Back to GetFilings.com
==================================================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period for _____________ to _______________.
Commission File No. 0-15997
FILENET CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-3757924
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3565 Harbor Boulevard
Costa Mesa, California 92626
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 327-3400
Securities Registered Pursuant to Section 12(b) of the act:
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports) and (2) has been subject to such filing requirements
for the past 90 days: Yes [x] No [ ]
Indicate by check mark whether the disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Based on the closing sale price as of March 25, 2002, the aggregate market value of the 35,356,730 shares
of voting stock of the Registrant held by non-affiliates of the Registrant on such day was $617,682,073. For
purposes of such calculation, only executive officers, board members and beneficial owners of more than 10%
of our outstanding common stock are deemed to be affiliates.
The number of shares outstanding on the Registrant's common stock was 35,397,418 at March 25, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement, to be delivered in connection with the
Registrant's 2002 Annual Meeting of Stockholders, are incorporated by reference into Part III of this Report.
==================================================================================================================
FILENET CORPORATION
2001 ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2001
TABLE OF CONTENTS
Page
PART I
Item 1. Business...................................................................................3
Item 2. Properties................................................................................14
Item 3. Legal Proceedings.........................................................................15
Item 4. Submission of Matters to a Vote of Security Holders.......................................16
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters..................17
Item 6. Selected Financial Data...................................................................18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations...........................................................................19
Item 8. Financial Statements and Supplementary Data...............................................28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...........................................................................28
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................29
Item 11. Executive Compensation...................................................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management...........................29
Item 13. Certain Relationships and Related Transactions...........................................29
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K..........................29
Signatures........................................................................................32
2
Forward-Looking Statements
In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act
of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and is subject to the safe harbors
created by those sections. These forward-looking statements involve risks and uncertainties, including those discussed
herein and in the notes to our financial statements for the year ended December 31, 2001, certain sections of which
are incorporated herein by reference as set forth in Items 7 and 8 of this report. The actual results that we achieve
may differ materially from any forward-looking statements, which reflect management's opinions only as of the date
hereof. We undertake no obligation to revise or publicly release the results of any revisions to these
forward-looking statements. Readers should carefully review the section entitled "Risk Factors" and other documents we
file from time to time with the Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q to be
filed by us in 2002. Our business, financial condition, operating results and prospects can be impacted by a number
of factors, including but not limited to those set forth in the section entitled "Risk Factors" and elsewhere in this
report, any one of which could cause our actual results to differ materially from recent results or from our
anticipated future results.
PART I
Item 1. Business
General
FileNET Corporation was incorporated on July 30, 1982. FileNET Corporation develops, markets, and services
Enterprise Content Management ("ECM"), Collaborative Commerce and Business Process Management ("BPM") software
products and packaged eBusiness applications and solutions for selected vertical markets. Our market-leading ECM and
collaborative commerce software products enable organizations to improve operational efficiency and leverage their
content resources through the delivery of efficient, flexible, and scalable eBusiness process management solutions.
By linking customers, business partners, suppliers, and employees, our software solutions help organizations increase
productivity, customer satisfaction, and revenue. FileNET also offers highly skilled professional services for the
implementation of these software solutions, as well as 24 x 7 technical support and services to our customers on a
global basis.
Markets And Customers
FileNET offers a family of core technology software products under the brand names Panagon(TM)and Brightspire(TM)
as well as packaged eBusiness applications for specific horizontal and vertical markets through our Acenza(TM)
applications family. These products and applications enable users to automate business processes and manage
associated content on an enterprise-wide basis, as well as within a collaborative environment that extends beyond a
customer's enterprise. FileNET's customers consist mostly of Global 2000 organizations, including 80 of the Fortune
100, and are typically those enterprises and government agencies that have complex, mission-critical business
processes that manage, store, and share electronic content. As of December 31, 2001, our installed base consisted of
more than 3,600 customers worldwide. FileNET's software solutions are effective for a variety of applications such as
mortgage loan servicing, customer relationship management, enterprise resource planning, insurance claims processing,
regulatory compliance, accounts payable and receivable, and for any business operation that processes significant
3
amounts of electronic content in their day-to-day operations. Additionally, our software products address ad hoc
business processes at the enterprise, departmental, and workgroup levels to improve overall enterprise productivity
and integrate with industry-standard productivity and enterprise applications such as Lotus Notes, Microsoft Office,
SAP, Siebel, and others.
We market our products in more than 90 countries around the world through a direct sales force and through
our ValueNET(R) business partner program. The ValueNET program brings together value-added resellers ("VARs"),
independent software vendors, system ntegrators, consultants, service providers, and master VARs to deliver a broad
range of solutions and services to our customers worldwide. Further, our strategic alliances with other industry
leaders contribute to our efforts in product development, customer satisfaction, and worldwide market penetration.
More than 350 firms operate under the ValueNET program and combine FileNET software products with vertical
market-specific, value-added services and applications to provide turnkey solutions for customers. FileNET solutions are
applicable in a wide variety of industries, however, historically, insurance, financial services, government,
manufacturing, telecommunications, and utilities have been FileNET's key vertical markets
FileNET's global customer support operation offers software maintenance and technical support services for
our products worldwide. These technical support programs offer a wide range of services including the right to new
versions of the majority of FileNET software, extended phone support coverage, on-site technical consultants, a
technical account management program, and software development kit support.
FileNET's professional services operation offers business and technical consulting services and training to
both end-users of our products and to ValueNET partners. These professional services are marketed by our direct sales
force and through the ValueNET business partner program, with a focus on FileNET centric enterprise system
implementation and the delivery of eBusiness applications.
Business Strategy
Our objective is to build on our many strengths to be the leader in the ECM and related applications market.
To achieve this objective, we intend to continue to aggressively invest in product development and introduction,
differentiating ourselves through a rich suite of collaborative and BPM based vertical and horizontal applications
that offer the most expansive ECM solution in the industry. We intend to continue to exploit our market leadership,
expansive installed customer base, financial strengths, strong development capabilities, and substantial worldwide
distribution and service network to deliver on this vision.
Industry Segments and Geographic Information
For the purposes of Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments
of an Enterprise and Related Information," we have provided a breakdown of our sales utilizing the management approach
in Note 12 of the "Notes to Consolidated Financial Statements" under Item 8, "Financial Statements and Supplementary
Data." Utilizing the management approach, we have categorized our sales by operating segments. A summary of our sales
by geographic location is incorporated herein by reference from Note 12 of the "Notes to Consolidated Financial
Statements" under Item 8, "Financial Statements and Supplementary Data."
Backlog
We typically ship our products within a short period of time after acceptance of orders, which is common in the
computer software industry.
4
Software Products and Solutions
Panagon
The Panagon family of software offers a comprehensive and tightly integrated eProcess and Content Management
application development platform. It's easy-to-use web browser interfaces, Application Programming Interfaces
("APIs"), and world-class server technology deliver a high-performance ECM solution. This integrated set of products
allows an organization to manage business processes and associated electronic content via intranet, extranet or the
Internet. Panagon software products are built around Panagon eProcess Services, an application development platform
that integrates with each of the Panagon products to build specific eBusiness solutions.
The Panagon product line includes the following software products:
Panagon eProcess Services is a next-generation Web browser based, business process management product.
eProcess Services enables an organization to create and manage high-volume, mission-critical business
processes in a dynamic web environment. Our web-based user interface, built-in eProcess applications,
Web server components, and XML architecture are easy to use and provide scalable connectivity of business
processes for employees, business partners, and customers.
Panagon Web Services combines a full-featured, web browser-based thin client, a comprehensive web-centric
application development tool kit, and web server components, to support complex and mission critical
eProcess and ECM business activities. This application provides a complete set of content management
functionality, allowing users to check in, check out, search and browse, share, revise, and change
properties for content stored in a Panagon repository, all from a web browser.
Panagon Content Services is an ECM repository for creating, accessing, managing, securing, and
dynamically updating business-critical electronic documents and content. Content Services allows a
business to manage enterprise content from creation, to secure delivery, to revision and re-use.
Panagon Web Publisher simplifies and automates web publishing operations for Internet, extranet, and
intranet Web sites by providing indexing and automatic formatting for Microsoft Word and other native
format documents that authors simply drag and drop to the appropriate Panagon repository folder. It
eliminates virtually all HTML coding, dramatically reducing workloads for Webmasters, information
technology staff, and Web publishers. Panagon Web Publisher can automatically update entire web sites
and on-line, compound documents without manual intervention, avoiding problems with broken links and
virtually eliminating out-of-date web content.
Panagon WorkFlo(R) Services is our high-performance eProcess workflow engine. WorkFlo Services, combined
with eProcess Services, enables customers to automate and access critical business processes and
associated content. Panagon WorkFlo Services can be used to create applications that reflect the way
business processes are performed, and is a critical enabling technology for the automation of business
processes via the Web. It allows organizations to control and modify work processes to meet the needs of
a dynamic business environment, and integrates the flow of information between software applications
5
within a company's business processes. Panagon WorkFlo Services supports multiple client, server and
applications development environments, such as Java and COM, and integrates with leading business process
reengineering products for reduced implementation time.
Panagon Integrated Document Management ("IDM") Desktop is a unified Microsoft Windows client software
application that allows users to view, manage, revise, share, and distribute content across an enterprise
for ad hoc or mission critical use. Panagon IDM Desktop allows users to manage content directly from
within Microsoft Office and Lotus Notes applications.
Panagon Image Services is an image and object server that allows businesses to manage the high-speed
acquisition, distribution, and access of content and objects of all types.
Panagon Report Manager is an online statement and report management system. Panagon Report Manager allows
organizations the ability to capture, store and access legacy print data streams within eBusiness
applications by storing, accessing, mining, and analyzing computer-generated reports, statements and
forms.
Panagon Capture addresses document and content capture needs. Available in high-volume Capture
Professional or small department Capture Desktop versions, Panagon Capture acquires digital and
paper-based content into Panagon Image Services or Panagon Content Services for enterprise-wide use and
online access.
Panagon Document Warehouse(TM)for SAP software is a document and data archiving application certified by
SAP, for use with the popular R/3 Enterprise Resource Planning ("ERP") application suite.
Brightspire
Brightspire is a powerful and customizable total business integration framework. The Brightspire software
product line is applications-focused and enables organizations to easily define and re-use business logic while
leveraging applications internal or external to the enterprise. Brightspire accelerates the development of
applications such as eProcurement and collaborative selling, rapidly increasing the productivity of supply chains and
expediting the sales cycle. Brightspire allows organizations to improve customer satisfaction and deliver a higher
return on investment by effectively enabling collaborative commerce.
The Brightspire product line includes the following components:
Brightspire Process Engine is the process management component for design, execution and tracking of
processes. It manages all processes and their associations with documents, data, and lifecycle
information residing in the Content Engine and external applications. It also tracks and records the
status of work in progress.
Brightspire Content Engine provides an object-oriented, XML-based repository for storing digital business
objects. It creates relationships between these objects and then manages their individual components and
lifecycle. The Content Engine manages access to business objects across a distributed environment and
maintains the information about the behavior, characteristics, and properties of these objects. The
Content Engine also monitors the content and reacts to certain events, such as when they are updated.
6
Brightspire Enterprise Application Integration ("EAI") and B2Bi connects packaged applications, legacy
systems and integration-specific software tools used to build custom solutions, from low-level transport
technology to more complete, product-based integration solutions, allowing them to operate seamlessly
together. Brightspire's business system integration also extends beyond the corporate firewall, allowing
you to automate collaborative interactions with suppliers and customers over the Internet using standards
such as EDI, XML and specific protocols such as RosettaNet. Brightspire can support B2Bi solutions that
are custom-built, delivered through packaged products, or supported by an outsourced trading community.
With these capabilities, Brightspire provides for visibility to enterprise-wide data, regardless of what
application or database stores the information. It also provides the control needed to define, manage and
track business processes independent of the enterprise applications that may be implemented.
Brightspire Application Engine is a high-level developer's interface and is the foundation for custom
applications, leveraging the flexibility of Java, SOAP, and XML. It links application programs to the
Content and Process Engines, allowing these components to operate seamlessly together. This is a single
control center for business logic, processes, information, and security, a unified interface for all
applications. With this capability, one can build applications that integrate and communicate with
different back-office applications, as well as with business partners' applications.
Brightspire Workplace is an end-user application that provides a Web-based interface to Brightspire. It
enables users to locate business content, initiate new transactions, check status and track a wide
variety of processes and information objects across multiple object stores. Highly customizable and
platform independent, Brightspire Workplace enables employees, partners and customers to manage work
processes.
Brightspire Workbench is a collection of Java applets designed for business analysts and administrators.
Its design tools include: a Business Process Designer, a search and Search Template Designer, and a
designer for defining publish templates. Also included are administrative tools such as a Process Tracker
for tracking work in progress, a Process Administrator for managing work queues and work objects, and
Site Preferences for setting user parameters.
Brightspire Solution Templates are a set of predefined business objects and processes that can be applied
to address specific industry scenarios, such as eProcurement. These solution templates integrate with
other vertical applications. This enables customers to build repeatable solutions that can be deployed
quickly, and realize a fast return on investment.
Acenza eBusiness Applications
The Acenza family of eBusiness applications is effective for linking people, process and content by
providing management of business processes and associated content in a variety of specific horizontal and vertical
industry sectors. Based on our Panagon and Brightspire core technologies, Acenza eBusiness applications streamline
the business processes associated with acquiring and servicing customers and business partners across the Web. Acenza
applications automate core front-office and back-office business processes and systems, externalize these business
processes to the Web, and create and manage associated content using the latest Panagon and Brightspire products and
technology.
7
The Acenza product family includes the following eBusiness applications:
Acenza for Insurance enables insurance organizations to improve operational efficiency and customer
service by delivering web-based business process management solutions. Acenza for Insurance provides the
following capabilities: eliminates or reduces filing costs; provides efficient and accurate self-service
that is customer friendly; improves workers' efficiency and utilization of their knowledge to reduce
processing time and costs; improves customer satisfaction; and supports the rapid deployment of
web-enabled claims, underwriting and policy administration operations, linking customers, agents/brokers,
and employees in shared processes and content. Acenza for Insurance offers two applications:
1. Acenza Claims - allows customers to submit claims conveniently via the Web, phone, fax or
email.
2. Acenza Underwriting and Policy Administration - allows applications, renewals, cancellations
and reinstatements to be s ubmitted, along with the required documentation, via the Web and then
forwarded directly to an underwriter for review and approval.
Acenza Payables streamlines the accounts payable process, allowing accounting staff to handle more
purchase transactions, quickly, easily, and accurately. Invoices presented in paper, fax or electronic
form are captured, filed securely, and routed for data entry and approval automatically. A Web interface
allows status checking and approval of invoices to be deployed cost-effectively across the enterprise and
to business partners.
Storage Management
We also manufacture and market an Optical Storage and Retrieval ("OSAR") library product based on 12-inch, 30
gigabyte, optical disk technology for storage management of business critical content.
Services, Support, And Manufacturing
We operate service and support organizations on a global basis to provide both pre-sales and post-sales
services to ensure successful implementation and customer satisfaction.
Our worldwide Customer Service and Support organization provides comprehensive support capabilities including
electronic and real-time phone support and global call tracking for customers and partners on support programs. Highly
skilled and experienced systems engineers deliver consistent support coverage on multiple platforms with
round-the-clock call handling. Our technical web site offers the ability to open cases, search our knowledge base and
review related status reports.
Support programs may be customized and enhanced with optional fee-based services. These options include after
hours phone coverage, on-site technical consultants to assist with upgrades and FileNET installations, and FileNET
Software Development Kit ("SDK") support for development teams building applications.
For the second consecutive year, our Global Technical Response Centers in North America and Europe achieved
certification under the prestigious Support Center Practices Certification program. This certification is an
internationally recognized standard created by the Service and Support Professionals Association.
8
Our worldwide professional services organization provides consulting, development, architecture and other
technical services to our licensed customers and training services. These services are provided through in-house
employees and through a network of qualified partners. Our worldwide professional services organization understands
the requirements for implementing an enterprise solution and offers a comprehensive methodology to install, integrate,
customize and deploy our solutions. These services range from the management of large-scale implementations of our
products to prepackaged standard services such as software installation. Our educational curriculum includes training
courses for end users, application developers and system administrators through media-based and instructor-led
training.
Our manufacturing facilities in Costa Mesa, California and Dublin, Ireland, conduct software manufacturing
and distribution, localization, integration, test and quality control.
Research And Development
We have made substantial investments in research and development, primarily through internal development
activities, third party embedded technology and to a lesser extent, through technology acquisitions. Our development
efforts use our ECM platform to deliver industry vertical applications and a next generation high throughput
transaction oriented Collaborative Commerce platform. Our development efforts also seek to deliver "end to end" ECM
capability in the market. Additionally, we embed third party software that enhances the functionality of our
products through a variety of OEM agreements. Expenditures for research and development were $68.8 million, $57.9
million, and $54.3 million for the years ended December 31, 2001, 2000, and 1999, respectively.
We expect to look for technology acquisitions that provide us with additional product know-how or domain
knowledge where appropriate and will continue to embed third party products that enhance our product line. We intend
to continue to invest significantly in internal development with a focus on developing new functionality in Business
Process Management, Content Management and Collaborative Commerce applications that provide a richer competitive
product offering to our customers.
Competition
The market for our products is highly competitive and competition is expected to intensify. We compete with
a large number of eProcess, Web Content Management, eBusiness Applications, workflow and document imaging, and
electronic document management companies. Numerous smaller software vendors also compete in each product area. We
also experience competition from systems integrators who configure hardware and software into customized systems.
Database vendors such as Oracle and IBM, messaging vendors and eCommerce vendors such as Broadvision,
webMethods, and Art Technology Group may compete with us in the future. It is also possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market share. We also expect that competition
will increase as a result of software industry consolidations.
We believe that the principal competitive factors affecting the market for our software products and services
include vendor and product reputation, product quality, performance and price, the availability of software products
on multiple platforms, product scalability, product integration with other enterprise applications, software
functionality and features, software ease of use, and the quality of professional services, customer support services
and training. The relative importance of each of these factors depends upon the specific customer involved.
Certain of our competitors and potential competitors may have greater resources, larger sales and marketing
teams, broader product lines and more experience developing Internet-based software than we do. Increased competition
9
may result in price reductions, reduced gross margins and loss of market share, any of which could have a material
adverse effect on our business, financial condition or results of operations.
Patents And Licenses
We hold three patents for our OSAR product, two of which expire on July 11, 2004 and the third of which
expires on August 4, 2004. We have one patent, which issued on January 8, 2002, directed to methods for balancing
work flow load among multiple work flow systems, and one additional patent pending directed to methods of partitioning
a workflow queue. We have also entered into non-exclusive license arrangements with a number of organizations,
including IBM and Oracle, which permit us and our resellers to grant sublicenses to end users of our systems to use
software developed by these third party vendors.
Employees
As of December 31, 2001, we had 1,749 full-time employees, of which 425 were employed in research and
development, 484 in sales, 91 in marketing, 252 in education and professional services, 260 in customer support, 77 in
operations, and 160 in administration. No employees are represented by labor unions, and we have never experienced a
work stoppage. We believe that we enjoy good employee relations. During fiscal year 2001, we experienced a workforce
reduction totaling 158 employees.
Risk Factors
Our Quarterly Operating Results May Fluctuate in Future Periods. Prior growth rates in our revenue and
operating results should not necessarily be considered indicative of future growth or operating results. Our
operating results have fluctuated in the past and we anticipate our future operating results will continue to
fluctuate due to many factors, some of which are beyond our control. These factors, include, but are not limited to,
the following:
o the persistence of the industry-wide slow down in IT spending as well as general economic recession
in our major Regions;
o general domestic and international economic and political conditions;
o the discretionary nature of our customer's budget and purchase cycles and the absence of long-term
customer purchase commitments;
o the tendency to realize a substantial amount of our revenue in the last weeks, or even days, of
each quarter;
o the potential for delays or deferrals of customer orders;
o the size, complexity and timing of individual transactions;
o changes in foreign currency exchange rates and the impact of the euro currency conversion;
o the length of our sales cycle;
o variations in the productivity of our sales force;
o the level of software product and price competition;
o the timing of new software introductions and software enhancements by us and our competitors;
o the mix of sales by products, software, services and distribution channels;
o acquisitions by us and our competitors;
o our ability to develop and market new software products and control costs;
o the quality of our customer support; and
o the level of international sales.
10
The decision to implement our products is subject to each customer's resources and budget availability. Our
quarterly sales generally include a mix of medium sized orders, along with several large individual orders, and as a
result, the loss or delay of an individual large order could have a significant impact on our quarterly operating
results and revenue. Our operating expenses are based on projected revenue trends and are generally fixed.
Therefore, any shortfall from projected revenue will cause significant fluctuations in operating results from quarter
to quarter. As a result of these factors, revenues and operating results for any quarter are subject to fluctuations
and are not predictable with any significant degree of accuracy. Therefore, we believe that period-to-period
comparisons of our results of operations should not be relied upon as indications of future performance. Moreover,
such factors could cause our operating results in a given quarter to be below the expectations of public market
analysts and investors. In either case, the price of our common stock could decline materially.
The Markets in Which We Operate Are Highly Competitive. The markets we serve are highly competitive and we
expect competition to intensify. Our future financial performance will depend primarily on the continued growth of the
market for our software products and services as well as the purchase of our products by customers in these markets.
If the markets we serve fail to grow or grow more slowly than we currently anticipate, our business, financial
condition and operating results would be harmed. This intensely competitive market is highly fragmented and rapidly
changing and there are certain competitors of ours with substantially greater sales, marketing, development and
financial resources. Our present or future competitors may be able to develop software products comparable or
superior to those offered by us, offer lower priced products or adapt more quickly than we do to new technologies or
evolving customer requirements. In order to be successful in the future, we must respond to technological change,
customer requirements and competitors' current software products and innovations. We cannot assure you that we will be
able to continue to compete effectively in our target markets or that future competition will not have a material
adverse effect on our business, financial condition or results of operations. In addition, current and potential
competitors have established, or may establish, cooperative relationships among themselves or with third parties to
increase the ability of their products to address the needs of the markets we serve. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased
competition may result in price reductions, reduced gross margins and loss of market share, any of which could have a
material adverse effect on our business, financial condition or results of operations.
We Must Develop and Sell New Products in Order to Keep Up With Rapid Technological Change. The market for
our software and services is characterized by rapid technological developments, evolving industry standards, changes
in customer requirements and frequent new product introductions and enhancements. Our ability to continue to sell
products will be dependent upon our ability to continue to enhance our existing software and services offerings,
develop and introduce, in a timely manner, new software products incorporating technological advances and respond to
customer requirements. Our future success also depends, in part, on our ability to execute on our strategy of
broadening our Enterprise Content Management and related applications market. This strategy may require us to
maintain relations with our existing technology partners and develop relations with new technology partners. We may
not be successful in maintaining and developing these relationships or in developing, marketing and releasing new
products or new versions of our products that respond to technological developments, evolving industry standards or
changing customer requirements. We may also experience difficulties that could delay or prevent the successful
development, introduction and sale of these enhancements. In addition, these enhancements may not adequately meet the
requirements of the marketplace and may not achieve any significant degree of market acceptance. If we fail to
successfully maintain or establish relationships with technology partners or to execute on our integrated product
solution strategy, or if release dates of any future products or enhancements are delayed, or if these products or
enhancements fail to achieve market acceptance when released, our business operating results and financial condition
11
could be materially harmed. In the past, we have experienced delays in the release dates of enhancements and new
releases to our products and we cannot assure you that we will not experience significant future delays in product
introduction. From time to time, we or our competitors may announce new software products, capabilities or
technologies that have the potential to replace or shorten the life cycles of our existing software products. We
cannot assure you that announcements of currently planned or other new software products will not cause customers to
delay their purchasing decisions in anticipation of such software products, and such delays could have a material
adverse effect on our business and operating results.
Protection of Our Intellectual Property and Other Proprietary Rights is Limited and There is Risk of
Third-Party Claims of Infringement. Our success depends, in part, on our ability to protect our proprietary rights
to the technologies used in our principal products. We rely on a combination of copyrights, trademarks, trade
secrets, confidentiality procedures and contractual provisions to protect our proprietary rights in our software
products. We cannot assure you that our existing or future copyrights, trademarks, trade secrets or other
intellectual property rights will have sufficient scope or strength to provide meaningful protection or a commercial
advantage to us. In addition, the laws of some foreign countries do not protect our proprietary rights to the same
extent as do the laws of the United States. Our inability to protect our intellectual property may have a material
adverse effect on our business, financial condition or results of operations.
We may, from time to time, be notified that we are infringing certain patent or intellectual property rights
of others. While there are no material actions currently pending against us for infringement of patent or other
proprietary rights of third parties, we cannot assure that third parties will not initiate infringement actions
against us in the future. Combinations of technology acquired through past or future acquisitions, embedded software
and our technology will create new software products and technology that also may give rise to claims of
infringement. Infringement actions can result in substantial costs and diversion of resources, regardless of the
merits of the actions. If we were found to infringe upon the rights of others, we cannot assure that we could redesign
the infringing products or could obtain licenses on acceptable terms, if at all. Additionally, significant damages
for past infringement could be assessed or future litigation relative to any such licenses or usage could occur. An
adverse disposition of any claims or the advent of litigation arising out of any claims of infringement may have a
material adverse effect on our business, financial condition or results of operations.
We Depend on Certain Strategic Relationships. In order to expand the distribution of our products and
broaden our product offerings, we have established strategic relationships with a number of indirect channel partners
and other consultants that provide marketing and sales opportunities for us. We have entered into key formal and
informal agreements with other companies such as Hewlett-Packard Company, IBM Global Services, Microsoft Corporation,
SAP AG, Siebel Systems Inc, Sun Microsystems, Inc., and Vignette Corporation, among others. Certain of these
agreements do not have minimum purchase requirements and/or are cancelable at will. We cannot assure you that these
companies will not reduce or discontinue their relationships with, or support of, FileNET and our products. Our
failure to maintain these relationships, or to establish new relationships in the future, could harm our business,
financial condition and results of operations.
We currently license certain software from third parties, including software that is integrated with
internally developed software and used in our products to perform key functions. In the past, we have had difficulty
renewing certain licenses. The failure to continue to maintain these licenses would prohibit us from selling certain
products. We cannot assure you that such third parties will remain in business, that they will continue to support
their software products or that their software products will continue to be available to us on acceptable terms. The
loss or inability to maintain any of these software licenses could result in shipment delays or reductions in software
shipments until equivalent software can be developed, identified, licensed, and integrated. This could adversely
affect our business, financial condition or results of operations.
12
We Must Retain and Attract Key Executives and Personnel. Our success depends to a significant degree upon
the continued contributions of our key management, as well as other marketing, technical and operational personnel.
The loss of the services of one or more key employees could have a material adverse effect on our operating results.
We also believe our future success will depend in large part upon our ability to attract and retain additional highly
skilled management, technical, marketing, product development, and operational personnel and consultants. There is
competition for such personnel, particularly software developers, professional service consultants and other technical
personnel and pay scales in the software industry have significantly increased. We cannot assure you that in the
future we will be successful in attracting and retaining such personnel.
We are Subject to Many Risks Internationally. Historically, we have derived approximately 25-30% of our
total revenues from international sales through our worldwide network of subsidiaries and channel partners.
International business is subject to certain risks, including, but not limited to, the following:
o tariffs and trade barriers;
o varying technical standards;
o political and economic instability;
o reduced protection for intellectual property rights in certain countries;
o difficulties in staffing and maintaining foreign operations;
o difficulties in managing foreign distributors;
o varying requirements for localized products;
o potentially adverse tax consequences;
o currency restrictions and currency exchange fluctuations;
o adoption of the euro and uncertainties surrounding the euro conversion;
o the burden of complying with a wide variety of complex foreign laws, regulations and treaties; and
o the possibility of difficulties in collecting accounts receivable.
Any of these factors could have a material adverse effect on our business, financial condition or results of
operations in the future.
Our Business Will Suffer if Our Software Contains Errors. Software and products as complex as those we sell
are susceptible to errors or failures, especially when first introduced or when new versions are released. Our
software products are often intended for use in applications that are critical to a customer's business. As a result,
our customers may rely on the effective performance of our software to a greater extent than the market for software
products generally. Despite internal testing and testing by current and potential customers, new products or
enhancements may contain undetected errors or performance problems that are discovered only after a product has been
installed and used by customers. Errors or performance problems could cause delays in product introduction and
shipments or could require design modifications, either of which could lead to a loss in or delay in revenue. These
problems could cause a diversion of development resources, harm our reputation or result in increased service or
warranty costs, or require the payment of monetary damages, any of which could harm our business, operating results
and financial condition. While our license agreements with customers typically contain provisions designed to limit
our exposure to potential product liability claims, it is possible that such limitation of liability provisions may
not be effective under the laws of certain jurisdictions.
13
Our Stock Price Has Been and May Continue to Be Volatile. The trading price of our common stock has fluctuated
in the past and is subject to significant fluctuations in response to the following factors, some of which are beyond
our control:
o variations in quarterly operating results;
o fluctuations in our order levels;
o changes in earnings estimates by analysts;
o announcements of technological innovations or new products or product enhancements by us or our competitors;
o key management changes;
o changes in joint marketing and development programs;
o developments relating to patents or other intellectual property rights or disputes;
o developments in our relationships with our customers, resellers and suppliers;
o our announcements of significant contracts, acquisitions, strategic partnerships or joint ventures;
o general conditions in the software and computer industries;
o fluctuations in stock market price and volume, which are particularly common among highly volatile
securities of software companies; and
o other general economic and political conditions.
In recent years, the stock market in general has experienced extreme price and volume fluctuations that have
affected the market price for many companies in industries similar to ours. Some of these fluctuations have been
unrelated to the operating performance of the affected companies. These market fluctuations may decrease the market
price of our common stock in the future.
Acquisitions of Companies or Technologies May Result in Disruptions to Our Business and Diversion of
Management Attention. In the past, we have made acquisitions, and as part of our business strategy, we frequently
evaluate strategic opportunities. We anticipate that our future growth may depend in part on our ability to identify
and acquire complementary businesses, technologies, market channels or product lines. Acquisitions involve
significant risks and could divert management's attention from the day-to-day operations of our ongoing business.
Additionally, such acquisitions may include numerous other risks, including, but not limited to the following:
o difficulties in the integration of the operations, products and personnel of the acquired companies;
o the incurrence of debt and impairment charges related to certain intangible assets;
o liabilities and risks that are not known or identifiable at the time of the acquisition;
o the potential loss of customers of FileNET or the acquired company; and
o the potential loss of key personnel of the acquired company.
If we fail to successfully manage future acquisitions or fully integrate future acquired businesses, products or
technologies with our existing operations, we may not receive the intended benefits of the acquisition and such
acquisitions may harm our business and financial results.
Item 2. Properties
We currently lease 352,000 square feet of office, development and manufacturing space in Costa Mesa,
California and 91,000 square feet of office and development space in Kirkland, Washington. In addition, we lease
24,500 square feet of office and manufacturing space in Dublin, Ireland. We also lease sales and support offices in
25 locations in the United States, 19 locations in Europe, 3 locations in Australia, 2 locations in Canada, and 2
14
locations in Asia. We believe that the Costa Mesa, Dublin and Kirkland facilities will be adequate for our
anticipated development and manufacturing needs through 2002.
Item 3. Legal Proceedings
In October 1994, Wang Laboratories, Inc. ("Wang") filed a complaint in the United States District Court for
the District of Massachusetts alleging that the Company was infringing five patents held by Wang (the "FileNET
Case"). On June 23, 1995, Wang amended its complaint to include an additional related patent. On July 2, 1996, Wang
filed a complaint in the same court alleging that Watermark Software Inc., a former wholly owned subsidiary of FileNET
that was merged with the Company, was infringing three of the same patents asserted in the initial complaint (the
"Watermark Case"). On October 9, 1996, Wang withdrew its claim in the FileNET Case that one of the patents it
initially asserted was infringed.
On January 8, 1997, the court stayed the Watermark Case, subject to limited exceptions for certain discovery.
The products at issue in the Watermark Case were phased out as of December 31, 1999. In March 1997, Eastman Kodak
Company purchased the Wang imaging business unit that had responsibility for this litigation. On July 30, 1997, the
court permitted Eastman Software and Kodak Limited of England to be substituted in the FileNET Case in place of Wang. On
April 24, 2001, the court permitted Eastman Software and Kodak Limited to be substituted in the Watermark Case in place
of Wang.
On August 10, 2000, Eastman Kodak Company, Eastman Software and eiStream WMS, Inc. ("eiStream") entered into
an Asset Purchase and Sale Agreement ("APA"), under which eiStream acquired some, but not all, of the assets of
Eastman Software.
Effective June 30, 2001, the Company and Eastman Kodak Company, the parent of Eastman Software, entered into an
agreement that settled the FileNET Case. In accordance with that settlement agreement, the parties filed on July 5,
2001, a stipulation dismissing the FileNET Case.
On September 19, 2001, eiStream filed a complaint against Eastman Kodak Company and Eastman Software in the
United States District Court for the district of Dallas County (the "eiStream Case"). eiStream sought, among other
things, a declaratory judgment that pursuant to the terms of the APA, eiStream owns the Watermark Case and has the right
to pursue claims in the Watermark Case regarding Watermark products sold prior to the phase out in December 1999 and
that Eastman Kodak Company was required to obtain eiStream's consent prior to settling the FileNET Case.
On October 15, 2001, Eastman Kodak Company filed its answer to eiStream's complaint in which Eastman Kodak
Company claimed ownership of the Watermark Case, denied that the APA gave eiStream ownership of the Watermark Case,
and stated that eiStream's claim that its consent was necessary prior to settling the FileNET Case was barred by
principles of equitable estoppel.
Also on October 15, 2001, Eastman Kodak Company moved to abate the eiStream Case because the previously filed
Watermark Case raises issues inherently related with issues raised in the eiStream Case and because certain necessary
and indispensable parties were not properly joined in the eiStream Case.
On October 31, 2001, Eastman Kodak Company moved for leave to amend the original complaint filed in the
Watermark Case to add eiStream as a party, to add the correct Eastman Kodak Company entities as plaintiffs and to add
a declaratory judgment count seeking a judgment that Eastman Kodak Company, not eiStream, owns the Watermark Case.
In November 2001, Eastman Kodak Company and eiStream amended the APA and resolved all their disputes
regarding Eastman Kodak Company's right to settle the FileNET Case and the Watermark Case. Effective November 15,
2001, eiStream agreed that the June 30, 2001 agreement between FileNET and Eastman Kodak Company which settled the
15
FileNET Case is in accordance with the APA, as amended, and that FileNET and Eastman Kodak Company may dismiss the
Watermark Case with prejudice.
Effective November 15, 2001, Eastman Kodak Company entered into an agreement with the Company that settled
the Watermark Case. In accordance with that settlement agreement and the amended APA between Eastman Kodak Company
and eiStream, the parties to the Watermark Case filed on November 16, 2001 a stipulation dismissing that case with
prejudice. A stipulation of non-suit with prejudice was filed in the eiStream Case on November 19, 2001.
Subsequent to December 31, 1998, the former shareholders of Saros Corporation, a former wholly-owned
subsidiary of FileNET that was merged with the Company, filed a demand for mandatory arbitration to release
approximately 375,700 shares of the Company's stock which were held in escrow pursuant to the Agreement and Plan of
Merger dated January 17, 1996 among FileNET Corporation, FileNET Acquisition Corporation and Saros Corporation and for
damages. The Company and the agent for the former Saros shareholders ("Shareholders' Agent") had agreed to mediate the
matter, but the Shareholders' Agent cancelled the mediation prior to the scheduled date and renewed the demand
for mandatory arbitration. A binding arbitration proceeding took place during the period March 5, 2001 through
March 23, 2001. On April 24, 2001 the arbitrators issued an interim decision denying all claims asserted by the
Shareholders' Agent against the Company, sustaining all claims asserted by the Company, and awarding all of the shares
of stock held in escrow to the Company. On June 7, 2001 the arbitrators issued a final award that reiterated the
principal rulings set forth in the interim decision and awarded all of the stock held in the escrow to the Company. The
final award further determined that the escrowed shares provide the exclusive source for the Company's recovery of
attorneys' fees and costs from the former stockholders of Saros. These shares were cancelled and retired when the
Company received the certificates from the escrow agent in September 2001.
In the normal course of business, we are subject to various other legal matters. While the results of
litigation and claims cannot be predicted with certainty, we believe that the final outcome of these other matters
will not have a materially adverse effect on our consolidated results of operations or financial conditions.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended
December 31, 2001.
16
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
Our common stock is traded on the Nasdaq National Market under the symbol "FILE". The following are the high
and low sale prices from January 1, 1999 through December 31, 2001, as reported by Nasdaq:
High Low
Year Ended December 31, 2001
4th Quarter $ 21.41 $ 9.00
3rd Quarter 14.86 8.95
2nd Quarter 16.23 8.88
1st Quarter 29.13 12.75
Year ended December 31, 2000
4th Quarter $ 35.63 $ 15.69
3rd Quarter 21.31 15.00
2nd Quarter 31.06 15.25
1st Quarter 46.81 21.19
Year ended December 31, 1999
4th Quarter $ 26.38 $ 10.00
3rd Quarter 13.69 7.75
2nd Quarter 12.00 6.00
1st Quarter 13.38 6.50
The closing price of our common stock at December 31, 2001 was $20.29. The approximate number of stockholders
of record as of March 27, 2002, was 536. The closing price of our common stock on that date was $17.58.
We have not paid any dividends on our common stock. We currently intend to retain earnings for use in our
business and do not anticipate paying cash dividends in the foreseeable future. Our ability to pay dividends is
limited by the terms of our line of credit agreement.
17
Item 6. Selected Financial Data
The following table summarizes certain selected financial data and should be read in conjunction with our
consolidated financial statements and the notes thereto, and Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations. The selected consolidated statements of operations and balance sheet data as of
and for each of the five years in the period ended, and as of December 31, 2001, have been derived from our audited
financial statements.
(In thousands, except per share amounts)
Fiscal Years Ended December 31, 2001 2000 1999 1998 1997
Consolidated statements of
operations data:
Revenue:
Software $ 118,972 $ 204,823 $ 183,253 $ 171,153 $ 132,723
Service 199,722 172,772 147,449 115,501 89,280
Hardware 13,840 21,019 16,418 23,579 29,422
Total revenue 332,534 398,614 347,120 310,233 251,425
Cost of revenue:
Cost of software revenue 7,481 14,594 16,984 16,814 13,416
Cost of service revenue 100,447 100,456 85,686 69,586 54,003
Cost of hardware revenue 10,021 13,380 8,805 13,181 20,330
Total cost of revenue 117,949 128,430 111,475 99,581 87,749
Gross profit 214,585 270,184 235,645 210,652 163,676
Operating expenses:
Research and development 68,838 57,914 54,307 50,132 40,927
Selling, general and
administrative 169,505 164,941 157,708 161,013 127,622
Merger, restructuring,
in-process research and
development, and other costs - 2,984 - 2,000 6,000
Total operating expenses 238,343 225,839 212,015 213,145 174,549
Operating income (loss) (23,758) 44,345 23,630 (2,493) (10,873)
Other income, net 2,503 5,406 3,409 3,840 3,160
Income (loss) before income taxes (21,255) 49,751 27,039 1,347 (7,713)
Provision (benefit) for income
taxes (4,633) 11,204 7,362 391 (2,187)
Net income (loss) $ (16,622) $ 38,547 $ 19,677 $ 956 $ (5,526)
Earnings (loss) per share:
Basic $ (0.47) $ 1.13 $ 0.61 $ 0.03 $ (0.18)
Diluted $ (0.47) $ 1.05 $ 0.59 $ 0.03 $ (0.18)
Weighted average shares outstanding:
Basic 35,117 34,155 32,125 31,083 30,310
Diluted 35,117 36,765 33,360 33,367 30,310
Consolidated balance sheet data:
Working capital $ 144,750 $ 155,483 $ 101,777 $ 67,972 $ 79,091
Total assets 301,639 324,093 243,398 206,822 179,440
Stockholders' equity 215,825 224,957 150,458 130,320 118,811
Note: Service revenue and costs include both Customer Support and Professional Services and Education.
Certain reclassifications have been made to the prior years' selected financial data to conform with the
current year's presentation.
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, and is subject to the safe harbors created by those sections. These
forward-looking statements are subject to a number of risks and uncertainties that could cause our actual results to
differ materially from those that may be anticipated by such forward-looking statements, which reflect management's
opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any
revisions to these forward-looking statements. Readers should carefully review the risk factors and various
disclosures described in this document and in other documents we file with the Securities and Exchange Commission that
attempt to advise interested parties of the risks and factors that may affect our business. The following discussion
should be read in conjunction with the Consolidated Financial Statements and Notes thereto submitted as a separate
section of this Form 10-K (Item 14).
Significant Accounting Policies
We prepare the consolidated financial statements of FileNET in conformity with accounting principles
generally accepted in the United States of America. The consolidated financial statements include our accounts and
the accounts of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. The
preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. The significant accounting policies we believe are most critical to aid in fully understanding and
evaluating our reported financial results include the following:
Revenue Recognition. Revenues from sales of software licenses sold through direct and indirect channels,
which do not contain multiple elements, are recognized upon shipment of the related product, if the requirements of
Statement of Position ("SOP") 97-2, as amended, are met. If the requirements of SOP 97-2, including evidence of an
arrangement, delivery, fixed or determinable fee, collectibility or vendor specific evidence about the value of an
element are not met at the date of shipment, revenue is not recognized until such elements are known or
resolved. Software license revenue for arrangements to deliver unspecified additional software products in the future
is recognized ratably over the term of the arrangement, beginning with the initial shipment. We recognize other
revenue at the time of product delivery and accrue any remaining costs, including vendor obligations. Revenue from
post-contract customer support is recognized ratably over the term of the contract. Revenue from professional
services is recognized as such services are delivered and accepted by the customer. Based on historical experience,
we maintain a sales returns allowance for the estimated amount of potential returns related to unforeseen events. While
such returns have historically been minimal and within our expectations of the allowances established, we cannot
guarantee that we will continue to experience the same return rates that we have in the past.
Accounts Receivable. We evaluate the creditworthiness of our customers prior to order fulfillment and we
perform ongoing credit evaluations of our customers to adjust credit limits based on payment history and the
customer's current creditworthiness. We constantly monitor collections from our customers and maintain a provision for
estimated credit losses that is based on historical experience and on specific customer collection issues. While such
credit losses have historically been within our expectations and the provisions established, we cannot guarantee that
we will continue to experience the same credit loss rates that we have in the past. Since our revenue recognition
policy requires customers to be creditworthy, our accounts receivable are based on customers whose payment is
19
reasonably assured. Our accounts receivable are derived from sales to a wide variety of customers. We do not believe
a change in liquidity of any one customer or our inability to collect from any one customer would have a material
adverse impact on our financial position.
Deferred Income Taxes. Deferred income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. We maintain a valuation allowance against a portion of the deferred tax asset due to uncertainty regarding
the future realization based on historical taxable income, projected future taxable income, and the expected timing of
the reversals of existing temporary differences. If we operate at a loss or are unable to generate sufficient future
taxable income we could be required to increase the valuation allowance against all or a significant portion of our
deferred tax assets which would result in a substantial increase to our effective tax rate and could result in a
material adverse impact on our operating results.
Long-Lived Assets. We account for the impairment and disposition of long-lived assets in accordance
with the Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." In accordance with SFAS No. 121, long-lived assets to be held are
reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. In
August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment of
long-lived assets and for the disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 and is effective for
fiscal years beginning after December 15, 2001. We evaluate the carrying value of intangible assets for impairment
of value based on undiscounted future cash flows. While we have not experienced impairment of intangible assets in
prior periods, we cannot guarantee that there will not be impairment in the future.
Other Operating Matters
We took selective actions in 2001 to help drive profitability and to reduce on-going annual expenses. These
actions included cost-saving measures, internal business process changes to improve efficiency and a worldwide
workforce reduction of 158 employees. Workforce reductions occurred during the second and fourth quarters of 2001
resulting in a total severance charge of $4.5 million. These severance charges were $897,000 in customer support,
$293,000 in professional services, $331,000 in research and development and $2.9 million in selling, general and
administrative, as discussed below.
Overview
Our revenue growth depends on the overall demand for computer software and services primarily to corporate
and government customers. In general, a weakening economy will most likely result in a decline in demand for computer
software that will result in decreased revenue for us. During fiscal 2001 we experienced a decrease in software
revenue on a worldwide basis and we believe this decrease was primarily due to a macro economic slow down which has
decreased our revenue stream. We are currently unable to predict when the global economic slowdown in the technology
sector will cease to have a negative impact on our revenues and results of operations.
20
Results Of Operations
The following table sets forth certain consolidated statement of operations data as a percentage of total
revenue for the periods indicated:
(As a percentage of total revenue)
December 31, 2001 2000 1999
Revenue:
Software 35.8% 51.4% 52.8%
Customer support 39.8 27.6 27.3
Professional services and education 20.2 15.7 15.2
Hardware 4.2 5.3 4.7
Total revenue 100.0 100.0 100.0
Cost of revenue:
Software 2.2 3.7 4.9
Customer support 12.8 11.5 12.5
Professional services and education 17.5 13.7 12.2
Hardware 3.0 3.3 2.5
Total cost of revenue 35.5 32.2 32.1
Gross profit 64.5 67.8 67.9
Operating expenses:
Research and development 20.7 14.5 15.7
Selling, general and administrative 51.0 41.4 45.4
In-process research and development - 0.8 -
Total operating expenses 71.7 56.7 61.1
Operating income (loss) (7.2) 11.1 6.8
Other income, net 0.8 1.4 1.0
Income (loss) before tax (6.4)% 12.5% 7.8%
Revenue
Total revenue decreased to $332.5 million in 2001 from $398.6 million in 2000, representing a decrease of
$66.1 million, or 17%. From 1999 to 2000, total revenue increased by $51.5 million, or 15%. The decrease in total
revenue from 2000 to 2001 was primarily attributable to lower software revenue as a result of unfavorable economic
conditions in 2001 resulting in decreased demand for our software products. This decrease was partially offset by an
increase in service revenues. The increase from 1999 to 2000 was largely due to an increased customer base, broader
software functionality, new product introductions, and an increased emphasis on professional services.
Software. Software revenue consists of fees earned from the licensing of our software products to
customers. Software revenue decreased to $119.0 million in 2001 from $204.8 million in 2000, representing a decrease
of $85.8 million, or 42%. From 1999 to 2000, software revenue increased $21.5 million from $183.3 million, or 12%.
The decrease from 2000 to 2001 is primarily due to the significant global economic slowdown in the technology sector
that resulted in a significant reduction in the amount and size of customer orders. Large enterprise projects were
eliminated or replaced by smaller projects as Information Technology budgets were reduced and delayed in 2001. We expect
that the trend toward smaller projects will continue for the foreseeable future. The increase from 1999 to 2000
was primarily attributable to large-scale deployments of our software products, as well as growth in the number of our
customers.
21
These expanded deployments resulted primarily from our web-enabled architecture as well as a more favorable IT
spending environment.
Customer Support. Customer support revenue consists of revenue from software maintenance contracts and "fee
for service" revenues and the sale of spare parts and supplies. Customer support revenue increased to $132.4 million
in 2001 from $110.3 million in 2000, representing an increase of $22.1 million, or 20%. From 1999 to 2000 customer
support revenue increased by $15.5 million from $94.8 million, or 16%. These increases in customer support revenue were
primarily due to the growth in our base of customers who receive ongoing maintenance as a result of new customer
sales, sales of additional products to our installed base and a high rate of renewal on the existing base. We expect
these trends to continue in the near future. However, a prolonged economic slowdown will result in a decrease in the
growth rate of customer support revenue and potentially a decrease in the actual maintenance revenue as this revenue
stream is directly related to software revenue fluctuations over time.
Professional Services and Education. Professional services and education revenue is generated primarily from
consulting and implementation services provided to end users of our software products, technical consulting services
provided to our resellers and training services. Professional services are generally performed on a time and material
basis. Professional services and education revenue increased to $67.3 million in 2001 from $62.5 million in 2000,
representing an increase of $4.8 million, or 8%. From 1999 to 2000 professional services and education revenue
increased by $9.8 million from $52.6 million, or 19%. These increases were primarily attributable to an increase in
custom development projects, and to a lesser extent, an increase in sales of prepackaged service offerings, which
include both consulting and training. As part of our business plan, we focused on expanding our professional services
capabilities to support our solutions and applications strategy and we plan to continue such focus. However, a
prolonged economic slowdown will result in a decrease in the growth rate of professional services and education
revenue and potentially a decrease in the absolute dollar amount of these revenues.
Hardware. Hardware revenue is generated primarily from the sale of 12-inch OSAR libraries. Hardware revenue
decreased to $13.8 million in 2001 from $21.0 million in 2000, representing a decrease of $7.2 million, or 34%. From
1999 to 2000 hardware revenue increased by $4.6 million from $16.4 million, or 28%. The decrease in 2001 compared to
2000 was primarily attributable to the economic downturn that caused a reduction in orders for the OSAR product. The
increase in 2000 was primarily due to increased demand for 30 gigabyte drives as delayed orders from 1999 resulting
from Y2K uncertainty were placed in 2000. Hardware is not a strategic focus for us and we expect hardware revenue to
remain flat or decrease in absolute dollars in future periods.
International. International revenues accounted for 25% of total revenue, or $82.9 million, in 2001, 28% of
total revenue, or $110.1 million, in 2000, and 28% of total revenue, or $98.1 million, in 1999. A significant portion
of international sales are denominated in the local currency of the country where sold. The strengthening of the U.S.
dollar against foreign currencies unfavorably impacted revenue reported in U.S. dollars in 2001 and 2000 and to a
lesser extent in 1999. The decrease in absolute dollars in 2001 as compared to 2000 is primarily the result of a
significant reduction in the amount and size of customer orders in Europe and Asia, our largest international markets,
due to a major slowdown in IT spending. We expect international revenue to continue to represent a significant
percentage of total revenue. However, international revenues will be adversely affected if the U.S. dollar continues
to strengthen against certain major international currencies and economic conditions continue to weaken.
Cost of Revenue
Total cost of revenue decreased to $118.0 million in 2001, from $128.4 million in 2000, representing a
decrease of $10.4 million, or 8%. From 1999 to 2000 total cost of revenue increased by $16.9 million, or 15%. The
decrease in total cost of revenue from 2000 to 2001 is primarily attributable to lower software and hardware costs
22
which can be directly related to lower software and hardware revenue, as well as the unbundling and discontinuation of
certain third party products. The increase from 1999 to 2000 was largely due to increases in cost in our service
segments offset in part by decreases in software cost.
Software Cost of software revenue includes royalties paid to third parties, media costs, and the cost
to manufacture and distribute software. The cost of software revenue was $7.5 million in 2001, $14.6 million in 2000
and $17.0 million in 1999, representing 6%, 7% and 9% of software revenue, respectively. The decreases as a
percentage of software revenue are primarily attributable to lower distribution costs as well as a reduction in
royalty costs due to the unbundling and discontinuation of certain third party products. However, we expect product
license costs to increase in the future as a percent of software revenue due to costs related to the integration of
third party technology that we may choose to embed in our product offerings.
Customer Support. Cost of customer support revenue includes the cost of customer support personnel, supplies
and spare parts, and the cost of third-party hardware maintenance. The cost of customer support revenue was $42.4
million in 2001, $45.9 million in 2000 and $43.6 million in 1999, representing 32%, 42%, and 46% of customer support
revenue, respectively. The decrease in 2001 from 2000 was primarily attributable to a reduction in variable
compensation and personnel as well as cost benefits from process improvements initiated in 2000. Workforce reductions
in 2001 resulted in severance costs of $897,000 that were absorbed by the benefit of ongoing reduced salary and
personnel expenses for 2001 and the near future. The decrease in customer support cost as a percentage of customer
support revenue in 2000 from 1999 was primarily attributable to process changes that allowed growth in the customer base
without a proportional increase in support personnel and cost. Due to increased productivity and controls over headcount
we expect to maintain these cost efficiencies for the near future.
Professional Services and Education. Cost of professional services and education revenue consists primarily
of professional services personnel, training personnel, and third-party contractors. The cost of professional
services and education revenue was $58.1 million in 2001, $54.6 million in 2000 and $42.1 million in 1999,
representing 86%, 87% and 80% of professional services and education revenue, respectively. The increase in absolute
dollars from 2000 to 2001 was primarily due to an increase in personnel costs and an increase in the use of third
party independent contractors. These costs were necessary to deliver increased revenues. Additionally, we recorded a
charge of approximately $293,000 for severance payments. Expressed as a percentage of revenue, costs were essentially
unchanged from 2000 to 2001. The increase in cost from 1999 to 2000 was primarily due to increased personnel costs as
we focused on building professional services capabilities to support our solutions-oriented strategy. We expect
professional services and education costs as a percentage of professional services and education revenue to vary from
period to period depending on the utilization rates of internal resources and the mix between internal and external
service providers.
Hardware. Cost of hardware revenue includes the cost of assembling our OSAR library products, the cost of
hardware integration personnel, warranty costs and distribution costs. The cost of hardware revenue was $10.0 million
in 2001, $13.4 million in 2000 and $8.8 million in 1999, representing 72%, 64% and 54% of hardware revenue,
respectively. The year-to-year increases in cost of hardware revenue as a percent of hardware revenue were primarily
due to increased warranty costs and unabsorbed fixed expenses.
23
Operating Expenses
Research and Development. Research and development expense consists primarily of personnel costs for
software developers, contracted development efforts and related facilities costs. Research and development expense
was $68.8 million in 2001, $57.9 million in 2000 and $54.3 million in 1999, representing 21%, 15% and 16% of total
revenue, respectively. The increase in expense from 2000 to 2001 was primarily due to increased numbers of personnel,
salary increases and increased consulting costs necessary for development of our strategy. In addition, we paid a
one-time bonus of $2.0 million related to the Application Partners, Incorporated ("API") acquisition and recorded
severance costs of approximately $331,000. The increase in expense from 1999 to 2000 was primarily due to market
driven increases in salaries and recruiting costs as a result of the intense competitive environment for software
engineers and an increase in the rates of contract developers.
We have made substantial investments in research and development, primarily through internal development
activities, and to a lesser extent, through technology acquisitions. Our development efforts use our ECM platform to
deliver industry vertical applications and a next generation high throughput transaction oriented Collaborative
Commerce platform. Our development efforts also seek to deliver "end to end" ECM capability in the market.
Additionally, we embed third party software that enhances the functionality of our products through a variety of OEM
agreements.
We intend to continue to invest significantly in internal development with a focus on developing new
functionality in Business Process Management, Web Content Management and Collaborative Commerce applications that
provide a richer competitive product offering to our customers. We expect that competition for qualified technical
personnel will continue for the foreseeable future and may result in higher levels of compensation expense for us. We
believe that research and development expenditures, including compensation of technical personnel, are essential to
maintaining our competitive position and expect these costs to continue to constitute a significant percentage of
total revenue in future periods.
Selling, General and Administrative. Selling, general and administrative expense consists primarily of
salaries, benefits, sales commissions and other expenses related to the direct and indirect sales force; various
marketing expenses; the cost of other market development programs; personnel costs for finance, information
technology, legal, human resources and general management; and the cost of outside professional services. Selling,
general and administrative expense was $169.5 million in 2001, $164.9 million in 2000 and $157.7 million in 1999.
Selling, general and administrative expense, as a percentage of total revenue, was 51% in 2001, 41% in 2000 and 45% in
1999. The increase as a percentage of total revenue for 2001 from 2000 was primarily due to a lower revenue base and
higher costs. The decrease as percent of total revenue for 2000 from 1999 was primarily due to cost containment
measures and expense control, along with higher revenue. The increase in absolute dollars in 2001 from 2000 was
primarily due to increased expenses including legal fees, IT and facility costs and increased expenses associated with
the expansion of sales and marketing for certain key areas, such as our new Brightspire product. Amortization of
goodwill and other intangibles was $3.0 million for twelve months in 2001 compared to $1.8 million for seven months in
2000. Charges for severance of $2.9 million related to workforce reductions and facility consolidation costs of
$218,000, primarily in sales, in 2001 also contributed to the increase year over year. However, these workforce
reductions and the facility consolidation will reduce personnel costs in the near future. The increase in absolute
dollars in 2000 from 1999 was primarily due to performance-based incentives, recruitment costs for sales personnel and
higher depreciation costs. We expect to maintain expense controls over selling, general and administrative costs in
2002. Accordingly, these costs during 2002 should remain relatively consistent with 2001.
24
Purchased In-Process Research and Development. Based upon an independent third-party appraisal, we allocated
approximately $3.0 million to in-process research and development in connection with our purchase of certain assets
from API in May 2000. The in-process research and development expenses were related to new product projects that were
under development at the date of the acquisition and were expected to eventually lead to new products but had not yet
established feasibility and for which no future alternative use was identified. The valuation of the in-process
research and development projects was based upon the discounted expected future net cash flows of the products over
their expected life, reflecting the estimated percent of completion of the projects and an estimate of the costs to
complete the projects. New product development projects underway at API at the time of the acquisition included
Sequis, an eService application which we estimated to be 88% complete at the date of the acquisition. The cost to
complete the project was estimated at approximately $300,000 to occur over a three-month period. We incurred
approximately $356,000 of research and development expenses related to the project which was 100% complete as of
September 30, 2000.
Amortization of Goodwill and Other Intangibles. In conjunction with our acquisition of certain assets of API
in May 2000, the purchase price amount allocated to goodwill was $14.6 million, which was being amortized over five
years. The purchase price amount allocated to assembled workforce was $386,000, which was being amortized over three
years. Amortization which is included in selling, general and administrative expense was $3.0 million in 2001
compared to $1.8 million in 2000. With the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," we will no
longer amortize goodwill and assembled workforce but will evaluate their carrying value on an annual basis or when
events or circumstances indicate that their carrying value may be impaired. We expect the impact of this adoption
will be a decrease in amortization expense of approximately $3.0 million in 2002.
Other Income, Net. Other income, net consists primarily of interest income earned on our cash and cash
equivalents, short and long-term investments, and other items including foreign exchange gains and losses, other items
of income, and interest expense. Other income, net of other expenses, was $2.5 million in 2001, $5.4 million in 2000
and $3.4 million in 1999. The decrease in 2001 from 2000 was primarily attributable to a $3.5 million settlement
charge included in other expenses partially offset by increased interest income related to a higher cash balance. The
increase in 2000 from 1999 was attributable to increased interest income directly related to higher cash balances and
a foreign exchange gain for the year, partially offset by increases in other expense related to an accrual of $2.5
million for a pending patent settlement.
Provision for Income Taxes. The benefit for income taxes was $4.6 million in 2001, compared to a provision
of $11.2 million in 2000 and a provision of $7.4 million in 1999. The effective tax rate was 22%, 23% and 27% for the
years ended December 31, 2001, 2000 and 1999, respectively. The reduced tax rate in 2001 was primarily due to the
generation of domestic and Irish taxable loss before stock option deductions, partially offset by earnings generated
in high tax foreign jurisdictions. FileNET management will continue weighing various evidence throughout each year to
assess the recoverability of its recorded deferred assets and the need for any valuation allowance against such
amounts.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, cash and cash equivalents, and investments were $172.2 million, an increase of $32.7
million from $139.5 million at December 31, 2000.
Cash provided by operating activities in 2001 was $40.7 million and resulted primarily from a substantial
decrease in accounts receivable due to decreased revenue and strong collections and additions to net loss for
depreciation and amortization expense, partially offset by a net loss of $16.6 million, decreases in accounts payable
25
and other accrued liabilities, including accrued compensation and benefits, and federal income tax payable. Cash used
for investing activities in 2001 was $41.9 million consisting primarily of capital expenditures and net purchases of
marketable securities. Cash provided by financing activities in 2001 was $9.5 million consisting primarily of
proceeds from the issuance of common stock upon exercise of employee stock options under the employee and non-employee
director stock purchase plan and income tax benefit from stock options.
Cash provided by operating activities in 2000 was $40.6 million and resulted primarily from net income of
$38.5 million, an increase in unearned maintenance revenue related to prepaid maintenance contracts, and additions to
net income for depreciation and amortization expense, partially offset by increases in accounts receivable, deferred
income taxes, and prepaid expenses. Cash used for investing activities in 2000 totaled $47.8 million, consisting
primarily of capital expenditures and cash paid for an acquisition. Cash provided by financing activities in 2000 was
$39.1 million, consisting primarily of proceeds from the issuance of common stock upon exercise of employee stock
options under the employee and non-employee director stock purchase plan and income tax benefit from stock options.
Cash provided by operating activities in 1999 was $38.0 million and resulted primarily from net income of
$19.7 million, an increase in unearned maintenance revenue related to prepaid maintenance contracts, additions to net
income for depreciation and amortization expense, partially offset by an increase in accounts receivable, and a
decrease in accounts payable. Cash used for investing activities totaled $25.4 million, consisting primarily of
capital expenditures and net purchases of marketable securities, partially offset by proceeds from the sales of
equipment. Cash provided by financing activities in 1999 was $5.5 million, consisting primarily of proceeds from the
issuance of common stock upon exercise of employee stock options under the employee and non-employee director stock
purchase plan.
Our capital expenditures were $14.1 million in 2001, $27.7 million in 2000, and $22.4 million in 1999. Our
primary capital expenditures during these years were for research and development equipment, demonstration and
training equipment, enhancements to our internal network and business systems, leasehold improvements on leased
property, and furniture.
We have a one-year, $5.0 million multi-currency revolving line of credit that expires on June 28, 2002.
Borrowings under the arrangement are unsecured and bear interest at one hundred and twenty basis points over the
London Interbank Offered Rate. An annual commitment fee of twenty basis points is assessed against any undrawn
amounts.
We are restricted from paying dividends during the term of the arrangement and, under the arrangement, must
comply with certain financial covenants, including quarterly and annual profitability covenants for which we received
a waiver from the bank. There were no borrowings outstanding at December 31, 2001 and 2000.
We anticipate that our present cash balances, together with internally generated funds and credit lines, will
be sufficient to meet our working capital and capital expenditures throughout 2002, which are anticipated to be
approximately $20.3 million. We have no long-term debt.
OTHER MATTERS
European Monetary Union. On January 1, 1999, 11 of the 15 member countries of the European Union established fixed
conversion rates between their existing sovereign currencies and the euro. These countries agreed to adopt the euro
as their common legal currency from that date. The legacy currencies remained legal tender in these countries as a
denomination of the euro between January 1, 1999 and January 1, 2002. Beginning on January 1, 2002, euro-denominated
26
bills and coins are now issued for cash transactions. For a period of up to six months from this date, both legacy
currencies and the euro will be legal tender. On or before July 1, 2002, the participating countries will withdraw
all legacy currencies and exclusively use the euro.
We have made the necessary changes to our internal business systems to support transactions denominated in
the euro, including establishing euro price lists for affected countries. We have been transacting in the euro
currency since 1999 and have evaluated the impact the euro has had on our financial condition and results of
operations. Based on this evaluation to date, we currently do not believe that there has been or will be a material
impact on our financial condition or results of operations as a result of the euro conversion.
Recent Accounting Pronouncements. In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, is effective for fiscal years beginning
after June 15, 2000. SFAS 133, as amended, established accounting and reporting standards for derivative instruments
including certain derivative instruments embedded in other contracts that were not formerly considered derivatives
and now may meet the definition of a derivative. Additionally, this standard required us to record all derivatives
on the balance sheet at fair value. For derivatives that are hedges, changes in the fair value of derivatives are offset
by the change in fair value of the hedged assets, liabilities, or firm commitments. We adopted this standard effective
January 1, 2001 and it has had no significant effect on our results of operations, financial position, or cash flows.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," which was effective immediately. SFAS
No. 141 required that the purchase method of accounting be used for all business combinations initiated after June 30,
2001 and eliminated the pooling-of-interests method. We do not believe that the adoption of this standard will have a
significant impact on our consolidated financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which is effective for us
January 1, 2002. SFAS No. 142 requires that goodwill and other intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually. We will no longer amortize intangible
assets but will evaluate their carrying value on an annual basis or when events or circumstances indicate that their
carrying value may be impaired. We expect the adoption of SFAS No. 142 to result in reduced amortization expense of
approximately $3.0 million in 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets."
This statement addresses financial accounting and reporting for the impairment of long-lived assets and for the disposal
of long-lived assets and discontinued operations. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and is effective for fiscal years beginning after
December 15, 2001. We believe that the adoption of this standard will not have a material impact on our financial
position and results of operations.
Inflation. Management believes that inflation has not had a significant impact on the price of our products, the cost
of our materials, or our operating results for any of the three years ended December 31, 2001.
27
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to a variety of risks, including changes in interest rates affecting the return on investments
and foreign currency fluctuations. In the normal course of business, we employ established policies and procedures to
manage our exposure to fluctuations in interest rates and foreign currency values.
Interest Rate Risk. Our exposure to market rate risk for changes in interest rates relates primarily to our investment
portfolio. We have not used derivative financial instruments in our investment portfolio. We place our investments
with high-quality issuers and, by policy, limit the amount of credit exposure to any one issuer. We protect and
preserve our invested funds by limiting default, market and reinvestment risk. Our investments in marketable
securities consist primarily of high-grade corporate and government securities with maturities of less than three
years. Investments purchased with an original maturity of three months or less are considered to be cash
equivalents. We classify all of our investments as available-for-sale. Available-for-sale securities are carried at
fair value, with unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity.
Foreign Currency Risk. We have entered into forward foreign exchange contracts primarily to hedge amounts due from
and the net assets of selected subsidiaries denominated in foreign currencies (mainly in Europe and Asia Pacific)
against fluctuations in exchange rates. We have not entered into forward foreign exchange contracts for speculative or
trading purposes. Our accounting policies for these contracts are based on our designation of the contracts as
hedging transactions. The criteria we use for designating a contract as a hedge include the contract's effectiveness
in risk reduction and one-to-one matching of derivative instruments to underlying transactions. Gains and losses on
foreign exchange contracts are recognized in income in the same period as gains and losses on the underlying
transactions. If an underlying hedged transaction is terminated earlier than initially anticipated, the offsetting
gain or loss on the related forward foreign exchange contract would be recognized in income in the same period. In
addition, since we enter into forward contracts only as a hedge, any change in currency rates would not result in any
material net gain or loss, as any gain or loss on the underlying foreign currency denominated balance would be offset
by the gain or loss on the forward contract. Our forward contracts generally have an original maturity of three
months. The total notional values of forward contracts purchased and forward contracts sold in 2001 were $23.7
million and $12.8 million, respectively. We do not expect gains or losses on these contracts to have a material
impact on our financial results (see Note 14 to the consolidated financial statements).
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements for the years ended December 31, 2001, 2000 and 1999 are incorporated
herein by reference and submitted as a separate section of this Form 10-K. (See Item 14).
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
28
PART III
Item 10. Directors and Executive Officers of the Registrant
We hereby incorporate by reference the information appearing under the caption "Election of Directors," under
the caption "Executive Officers of the Company," and under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" of our definitive Proxy Statement for our 2002 Annual Meeting to be filed with the Securities and Exchange
Commission.
Item 11. Executive Compensation
We hereby incorporate by reference the information appearing under the caption "Executive Compensation" and
under the caption "Election of Directors" of our definitive Proxy Statement for our 2002 Annual Meeting to be filed
with the Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management
We hereby incorporate by reference the information appearing under the caption "Voting Securities and
Principal Holders Thereof" of our definitive Proxy Statement for our 2002 Annual Meeting to be filed with the
Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions
None
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) Independent Auditors' Report, Financial Statements and Financial Statement Schedule
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 2001 and December 31, 2000 F-3
Consolidated Statements of Operations for each of the years ended
December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Comprehensive Operations for each of the years
ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Stockholders' Equity for each of the years ended
December 31, 2001, 2000 and 1999 F-6
Consolidated Statements of Cash Flows for each of the years ended
December 31, 2001, 2000 and 1999 F-7
Notes to Consolidated Financial Statements F-8
Schedule II. Valuation and Qualifying Accounts and Reserves S-1
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter ended December 31, 2001.
29
(c) Exhibits
The following exhibits are filed herewith or incorporated by reference:
Exhibit No. Exhibit Description
3.1* Restated Certificate of Incorporation, as amended (filed as Exhibit 3.1 to Registrant's Form S-4
filed on January 26, 1996; Registration No. 333-00676).
3.1.1* Certificate of Amendment of Restated Certificate of Incorporation (filed as Exhibit 3.1.1 to
Registrant's Form S-4 filed on January 26, 1996, Registration No. 333-00676).
3.2* Bylaws (filed as Exhibit 3.2 of the Registrant's registration statement on Form S-1, Registration
No. 33-15004 (the "Form S-1")).
4.1* Form of certificate evidencing Common Stock (filed as Exhibit 4.1 to Registrant's registration
statement on Form S-1, Registration No. 33-15004).
4.2* Rights Agreement, dated as of November 4, 1988 between FileNET Corporation and the First National
Bank of Boston, which includes the form of Rights Certificate as Exhibit A and the Summary of
Rights to Purchase Common Shares as Exhibit B (filed as Exhibit 4.2 to Registrant's registration
statement on Form S-4 filed on January 26, 1996; Registration No. 333-00676).
4.3* Amendment One dated July 31, 1998 and Amendment Two dated November 9, 1998 to Rights Agreement
dated as of November 4, 1988 between FileNET Corporation and BANKBOSTON, N.A. formerly known as
The First National Bank of Boston (filed as Exhibit 4.3 to Registrant's registration statement on
Form 10-Q for the quarter ended September 30, 1998).
4.4 Amendment Three dated November 30, 2001 to Rights Agreement dated as of November 4, 1988 between
FileNET Corporation and Equiserve Trust Company, N.A., successors to BANKBOSTON, N.A.
10.1 Waiver and First Amendment to Credit Agreement (Multi-currency) by and among the Registrant and Bank of
America N. A., formerly known as Bank of America National Trust and Savings Association, dated
June 29, 2001, effective June 29, 2001.
10.2*+ Amended and Restated 1995 Stock Option Plan of FileNET (filed as Exhibit 99.1 to Registrant's
registration statement on Form S-8 filed on October 15, 2001; Registration No. 333-71598).
10.3*+ Second Amended and Restated 1986 Stock Option Plan of FileNET Corporation, together with the forms of
Incentive Stock Option Agreement and Non-Qualified Stock Option Agreement (filed as Exhibits 4(a),
4(b) and 4(c), respectively, to the Registrant's registration statement on Form S-8, Registration
No. 33-48499), the first Amendment thereto (filed as Exhibit 4(d) to the Registrant's registration
statement on Form S-8, Registration No. 33-69920), and the Second Amendment thereto (filed as
Appendix A to the Registrant's Proxy Statement for the Registrant's 1994 Annual Meeting of
Stockholders, filed on April 29, 1994).
10.4*+ Non-Statutory Stock Option Agreement (with Notice of Grant of Stock Option and Special Addendum) between
Registrant and Mr. Lee Roberts (filed as Exhibit 99.17 to Registrant's registration statement on Form S-8
filed on August 20,1997).
10.5*+ Non-Statutory Stock Option Agreement (with Notice of Grant of Stock Option and Special Addendum) between
Registrant adn Mr. Ron Ercanbrack (filed as Exhibit 99.19 to Registrant's registration statement on
Form S-8 filed on August 20,1997).
10.6*+ Amended and Restated FileNET Corporation 1998 Employee Stock Purchase Plan (filed as Exhibit 99.2
to Registrant's registration statement on Form S-8, filed on October 15, 2001; Registration No.
333-71598).
10.7*+ FileNET Corporation International Employee Stock Purchase Plan (filed as Exhibit 99.3 to
Registrant's registration statement on Form S-8, filed on October 15, 2001; Registration No.
333-71598).
10.8* Lease between the Registrant and C. J. Segerstrom and Sons for the headquarters of the Company, dated
September 1, 1999 (filed as Exhibit 10.23 to Registrant's registration statement on Form 10-Q for
the quarter ended September 30, 1999).
10.9* Asset Purchase Agreement between the Registrant and Application Partners, Inc. dated May 18, 2000
(filed as Exhibit 10.24 to Registrant's Form 10-Q for the quarter ended June 30, 2000).
10.10*+ Written Compensation Agreement and Non-Statutory Stock Option Agreement (with Notice of Grant of
Stock Option and Special Addendum) between Registrant and Mr. Sam Auriemma (filed as Exhibit 99.1
and 99.2 to Registrant's registration statement on Form S-8, filed on April 20, 2001; Registration
No. 333-59274).
30
21.1 List of subsidiaries of Registrant (filed as FileNET Corporation Subsidiary Information).
23.1 Independent Auditors' consent
* Incorporated herein by reference
+ Management contract, compensatory plan or arrangement
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
FILENET CORPORATION
Date: March 28, 2002 By: /s/ Lee D. Roberts
Lee D. Roberts
Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
DATE SIGNATURE AND TITLE
March 28, 2002 /s/ Lee D. Roberts
Lee D. Roberts
Chief Executive Officer and
Chairman of the Board
March 28, 2002 /s/ Sam M. Auriemma
Sam M Auriemma,
Chief Financial Officer and Senior Vice
President, Finance (Principal Financial
and Accounting Officer)
March 28, 2002 /s/ Theodore J. Smith
Theodore J. Smith
Director
March 28, 2002 /s/ L. George Klaus
L. George Klaus
Director
March 28, 2002 /s/ William P. Lyons
William P. Lyons
Director
March 28, 2002 /s/ John C. Savage
John C. Savage
Director
March 28, 2002 /s/ Roger S. Siboni
Roger S. Siboni
Director
32
FILENET CORPORATION
Index to Consolidated Financial Statements
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 2001 and December 31, 2000 F-3
Consolidated Statements of Operations for each of the years ended
December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Comprehensive Operations for each of the years
ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Stockholders' Equity for each of the years ended
December 31, 2001, 2000 and 1999 F-6
Consolidated Statements of Cash Flows for each of the years ended
December 31, 2001, 2000 and 1999 F-7
Notes to Consolidated Financial Statements F-8
INDEPENDENT AUDITORS' REPORT
To the Stockholders and the Board of Directors of
FileNET Corporation:
We have audited the accompanying consolidated balance sheets of FileNET Corporation and its subsidiaries (the Company)
as of December 31, 2001 and 2000, and the related consolidated statements of operations, comprehensive operations,
stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial
position of FileNET Corporation and its subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE and TOUCHE LLP
Costa Mesa, California
January 28, 2002
F-2
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands, except share and per share amounts)
December 31, 2001