the Plan following such termination. 7 X. AMENDMENT OF THE PLAN The Board may alter, amend, suspend or discontinue the Plan at any time to become effective immediately following the close of any purchase period. However, the Board may not, without the approval of the Corporation's stockholders, (i) increase the number of shares of Common Stock issuable under the Plan and the U.S. Plan, except for permissible adjustments in the event of certain changes in the Corporation's capitalization, (ii) alter the purchase price formula so as to reduce the purchase price payable for the shares of Common Stock purchasable under the Plan, or (iii) modify the requirements for eligibility to participate in the Plan. XI. GENERAL PROVISIONS A. All costs and expenses incurred in the administration of the Plan shall be paid by the Corporation. B. Nothing in the Plan shall confer upon the Participant any right to continue in the employ of the Corporation or any Corporate Affiliate for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Corporate Affiliate employing such person) or of the Participant, which rights are hereby expressly reserved by each, to terminate such person's employment at any time for any reason, with or without cause. C. Except to the extent otherwise provided in any addendum to the Plan, the provisions of the Plan shall be governed by the laws of the State of California without resort to that State's conflict-of-laws rules. D. A Foreign Subsidiary or the Plan Administrator, as the case may be, shall have the right to deduct from any payment to be made under this Plan, or to otherwise require, prior to the issuance or delivery of any shares of Common Stock or the payment of any cash, payment by each Participant of any tax required by applicable law to be withheld. E. Additional provisions for individual Foreign Subsidiaries may be incorporated in one or more Addenda to the Plan. Such Addenda shall have full force and effect with respect to the Foreign Subsidiaries to which they apply. In the event of a conflict between the provisions of such an Addendum and one or more other provisions of the Plan, the provisions of the Addendum shall be controlling. 8 Schedule A Foreign Subsidiaries Participating in International Employee Stock Purchase Plan FileNET Canada, Inc. (Canada) FileNET France (France) FileNET GmbH (Germany) FileNET Company Limited (Ireland) FileNET BV (Netherlands) FileNET Limited (United Kingdom) Addendum A FILENET CORPORATION INTERNATIONAL EMPLOYEE STOCK PURCHASE PLAN PLAN ADDENDUM FOR AUSTRALIAN PARTICIPANTS The following provision shall apply with respect to the extension of the FileNET Corporation International Employee Stock Purchase Plan to Participants (the "Australian Participants") who are Eligible Employees of FileNET Corporation Pty Limited (ACN 056 639 500) ("FileNET Australia"). Notwithstanding the last sentence of Paragraph D of Article VI, the amounts collected from an Australian Participant (including amounts converted into U.S.Dollars on the applicable Purchase Date) shall be held on trust by FileNET Australia in a specific account established by FileNET Australia for such purpose and may not be commingled with the general assets of FileNET Australia or the Corporation or used for general corporate purposes. APPENDIX The following definitions shall be in effect under the Plan: A. Board shall mean the Corporation's Board of Directors. B. Cash Earnings shall mean the (i) base salary payable to a Participant by one or more Foreign Subsidiaries during such individual's period of participation in one or more purchase periods under the Plan plus (ii) all overtime payments, bonuses, commissions, and other incentive-type payments before deduction of any income or employment taxes. Such Cash Earnings shall be calculated before deduction of (A) any income or employment tax withholdings or (B) any pre-tax contributions made by the Participant to any plan or program now or hereafter established by the Corporation or any Corporate Affiliate. However, Cash Earnings shall not include any contributions made on the Participant's behalf by the Corporation or any Corporate Affiliate to any employee benefit or welfare plan now or hereafter established. C. Code shall mean the U.S. Internal Revenue Code of 1986, as amended. D. Common Stock shall mean the Corporation's common stock. E. Corporate Affiliate shall mean any parent or subsidiary corporation of the Corporation (as determined in accordance with Code Section 424), whether now existing or subsequently established. 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 fifty percent (50%) or more 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 assets of the Corporation in complete liquidation or dissolution of the Corporation. G. Corporation shall mean FileNET Corporation, a Delaware corporation, and any corporate successor to all or substantially all of the assets or voting stock of FileNET Corporation which shall by appropriate action adopt the Plan. H. Effective Date shall mean September 1, 1998. Any Foreign Subsidiary which elects, with the approval of the Board, to extend the benefits of this Plan to its employees after such Effective Date shall designate a subsequent Effective Date with respect to its Participants. A-1 I. Eligible Employee shall mean any person who is employed by a Foreign Subsidiary on a basis under which he or she is regularly expected to render more than twenty (20) hours of service per week for more than five (5) months per calendar year for earnings considered wages under Code Section 3401(a). J. 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 U.S. Dollar selling prices per share of Common Stock on the date in question, as those prices are reported by the National Association of Securities Dealers on the Nasdaq National Market. If there are no selling prices for the Common Stock on the date in question, then the Fair Market Value shall be the average of the high and low U.S. Dollar 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 of the high and low U.S. Dollar 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 those prices are officially quoted in the composite tape of transactions on such exchange. If there are no selling prices for the Common Stock on the date in question, then the Fair Market Value shall be the average of the high and low U.S. Dollar selling prices on the last preceding date for which such quotations exist. K. Foreign Subsidiary shall mean any non-U.S. Corporate Affiliate or Affiliates as may be authorized from time to time by the Board to extend the benefits of the Plan to their Eligible Employees. The Foreign Subsidiaries in the Plan are listed in attached Schedule A. L. 1933 Act shall mean the Securities Act of 1933, as amended. M. Participant shall mean any Eligible Employee of a Foreign Subsidiary who is actively participating in the Plan. N. Plan shall mean the FileNET Corporation International Employee Stock Purchase Plan, as set forth in this document. O. Plan Administrator shall mean the committee of two (2) or more non-employee Board members appointed by the Board to administer the Plan. P. Predecessor Plan shall mean the Corporation's 1988 Employee Stock Purchase Plan to which the U.S. Plan is a successor. A-2 Q. Purchase Date shall mean the last business day of each purchase period. R. Stock Exchange shall mean either the American Stock Exchange or the New York Stock Exchange. S. U.S. Plan shall mean the FileNET Corporation 1998 Employee Stock Purchase Plan. A-3 Dear Stockholder: Please fill out, sign and return your Proxy card promptly or use our telephone or Internet voting capabilities. Your vote is very important. Thank you for your cooperation. FileNET Corporation - -------------------------------------------------------------------------------- DETACH HERE - -------------------------------------------------------------------------------- PROXY FILENET CORPORATION 3565 Harbor Boulevard Costa Mesa, CA 92626 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints Sam Auriemma and Katharina Martinka as proxy holders, or either of them acting alone, each with the power to appoint his or her substitute, and hereby authorizes them to represent and vote, as designated below, all of the shares of Common Stock of FileNET Corporation (the "Company"), held of record by the undersigned on March 22, 2001 at the 2001 Annual Meeting of Stockholders to be held at 9:00 a.m., Pacific time, on May 16, 2001, at The Mondavi Center, 1570 Scenic Avenue, Costa Mesa, California 92626, and any adjournment thereof (the "Annual Meeting"). ALL STOCKHOLDERS ARE INVITED TO ATTEND THE ANNUAL MEETING. WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR REPRESENTATION AT THE ANNUAL MEETING. A POSTAGE-PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE ANNUAL MEETING. CONTINUED AND TO BE SIGNED ON REVERSE SIDE (SEE REVERSE SIDE) 1 - -------------------------------------------------------------------------------------------- DETACH HERE - -------------------------------------------------------------------------------------------- Vote by Telephone Vote by Internet It's fast, convenient, and immediate! It's fast, convenient, and your vote is Call Toll-Free on a Touch-Tone Phone immediately confirmed and posted. 1-877-PRX-VOTE (1-877-779-8683) Follow these four easy steps: Follow these four easy steps: 1. Read the accompanying Proxy 1. Read the accompanying Proxy Statement/Prospectus and Proxy Card. Statement/Prospectus and Proxy Card. 2. Call the toll-free number 2. Go to the Website 1-877-PRX-VOTE (1-877-779-8683). http://www.eproxyvote.com/file 3. Enter your 14-digit Voter Control 3. Enter your 14-digit Voter Control Number Number located on your Proxy Card located on your Proxy Card above your name. above your name. 4. Follow the recorded instructions. 4. Follow the instructions provided. YOUR VOTE IS IMPORTANT! YOUR VOTE IS IMPORTANT! Call 1-877-PRX-VOTE anytime! Go to http://www.eproxyvote.com/file anytime! DO NOT RETURN YOUR PROXY CARD IF YOU ARE VOTING BY TELEPHONE OR INTERNET 2 - ----------------------------------------------------------------------------------------------- DETACH HERE - ----------------------------------------------------------------------------------------------- Please mark [X] votes as in this example. This Proxy when properly executed will be voted in the manner directed herein by the undersigned stockholder. If no direction is given, this Proxy will be voted FOR the election to the Board of ALL the nominees listed below and FOR proposals 2, 3 and 4. In their discretion, the Proxy holders are authorized to vote upon such other business as may properly come before the meeting or any adjournment or postponement thereof. 1. Election of Directors Nominees: (01)L. George Klaus, (02)William P. Lyons, (03)Lee D. Roberts, (04)John C. Savage, (05)Roger S. Siboni, and (06)Theodore J. Smith FOR ALL NOMINEES [_] WITHHELD FROM ALL NOMINEES [_] [_] _______________________________________ [_] MARK HERE FOR ADDRESS For all nominees except as noted above CHANGE AND NOTE BELOW 2. To approve The 2002 Incentive Award Plan FOR [_] AGAINST [_] ABSTAIN [_] 3. To approve an amendment to the Company's 1998 Employee Stock Purchase Plan to increase the number of shares of Common Stock available for issuance thereunder by an additional 1,100,000 shares. FOR [_] AGAINST [_] ABSTAIN [_] 4. To ratify the appointment of Deloitte and Touche LLP as the independent accountants of the Company for its year ending December 31, 2002. FOR [_] AGAINST [_] ABSTAIN [_] To transact such other business as may properly come before the meeting. Please date this Proxy and sign it exactly as your name or names appear. When shares are held by joint tenants, both should sign. When signing as an attorney, executor, administrator, trustee or guardian, please give full title as such. If shares are held by a corporation, please sign in full corporate name by the president or other authorized officer. If shares are held by a partnership, please sign in full partnership name by an authorized person. Signature: _________________________________ Date: ________________ Signature: _________________________________ Date: ________________ 3
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DEF 14A Filing
Filenet (FILE) Inactive DEF 14ADefinitive proxy
Filed: 18 Apr 02, 12:00am