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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 00-15997
FILENET CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-3757924
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3565 Harbor Boulevard, Costa Mesa, CA 92626
(Address of principal executive offices) (Zip code)
(714) 327-3400
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
As of August 12, 2002, there were 35,627,846 shares of the Registrant's common
stock outstanding.
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FILENET CORPORATION
Index
Page
Number
PART I. FINANCIAL INFORMATION..................................... 3
Item 1. Condensed Consolidated Financial Statements............... 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 13
Item 3. Quantitative and Qualitative Disclosures about........... 24
Market Risk
PART II. OTHER INFORMATION........................................ 25
Item 1. Legal Proceedings........................................ 25
Item 4. Submssion of Matters to a Vote of Securities Holders..... 25
Item 6. Exhibits and Reports on Form 8-K......................... 26
SIGNATURE ......................................................... 27
INDEX TO EXHIBITS ......................................................... 28
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
FILENET CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share amounts)
June 30, December 31,
2002 2001
ASSETS
Current assets:
Cash and cash equivalents $ 84,290 $ 107,502
Short-term investments 67,395 64,660
Accounts receivable, net 53,420 36,909
Inventories, net 2,535 2,993
Prepaid expenses and other current assets 12,701 9,521
Deferred income taxes 2,779 2,779
Total current assets 223,120 224,364
Property, net 40,748 44,206
Long-term investments 17,008 -
Goodwill 16,581 9,953
Intangible assets, net 3,317 182
Deferred income taxes 21,436 21,445
Other assets 5,624 1,489
Total assets $ 327,834 $ 301,639
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,102 $ 8,282
Customer deposits 3,920 4,848
Accrued compensation and benefits 20,814 17,804
Unearned maintenance revenue 43,044 30,996
Income taxes payable 4,930 3,999
Other accrued liabilities 11,515 13,685
Total current liabilities 95,325 79,614
Unearned maintenance revenue and other
liabilities 4,978 6,200
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.10 par value; 7,000,000 shares
authorized; none issued and outstanding - -
Common stock - $.01 par value; 100,000,000 shares
authorized; 36,711,966 shares issued and
35,613,966 shares outstanding at June 30, 2002; and
36,389,682 shares issued and 35,291,682 shares
outstanding at December 31, 2001 203,129 199,526
Retained earnings 48,004 44,906
Accumulated other comprehensive loss (9,035) (14,040)
242,098 230,392
Treasury stock, at cost; 1,098,000 shares (14,567) (14,567)
Net stockholders' equity 227,531 215,825
Total liabilities and stockholders' equity $ 327,834 $ 301,639
See accompanying notes to condensed consolidated financial statements.
3
FILENET CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
Revenue:
Software $ 34,350 $ 28,788 $ 65,590 $ 61,531
Customer Support 37,281 32,690 73,844 61,829
Professional services and education 14,491 18,707 30,327 35,934
Hardware 2,105 2,663 4,707 8,048
Total revenue 88,227 82,848 174,468 167,342
Costs:
Software 2,510 1,343 4,591 3,383
Customer Support 9,807 11,466 19,895 23,452
Professional services and education 13,187 16,340 26,642 33,331
Hardware 1,585 1,943 3,510 5,474
Total cost of revenue 27,089 31,092 54,638 65,640
Gross Profit 61,138 51,756 119,830 101,702
Operating expenses:
Research and development 19,088 19,524 36,393 35,612
Selling, general and administrative 41,366 43,618 81,843 86,777
In-process research and development 400 - 400 -
Total operating expenses 60,854 63,142 118,636 122,389
Operating income (loss) 284 (11,386) 1,194 (20,687)
Other income (loss), net 1,921 (1,836) 2,829 (166)
Income (loss) before income taxes 2,205 (13,222) 4,023 (20,853)
Provision (benefit) for income taxes 471 (2,527) 925 (4,587)
Net income (loss) $ 1,734 $ (10,695) $ 3,098 $ (16,266)
Earnings (loss) per share:
Basic $ 0.05 $ (0.30) $ 0.09 $ (0.46)
Diluted $ 0.05 $ (0.30) $ 0.08 $ (0.46)
Weighted average shares outstanding:
Basic 35,543 35,281 35,452 35,139
Diluted 36,741 35,281 36,983 35,139
See accompanying notes to condensed consolidated financial statements.
4
FILENET CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (UNAUDITED)
(In thousands)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
Net income (loss) $ 1,734 $ (10,695) $ 3,098 $ (16,266)
Other comprehensive income (loss):
Foreign currency translation
adjustments 1 5,401 (1,439) 4,991 (4,628)
Unrealized gains on securities:
Unrealized holding gains 2 89 75 14 91
Total other comprehensive income (loss) 5,490 (1,364) 5,005 (4,537)
Comprehensive income (loss) 7,224 (12,059) 8,103 (20,803)
1 net of tax effect of $3,601 and $(959) for the three months ended June 30, 2002 and 2001, respectively
and net of tax effect of $3,327 and $(3,085) for the six months ended June 30, 2002 and 2001,
respectively
2 net of tax effect of $59 and $50 for the three months ended June 30, 2002 and 2001, respectively
and net of tax effect of $9 and $61 for the six months ended June 30, 2002 and 2001, respectively
See accompanying notes to condensed consolidated financial statements.
5
FILENET CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended June 30,
2002 2001
Cash flows from operating activities:
Net income (loss) $ 3,098 $ (16,266)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Purchased in-process research and development 400 -
Depreciation and amortization 10,724 11,936
Loss on sale of fixed assets 10 115
Provision for doubtful accounts 612 611
Deferred income taxes 9 (27)
Changes in operating assets and liabilities, net
of the effects of acquisition:
Accounts receivable (15,403) 28,604
Inventories 458 (453)
Prepaid expenses and other current assets (3,969) 260
Accounts payable 2,630 (5,252)
Accrued compensation and benefits 2,438 (6,420)
Customer deposits and advances (983) 4,823
Accrued legal fees - 4,022
Unearned maintenance revenue 9,845 14,934
Income taxes payable 886 (8,645)
Other (5,015) (2,457)
Net cash provided by operating activities 5,740 25,785
Cash flows from investing activities:
Capital expenditures (6,506) (9,809)
Proceeds from sale of property 40 83
Note receivable from officer (1,900) -
Cash paid for acquisition (9,359) -
Purchases of marketable securities (73,497) (72,995)
Proceeds from sales and maturities of marketable
securities 55,100 40,303
Net cash used in investing activities (36,122) (42,418)
Cash flows from financing activities:
Proceeds from issuance of common stock 3,603 5,510
Principal payments on capital lease obligations (854) (109)
Net cash provided by financing activities 2,749 5,401
Effect of exchange rate changes on cash and cash
equivalents 4,421 (3,041)
Net decrease in cash and cash equivalents (23,212) (14,273)
Cash and cash equivalents, beginning of year 107,502 101,497
Cash and cash equivalents, end of period $ 84,290 $ 87,224
Supplemental cash flow information:
Interest paid $ 51 $ 12
Income taxes paid $ 120 $ 4,097
See accompanying notes to condensed consolidated financial statements.
6
FILENET CORPORATION
Notes To Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements of FileNET Corporation (the "Company") reflect adjustments
(consisting of normal recurring adjustments) necessary to present fairly
the financial position of the Company at June 30, 2002, the results of its
operations and its comprehensive operations for the three and six months
ended June 30, 2002 and 2001 and its cash flows for the six months ended
June 30, 2002 and 2001. Certain information and footnote disclosures
normally included in financial statements have been condensed or omitted
pursuant to rules and regulations of the Securities and Exchange Commission
("SEC"), although the Company believes that the disclosures in the
condensed consolidated financial statements are adequate to ensure the
information presented is not misleading. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto, and Management's Discussion and
Analysis of Financial Condition and Results of Operations, contained in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2001 filed with the SEC on March 28, 2002. The results of operations for
the interim periods are not necessarily indicative of the operating results
for the year.
Certain reclassifications have been made to the prior year's condensed
consolidated financial statements to conform to the current year's
presentation.
2. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended, is effective for fiscal years beginning after June 15, 2000. SFAS
133, as amended, established accounting and reporting standards for
derivative instruments including certain derivative instruments embedded in
other contracts that were not formerly considered derivatives and now may
meet the definition of a derivative. Additionally, this standard requires
all derivatives to be reported on the balance sheet at fair value. For
derivatives that are fair value hedges, changes in the fair value of
derivatives are offset by the change in fair value of the hedged assets,
liabilities, or firm commitments. The Company adopted this standard
effective January 1, 2001 with no significant effect to its results of
operations, financial position, or cash flows.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which
was effective immediately. SFAS No. 141 requires that the purchase method
of accounting be used for all business combinations initiated after June
30, 2001; and it eliminated the pooling-of-interests method. The adoption
of this standard did not have a significant impact on the Company's
consolidated financial statements. The Company's April 2002 acquisition of
certain assets and certain liabilities of eGrail, Inc. has been accounted
for in compliance with this pronouncement (see Note 3 for details).
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which the Company adopted January 1, 2002. SFAS No. 142 requires
that goodwill and other intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually
and written down when impaired. SFAS No. 142 requires purchased intangible
assets other than goodwill to be amortized over their useful lives unless
these lives are determined to be indefinite. In accordance with this
Standard, the Company no longer amortizes goodwill and indefinite life
intangible assets but evaluates their carrying value annually or when
events or circumstances indicate that their carrying value may be impaired.
Assembled workforce no longer meets the definition of a
separately-identified intangible asset under the provisions of SFAS No.
141, and the balance of $182,000 was reclassified as goodwill at January 1,
2002. The Company ceased amortizing the goodwill balance of $10.1 million
from its 2000 acquisition of Applications Partner, Inc. as of January 1,
2002. In accordance with SFAS No. 142, the Company is required to perform a
two-step transitional impairment review. The first step of this review was
completed by June 30, 2002 with the determination of the fair value of the
Company's reporting units in order to identify whether the fair value of
each reporting unit is less than its carrying amount. In
the event that the fair value of the reporting unit is less than the
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carrying amount, the second step of the test would be required to determine
if the carrying value of goodwill exceeds the implied value. The Company
determined that it did not have a transitional impairment of goodwill. The
Company had no indefinite life intangible assets as of January 1, 2002. If
estimates change, a materially different impairment conclusion could
result.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment of long-lived assets and for
the disposal of long-lived assets and discontinued operations. SFAS No. 144
superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and is effective for
fiscal years beginning after December 15, 2001. The adoption of this
Standard on January 1, 2002 did not have a material impact on the Company's
financial position and results of operations.
In November 2001, the FASB announced Emerging Issues Task Force ("EITF")
Topic No. D-103, "Income Statement Characterization of Reimbursements
Received for Out-of-Pocket Expense Incurred", is required to be applied in
financial reporting periods beginning after December 15, 2001. The EITF
requires companies to characterize reimbursements received for
out-of-pocket expenses as revenues in the statement of operations.
Historically, the Company has netted reimbursements received for
out-of-pocket expenses against the related expenses in the statement of
operations. Application of this EITF requires that comparative financial
statements for prior periods be reclassified to comply with the guidance.
The Company adopted this EITF as of January 1, 2002 and has reclassified
its prior period consolidated financial statements to conform to the
current presentation. The adoption of this EITF did not have a material
effect on total revenues or gross margin percentages and has no impact on
results of operations as it required an equivalent increase to both revenue
and cost of revenue. Revenue and cost of revenue for the three months ended
June 30, 2001 increased by $642,000 and increased by $1.2 million for the
six months ended June 30, 2001.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities and
supersedes EITF Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 requires that costs
associated with exit or disposal activities be recognized when they are
incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS 146 also establishes that the liability should initially be
measured and recorded at fair value. The Company will adopt the provisions
of SFAS 146 for exit or disposal activities that are initiated after
December 31, 2002.
3. ACQUISITIONS
On April 2, 2002, the Company acquired certain assets and assumed certain
liabilities of eGrail, Inc. ("eGrail"), a Web content management company,
for $9.0 million in cash. This strategic acquisition provides additional
Web Content Management ("WCM") software application capabilities that
enhance the Company's position in the Enterprise Content Management ("ECM")
market. These enhancements are expected to expand our ECM offerings and
contributed to the purchase price that resulted in goodwill. In accordance
with SFAS No. 141, "Business Combinations," the acquisition has been
accounted for under the purchase method of accounting. The purchase price
for eGrail consisted of $9.0 million cash and direct acquisition costs of
$359,000. The purchase price was allocated as follows (in thousands):
Net tangible assets $ 581
Goodwill 5,793
Patents 24
Acquired technology 3,300
In-process research and development 400
Liabilities assumed (739)
$ 9,359
The amount allocated to in-process research and development and acquired
technology was determined through established valuation techniques in the
high-technology industry by an independent third-party appraiser.
In-process research and development was expensed upon acquisition because
technological feasibility had not been established and no future
alternative uses existed. New product development underway at eGrail at the
time of the acquisition included the next generation of their Web Content
Management product that was in the early stages of design and only 5%
complete at the date of the acquisition. The cost to complete the project
8
was estimated at approximately $3.0 million to occur over a twelve-month
period. As of June 30, 2002 the Company has incurred approximately $906,000
of research and development expenses related to the project. The remaining
purchase price was primarily allocated to tangible assets and goodwill. The
acquired technology of $3.3 million was assigned a useful life of five
years and patents of $24,000 were assigned a useful life of two years. In
accordance with SFAS No. 142, goodwill will not be amortized but will be
reviewed for impairment on an annual basis. Goodwill is tax deductible for
this asset purchase.
Actual results of operations of eGrail, as well as certain assets and
liabilities acquired on April 2, 2002, are included in the condensed
consolidated financial statements from the date of acquisition. Therefore,
the Company's financial results for the three months ended June 30, 2002
include the actual results of eGrail for this period. The pro forma results
of operations data for the six month periods ended June 30, 2001 and 2002
presented below assume that the acquisition had been made at the beginning
of fiscal 2001. The pro forma data is presented for informational purposes
only and is not necessarily indicative of the results of future operations
nor of the actual results that would have been achieved had the
acquisitions taken place at the beginning of fiscal 2001 (in thousands):
Six Months Ended June 30,
2002 2001
Revenue $ 175,220 $ 170,528
Net Income (Loss) 1,515 (17,269)
Earnings (Loss) per share:
Basic 0.04 (0.49)
Diluted 0.04 (0.49)
Alliant Partners acted as financial advisors to eGrail in this transaction
and was paid approximately $500,000 by eGrail. John Savage, a member of
FileNET's Board of Directors and the Audit Committee of FileNET's Board of
Directors, is Managing Partner of Alliant Partners and, accordingly,
recused himself from all discussions related to the transaction and
abstained from voting on this transaction.
4. GOODWILL AND PURCHASED INTANGIBLE ASSETS
In acquisitions accounted for using the purchase method, goodwill is
recorded as the difference, if any, between the aggregate consideration
paid for an acquisition and the fair value of the net tangible and
identified intangible assets acquired. Statement No. 142 requires that
ratable amortization of goodwill and indefinite life intangibles be
replaced with periodic review and analysis of goodwill for possible
impairment. Intangible assets with definite lives must be amortized over
their estimated useful lives. On January 1, 2002 the Company adopted SFAS
No. 142, and as a result, goodwill is no longer amortized. Summarized below
are the effects on net income (loss) per share data if the Company had
followed the amortization provisions of SFAS 142 for all periods presented
(in thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Net income (loss):
As reported $ 1,734 $ (10,695) $ 3,098 $ (16,266)
Add: goodwill amortization, net of taxes - 617 - 1,200
Adjusted net income (loss) $ 1,734 $ (10,078) $ 3,098 $ (15,066)
Basic net income (loss) per share:
As reported $ 0.05 $ (0.30) $ 0.09 $ (0.46)
Add: goodwill amortization, net of taxes - 0.02 - 0.03
Adjusted basic net income (loss) per
share $ 0.05 $ (0.28) $ 0.09 $ (0.43)
9
Diluted net income (loss) per share:
As reported $ 0.05 $ (0.30) $ 0.08 $ (0.46)
Add: goodwill amortization, net of taxes - 0.02 - 0.03
Adjusted diluted net income (loss) per
share $ 0.05 $ (0.28) $ 0.08 $ (0.43)
Note: Goodwill and intangible assets were allocated to our Ireland
subsidiary and therefore the following tables reflect amounts resulting
from foreign exchange translation.
The following table presents the changes in goodwill allocated to the
reportable segments during the first six months of 2002 (in thousands):
Balance at Foreign Balance at
December 31, Currency June 30,
2001 Acquired Adjustments Fluctuation 2002
Software $ 4,914 $ 3,654 $ 90 $ 322 $ 8,980
Customer support 3,271 406 60 215 3,952
Professional services
and education 1,768 1,733 32 116 3,649
Hardware - - - - -
Total $ 9,953 $ 5,793 $ 182 $ 653 $ 16,581
The adjustments during the first six months were due to the
reclassification of assembled workforce intangible to goodwill at January
1, 2002 as a result of the adoption of SFAS 142. The acquired goodwill
resulted from the acquisition of eGrail in April 2002.
Acquired technology and patents are the Company's only intangible assets
subject to amortization under Statement No. 142. These assets were recorded
in connection with the April 2002 eGrail acquisition and are comprised of
the following as of June 30, 2002 (in thousands):
Accumulated
Gross Amortization Net
Acquired technology $ 3,468 $ 173 $ 3,295
Patents 25 3 22
$ 3,493 $ 176 $ 3,317
Acquired technology is being amortized over a useful life of five years and
patents are being amortized over a useful life of two years. Amortization
expense for amortizing intangible assets was $168,190 for the three months
ended June 30, 2002 and estimated future amortization expense (excluding
foreign exchange effect) of purchased intangible assets as of June 30, 2002
is as follows (in thousands):
Fiscal
Year Amount
2002 (remaining 6 months) 336,380
2003 672,760
2004 663,190
2005 660,000
2006 660,000
2007 165,000
$ 3,157,330
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5. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss)
for the period by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing net
income by the weighted average number of common shares outstanding plus the
dilutive effect of outstanding stock options and shares issuable under the
employee stock purchase plan using the treasury stock method. The dilutive
loss per share excludes these adjustments, as the impact would be
anitidilutive. The following table sets forth the computation of basic and
diluted earnings (loss) per share for the three and six months ended June
30, 2002 and 2001:
(In thousands, except per share amounts) Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
Net income (loss) $ 1,734 $ (10,695) $ 3,098 $ (16,266)
Shares used in computing
basic earnings (loss) per share 35,543 35,281 35,452 35,139
Dilutive effect of stock plans 1,198 - 1,531 -
Shares used in computing
diluted earnings (loss) per share 36,741 35,281 36,983 35,139
Earnings (loss) per basic share $ 0.05 $ (0.30) $ 0.09 $ (0.46)
Earnings (loss) per diluted share $ 0.05 $ (0.30) $ 0.08 $ (0.46)
6. ACCUMULATED OTHER COMPREHENSIVE LOSS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires enterprises to report comprehensive income
and its components in general-purpose financial statements. SFAS No. 130
was effective for the Company beginning January 1, 1998. Accordingly, the
Company has prepared Statements of Comprehensive Operations for the six
months ended June 30, 2002. Accumulated other comprehensive loss as of June
30, 2002 is comprised of the following:
Foreign Unrealized Accumulated
Currency Holding Other
Translation Gains Comprehensive
(in thousands) Adjustment (Losses) Operations
Balance, December 31, 2001 $ (14,079) $ 39 $ (14,040)
Current period changes 4,991 14 5,005
Balance June 30, 2002 $ (9,088) $ 53 $ (9,035)
7. OPERATING SEGMENT DATA
The Company has prepared operating segment information in accordance with
SFAS No. 131, "Disclosures About Segments of An Enterprise and Related
Information," to report components that are evaluated regularly by the
Company's chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. The
Company is organized geographically and by line of business. The line of
business management structure is the primary basis upon which financial
performance is assessed and resources allocated.
The Company's reportable operating segments include Software, Customer
Support, Professional Services and Education, and Hardware. The Software
operating segment develops and markets the Company's Enterprise Content
Management and Business Process Management software products. The Customer
Support segment provides after-sale support for software, as well as
providing software upgrades pursuant to the Company's right to new versions
program. The Professional Services and Education segment provides fee-based
implementation and technical services related to the Company's software
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products, and also provides training. The Hardware operating segment
manufactures and markets the Company's line of Optical Storage And
Retrieval ("OSAR") libraries. The financial results of the segments reflect
allocation of certain functional expense categories consistent with the
basis and manner in which Company management internally disaggregates
financial information for the purpose of assisting in making internal
operating decisions, which are not the same as GAAP reporting. The Company
evaluates performance based on stand-alone segment operating results.
Because the Company does not evaluate performance based on the return on
assets at the operating segment level, assets are not tracked internally by
segment. Therefore, segment asset information is not presented.
Operating segments data for the three and six months ended June 30, 2002
and 2001 are as follows:
Three months ended June 30, Six months ended June 30,
In thousands 2002 2001 2002 2001
Software
Revenue $ 34,350 $ 28,788 $ 65,590 $ 61,531
Operating loss (12,984) (19,530) (25,408) (34,699)
Customer Support
Revenue $ 37,281 $ 32,690 $ 73,844 $ 61,829
Operating income 14,480 9,844 28,145 18,195
Professional Services and
Education Revenue $ 14,491 $ 18,707 $ 30,327 $ 35,934
Operating loss (1,234) (1,306) (1,679) (3,777)
Hardware
Revenue $ 2,105 $ 2,663 $ 4,707 $ 8,048
Operating income (loss) 22 (394) 136 (406)
Total
Revenue $ 88,227 $ 82,848 $ 174,468 $ 167,342
Operating income (loss) 284 (11,386) 1,194 (20,687)
8. LEGAL PROCEEDINGS
In the normal course of business, the Company is subject to ordinary
routine litigation incidental to the business. While the results of this
litigation cannot be predicted with certainty, the Company believes that
the final outcome of these matters will not have a materially adverse
effect on its consolidated results of operations or financial condition.
9. RELATED PARTY TRANSACTIONS
In July 2001, the Compensation Committee of the Company's Board of
Directors entered into discussions with Lee Roberts, the Company's Chief
Executive Officer, regarding a secured loan by the Company to Mr. Roberts
to enable him to purchase a home in Orange County, California. In July
2001, the Compensation Committee forwarded its recommendation to the Board
to approve, in principle, a secured loan, in the amount of $1.2 million to
Mr. Roberts. In September 2001, the Compensation Committee approved, in
principle, an increase in the previously requested loan amount to $1.9
million, subject to review of final loan documents and approval of the
Board. In May 2002, the Compensation Committee reviewed proposed loan
documentation for a secured loan to Mr. Roberts and forwarded its
recommendation to the Board to approve the loan on the terms set forth in
the loan documents. The loan documents provided that the loan would be
secured by the real estate purchased by Mr. Roberts. Subsequently, on June
5, 2002, the Board approved the loan documents and the loan. The authority
to grant such a loan is "grand fathered" under Section 13 of the Securities
Exchange Act of 1934, as amended by Section 402 of the Sarbanes-Oxley Act
on July 30, 2002.
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As of June 30, 2002, FileNET had an outstanding secured note receivable
from Mr. Roberts in the amount of $1.9 million that relates to the
above-referenced loan and is included in other assets on the condensed
consolidated balance sheet. The note bears interest at 2.89% per annum.
Accrued interest on the principal balance of this note is payable annually
beginning February 15, 2003 and on each February 15th thereafter until the
entire principal balance becomes due. The entire outstanding principal
balance of this note and any accrued interest is due and payable at the
earliest of (a) June 7, 2005, (b) one year after termination of Mr.
Roberts' employment by the Company, or (c) ninety (90) days after voluntary
termination of employment by Mr. Roberts. The difference between the stated
interest rate of the Note and a fair value interest rate of 7% was recorded
as a discount that is being amortized over the term of the Note to
compensation expense using the effective interest method.
10. FOREIGN CURRENCY TRANSACTIONS
As of June 30, 2002, we had forward foreign exchange contracts outstanding
totaling approximately $1,192,809 eight currencies. These contracts are
opened on the last business day of the quarter and mature within three
months. Accordingly, the fair value of such contracts is zero at June 30,
2002.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E
of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, and is subject to the safe harbors created
by those sections. These forward-looking statements are subject to a number of
risks and uncertainties, including those discussed in "Risk Factors That May
Affect Future Results" below and in the notes to our consolidated financial
statements for the year ended December 31, 2001. The actual results that we
achieve may differ materially from any forward-looking statements, which reflect
management's opinions only as of the date hereof. We undertake no obligation to
revise or publicly release the results of any revisions to these forward-looking
statements. Readers should carefully review the risk factors described below and
in other documents we file from time to time with the Securities and Exchange
Commission, including our Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.
Overview
FileNET Corporation develops, markets, implements and services Enterprise
Content Management ("ECM") and Business Process Management software products and
eBusiness applications and solutions for selected vertical markets. Our software
products enable organizations to improve operational efficiency and leverage
their content resources through the delivery of efficient, flexible, and
scalable eBusiness process management solutions. We also offer professional
services and training for the implementation of these software solutions, as
well as 24 hours a day, seven days a week technical support and services to our
customers on a global basis.
Significant Accounting Policies
We prepare the consolidated financial statements of FileNET in conformity with
accounting principles generally accepted in the United States of America. The
consolidated financial statements include our accounts and the accounts of our
wholly-owned subsidiaries. All intercompany balances and transactions have been
eliminated. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
significant accounting policies we believe are most critical to aid in fully
understanding and evaluating our reported financial results include the
following:
Revenue Recognition. Revenues from sales of software licenses sold through
direct and indirect channels, which do not contain multiple elements, are
recognized upon shipment of the related product if the requirements of Statement
of Position ("SOP") 97-2, as amended, are met. If the requirements of SOP 97-2,
including evidence of an arrangement, delivery, fixed or determinable fee,
collectibility or vendor specific evidence about the value of an element are not
met at the date of shipment, revenue is not recognized until such elements are
known or resolved. Software license revenue for arrangements to deliver
unspecified additional software products in the future is recognized ratably
over the term of the arrangement, beginning with the initial shipment. Revenue
from post-contract customer support is recognized ratably over the term of the
contract. Revenue from professional services and education is recognized as such
services are delivered and accepted by the customer. Anticipated losses on
13
fixed-price contracts are recognized in the period when they become known. We
recognize other revenue at the time of product delivery and accrue any remaining
costs, including vendor obligations. Based on historical experience, we maintain
a sales return allowance for the estimated amount of potential returns. While
such returns have historically been minimal and within our expectations of the
allowances established, we cannot guarantee that we will continue to experience
the same return rates that we have in the past.
Accounts Receivable. We evaluate the creditworthiness of our customers prior to
order fulfillment and we perform ongoing credit evaluations of our customers to
adjust credit limits based on payment history and the customer's current
creditworthiness. We monitor collections from our customers and maintain a
provision for estimated credit losses that is based on historical experience and
on specific customer collection issues. While such credit losses have
historically been within our expectations and the provisions established, we
cannot guarantee that we will continue to experience the same credit loss rates
that we have in the past. Since our revenue recognition policy requires
customers to be creditworthy, our accounts receivable are based on customers
whose payment is reasonably assured. Our accounts receivable are derived from
sales to a wide variety of customers. We do not believe a change in liquidity of
any one customer or our inability to collect from any one customer would have a
material adverse impact on our financial position.
Deferred Income Taxes. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. We
maintain a valuation allowance against a portion of the deferred tax asset due
to uncertainty regarding the future realization based on historical taxable
income, projected future taxable income, and the expected timing of the
reversals of existing temporary differences. If we operate at a loss or are
unable to generate sufficient future taxable income we could be required to
increase the valuation allowance against all or a significant portion of our
deferred tax assets which would result in a substantial increase to our
effective tax rate and could result in a material adverse impact on our
operating results.
Accounting for Impairment or Disposal of Long-Lived Assets. We account for the
impairment and disposition of long-lived assets in accordance with the Statement
of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In
accordance with SFAS No. 144, long-lived assets to be held are reviewed for
events or changes in circumstances that indicate that their carrying value may
not be recoverable. In August 2001, the Financial Accounting Standards Board
("FASB") issued SFAS No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets." This statement addresses financial accounting and reporting
for the impairment of long-lived assets and for the disposal of long-lived
assets. SFAS No. 144 superseded SFAS No. 121, and is effective for fiscal years
beginning after December 15, 2001. We evaluate the carrying value of intangible
assets for impairment of value based on undiscounted future cash flows, which
are subject to change. While we have not experienced impairment of intangible
assets in prior periods, we cannot guarantee that there will not be impairment
in the future.
Research and Development Costs. We expense research and development costs as
incurred. No amounts are required to be capitalized in accordance with SFAS No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," because our software is substantially completed
concurrently with the establishment of technological feasibility.
Results of Operations
The following table sets forth certain consolidated statements of operations
data as a percentage of total revenue for the periods indicated:
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
Revenue:
Software 38.9 % 34.7 % 37.6 % 36.8 %
Customer support 42.3 39.5 42.3 36.9
Professional services and
education 16.4 22.6 17.4 21.5
Hardware 2.4 3.2 2.7 4.8
Total Revenue 100.0 100.0 100.0 100.0
14
Cost of revenue:
Software 2.8 1.6 2.6 2.0
Customer support 11.1 13.8 11.4 14.0
Professional services and
education 15.0 19.7 15.3 19.9
Hardware 1.8 2.4 2.0 3.3
Total cost of revenue 30.7 37.5 31.3 39.2
Gross Profit 69.3 62.5 68.7 60.8
Operating expenses
Research and development 21.6 23.6 20.9 21.3
Selling, general and administrative 46.9 52.6 46.9 51.9
In-process research and development 0.5 - 0.2 -
Total operating expenses 69.0 76.2 68.0 73.2
Operating income (loss) 0.3 (13.7) 0.7 (12.4)
Other income, net 2.2 (2.2) 1.6 (0.1)
Income (loss) before income tax 2.5 % (15.9)% 2.3 % (12.5)%
Revenue
Total revenue was $88.2 million for the three months ended June 30, 2002
compared to $82.8 million for the three months ended June 30, 2001, representing
an increase of $5.4 million, or 6%. Total revenue was $174.5 million for the six
months ended June 30, 2002 and $167.3 million for the comparable six months
ended June 30, 2001, representing an increase of $7.2 million, or 4%. As more
fully discussed below, the increase in total revenue was primarily attributable
to an increase in software and customer support revenue partially offset by
lower professional services and education revenue.
Software revenue consists of fees earned from the licensing of our software
products to customers. Software revenue increased by 19%, or $5.6 million, to
$34.4 million for the three months ended June 30, 2002 from $28.8 million for
the three months ended June 30, 2001; and increased by 7%, or $4.1 million, to
$65.6 million for the six months ended June 30, 2002 from $61.5 million for the
six months ended June 30, 2001. Software revenue represented 38.9% of total
revenue for the three months ended June 30, 2002 compared to 34.7% for the
comparable period of 2001, and represented 37.6% of total revenues for the six
months ended June 30, 2002 compared to 36.8% for the comparable period of 2001.
Compared to 2001, the increases in software revenue in 2002 are primarily due to
increased revenue from channel partners across most geographies. While we saw
signs of potential improvement in customer spending in the second quarter of
2002, we are not currently able to assess the likely trend of software revenue
in future periods due to the continued slowdown in IT spending.
Customer support revenue consists of revenue from software maintenance
contracts, "fee for service" revenues and the sale of spare parts and supplies.
Customer support revenue increased by 14%, or $4.6 million, to $37.3 million for
the three months ended June 30, 2002 from $32.7 million for the three months
ended June 30, 2001; and increased by 19%, or $12.0 million, to $73.9 million
for the six months ended June 30, 2002 from $61.9 million for the six months
ended June 30, 2001. Customer support revenue represented 42.3% of total revenue
for the three months ended June 30, 2002 compared to 39.5% for the comparable
period of 2001; and represented 42.3% of total revenues for the six months ended
June 30, 2002 compared to 36.9% for the comparable period of 2001. The increase
in customer support revenue was primarily due to the growth in our base of
customers who receive ongoing maintenance as a result of new customer sales and
sales of additional products to our installed base along with a high rate of
renewal on the existing base. However, the occurrence of a prolonged economic
slowdown that continues to reduce software revenue will result in a decrease in
the future growth rate of customer support revenue.
Professional services and education revenue is generated primarily from
consulting and implementation services provided to end users of our software
products, technical consulting services provided to our resellers and training
services provided to end users and resellers. Professional services are
generally performed on a time and material basis. Professional services and
education revenue decreased by 22%, or $4.2 million, to $14.5 million for the
three months ended June 30, 2002 from $18.7 million for the three months ended
June 30, 2001; and decreased by 16%, or $5.6 million, to $30.3 million for the
15
six months ended June 30, 2002 compared to $35.9 million for the comparable
period of 2001. Professional services and education revenue represented 16.4% of
total revenue for the three months ended June 30, 2002 compared to 22.6% for the
comparable period in 2001, and represented 17.4% of total revenues for the six
months ended June 30, 2002 compared to 21.5% for the comparable period of 2001.
Professional services and education revenue generally reflects the trends in
software revenue that occurred two to three quarters prior. The decrease in
professional services and education revenue in 2002 compared to 2001 resulted
primarily from decreased software revenue that occurred in 2001 due to a
slowdown in IT spending. A prolonged economic slow down, which continues to
negatively affect software revenue, will most likely continue to have a negative
impact on professional services and education revenue.
Hardware revenue is generated primarily from the sale of 12-inch Optical Storage
and Retrieval ("OSAR") libraries. Hardware revenue decreased by 21%, or $0.6
million, to $2.1 million for the three months ended June 30, 2002 from $2.7
million for the three months ended June 30, 2001 and decreased by 42%, or $3.4
million, to $4.7 million for the six months ended June 30, 2002 compared to $8.1
million for the comparable period of 2001. Hardware revenue represented 2.4% of
total revenue for the three months ended June 30, 2002 compared to 3.2% for the
comparable period of 2001, and represented 2.7% of total revenues for the six
months ended June 30, 2002 compared to 4.8% for the comparable period of 2001.
Hardware is not a strategic focus for us and we expect hardware revenue to
continue to decrease as a percent of total revenue.
International revenue accounted for 27% of total revenue, or $23.7 million, for
the three months ended June 30, 2002 and 22% of total revenue, or $18.1 million,
for the three months ended June 30, 2001, and accounted for 27% of total
revenue, or $46.8 million, for the six months ended June 30, 2002, and 27%, or
$44.6 million, for the comparable period of 2001. This increase in international
sales for the first six months in 2002 of $2.2 million is primarily a result of
increased sales to our channel partners.
Cost of Revenue
Total cost of revenue decreased to $27.1 million for the three months ended June
30, 2002 from $31.1 million for the three months ended June 30, 2001,
representing a decrease of $4.0 million, or 13%. For the six months ended June
30, 2002, total cost of revenue decreased to $54.6 million from $65.6 million
for the comparable period in 2002, representing a decrease of $11.0 million, or
17%. This decrease is primarily due to decreases in the cost of customer support
revenue and professional services and education revenue as discussed more fully
below.
Cost of software revenue includes royalties paid to third parties, partner
commissions, software media costs, and the cost to manufacture and distribute
software. The cost of software revenue increased by 92% to $2.5 million for the
three months ended June 30, 2002 from $1.3 million for the three months ended
June 30, 2001, and increased by 35% to $4.6 million for the six months ended
June 30, 2002 from $3.4 million for the six months ended June 30, 2001. These
costs represented 7% and 5% of the related software revenue for each of the
three and six months ended June 30, 2002 and 2001, respectively. These increases
in absolute dollars are primarily the result of increased use of third party
software products resulting in higher royalty fees and increased partner
commissions as a consequence of increased channel revenue. Going forward we
anticipate cost of software revenue as a percent of software revenue to remain
comparable to current levels.
Cost of customer support revenue includes costs of customer support personnel,
cost of supplies and spare parts, and the cost of third-party hardware
maintenance. The cost of customer support revenue decreased by 15% to $9.8
million for the three months ended June 30, 2002 from $11.5 million for the
three months ended June 30, 2001; and decreased by 15% to $19.9 million for the
six months ended June 30, 2002 from $23.5 million for the six months ended June
30, 2001. These costs represented 26% and 35% of the related customer support
revenue for the three months ended June 30, 2002 and 2001, respectively; and 27%
and 38% of the related customer support revenue for the six months ended June
30, 2002 and 2001, respectively. The decrease in absolute dollars is primarily
attributable to lower compensation cost as a result of a reduction in workforce
in 2001. The decrease as a percentage of customer support revenue is primarily
attributable to automation and process improvements that allowed growth in the
customer base, which generated increased revenue, without a proportional
increase in support personnel and cost. We expect these costs to remain
relatively stable in absolute dollars for the foreseeable future.
Cost of professional services and education revenue consists primarily of costs
of professional services personnel, training personnel, and third-party
independent consultants. The cost of professional services and education revenue
decreased by 19% to $13.2 million for the three months ended June 30, 2002 from
$16.3 million for the three months ended June 30, 2001; and decreased by 20% to
$26.6 million for the six months ended June 30, 2002 from $33.3 million for the
six months ended June 30, 2001. These costs represented 91% and 87% of the
16
related professional services and education revenue for the three months ended
June 30, 2002 and 2001, respectively; and 88% and 93% of the related
professional services and education revenue for the six months ended June 30,
2002 and 2001, respectively. The decrease in absolute dollars was primarily
attributable to a reduction in the use of higher cost third-party independent
consultants and reduced variable compensation as a result of lower 2002 revenues
discussed above. We expect professional services and education costs as a
percentage of professional services and education revenue to vary from period to
period depending on the utilization rates of internal resources and the mix
between internal and third party independent consultants.
Cost of hardware revenue includes the cost of assembling and distributing our
OSAR library products, the cost of hardware integration personnel, and warranty
costs. The cost of hardware revenue decreased by 18% to $1.6 million for the
three months ended June 30, 2002 from $1.9 million for the three months ended
June 30, 2001; and decreased by 36% to $3.5 million for the six months ended
June 30, 2002 from $5.5 million for the six months ended June 30, 2001. These
costs represented 75% and 73% of the related hardware revenue for the three
months ended June 30, 2002 and 2001, respectively; and 75% and 68% of the
related hardware revenue for the six months ended June 30, 2002 and 2001,
respectively. The decrease in absolute dollars is directly related to the
decrease in sales of OSAR library products. The increase in cost of hardware
revenue as a percentage of hardware revenue was primarily due to unabsorbed
fixed costs.
Operating Expenses
Research and development expense primarily consists of costs of personnel to
support product development. Research and development expense decreased by 2% to
$19.1 million for the three months ended June 30, 2002 from $19.5 million for
the three months ended June 30, 2001, and represented 22% and 24% of total
revenue for these respective periods. Research and development expense increased
2% to $36.4 million for the six months ended June 30, 2002 from $35.6 million
for the six months ended June 30, 2001, and represented 21% of total revenue for
these respective periods. Excluding the impact of one-time charges in 2001,
explained below, and the added charges in 2002 more fully explained below,
expenses increased in the three and six-month periods ended June 30, 2002 over
the comparable periods in 2001 primarily due to increased headcount expense.
Expenses for the period ended June 30, 2001 included a one-time bonus payment of
$2.0 million related to the Applications Partners Incorporated ("API")
acquisition. The eGrail acquisition, which was completed on April 2, 2002,
contributed approximately $1.5 million of additional expenses, including a
one-time charge of $400,000 for in-process research and development and
amortization of purchased intangible assets of $168,000, in the three months
ended June 30, 2002.
Our research and development efforts are focused on developing our ECM
capabilities. These efforts will focus on improvements in Business Process
Management, Content Management, Web Content Management and associated
applications to provide a richer competitive product offering to our customers.
We intend to compliment internal development with third party software through
OEM agreements and may execute additional technology acquisitions. New product
development underway at eGrail at the time of the acquisition included the next
generation of their Web Content Management product that was in the early stages
of design and only 5% complete at the date of the acquisition. The cost to
complete the project was estimated at approximately $3.0 million to occur over a
twelve-month period. As of June 30, 2002 the Company has incurred approximately
$906,000 of research and development expenses related to the project.
We expect that competition for qualified technical personnel, while easing due
to the global economic slowdown in the short-term, will remain intense
thereafter and may result in higher levels of compensation expense for us in the
future. We believe that research and development expenditures, including
compensation of technical personnel, are essential to maintaining our
competitive position and expect these costs will continue to constitute a
significant percentage of total revenue.
Selling, general and administrative expense consists primarily of salaries,
benefits, sales commissions and other expenses related to the direct and
in-direct sales force; various marketing expenses; the cost of other market
development programs; personnel costs for finance, information technology,
legal, human resources and general management; and the cost of outside
professional services. Selling, general and administrative expense decreased by
5% to $41.4 million for the three months ended June 30, 2002 from $43.6 million
for the three months ended June 30, 2001, and represented 47% and 53% of total
revenues for these respective periods. Selling, general and administrative
expense decreased 6% to $81.8 million for the six months ended June 30, 2002
from $86.8 million for the six months ended June 30, 2001, and represented 47%
and 52% of total revenue for these respective periods. These decreases in 2002
were primarily due to a reduction in headcount during 2001 resulting in overall
reduced personnel costs, lower recruitment and training expense in addition to
decreased marketing development expense. The elimination of goodwill
amortization, which was $1.5 million for the six months ended June 30, 2001,
also contributed to this decrease (see "Amortization of Goodwill and Intangible
Assets" below).
17
We expect operating expenses to remain at or above these current levels for the
foreseeable future as a result of continued development of our ECM capabilities.
Amortization of Goodwill and Identifiable Intangible Assets
In connection with our acquisition of certain assets from API on May 18, 2000,
the purchase price amount allocated to goodwill of $14.6 million was being
amortized over a useful life of five years and assembled workforce of $386,000
was being amortized over a useful life of three years. These amortization costs
were recorded in selling, general and administrative expense. We ceased
amortizing goodwill and assembled workforce as of the beginning of the first
quarter of 2002 in compliance with SFAS No. 142. In contrast, we recognized
$762,000 of amortization expense in the three months ended June 30, 2001 and
$1.5 million of amortization expense in the six months ended June 30, 2001.
Assembled workforce no longer meets the definition of a separately-identified
intangible asset under the provisions of SFAS No. 141, "Business Combinations,"
and the balance of $182,000 was reclassified as goodwill at January 1, 2002.
SFAS No. 142 is effective for new business combinations that occur after June
30, 2001. Accordingly, goodwill of $5.8 million that was recorded in April 2002
in connection with the eGrail acquisition will not be amortized. We will
evaluate the carrying value of goodwill annually or when events or circumstances
indicate that their carrying value may be impaired. In accordance with SFAS No.
142, we are required to perform a two-step transitional impairment review. We
completed the first step of this review by June 30, 2002 with the determination
of the fair value of our reporting units in order to identify whether the fair
value of each reporting unit is less than its carrying amount. In the event that
the fair value of the reporting unit is less than the carrying amount, the
second step of the test would be required to determine if the carrying value of
goodwill exceeds the implied value. We determined that we did not have a
transitional impairment of goodwill. We had no indefinite life intangible assets
as of January 1, 2002. If estimates change, a materially different impairment
conclusion could result.
Other Income, Net
Other income, net consists primarily of interest income earned on our cash and
cash equivalents, short and long-term investments, and other items including
foreign exchange gains and losses, the gain (loss) on sale of fixed assets, and
interest expense. Other income, net was $1.9 million for the three months ended
June 30, 2002 compared to other loss, net of $1.8 million for the three months
ended June 30, 2001. Other income, net for the six months ended June 30, 2002
was $2.8 million compared to other loss, net of $166,000 for the comparable
six-month period in 2001. The loss in 2001 was due to a one-time charge of $4.0
million for a legal settlement that was recorded in the second quarter of 2001.
Included in other income, net in the second quarter of 2002 is a net gain on
foreign exchange of $1.1 million related to the strengthening of the euro
against the U.S. dollar during the quarter.
Income Taxes
Our combined federal, state and foreign annual effective tax rate for the three
months ended June 30, 2002, is 21% compared to 19% for the comparable period in
2001. The combined federal, state and foreign annual effective tax rate for the
six months ended June 30, 2002, is 23% compared to 22% for the comparable period
in 2001. FileNET management will continue weighing various factors throughout
the year to assess the recoverability of its recorded deferred assets and the
need for any valuation allowance against such amounts. Any adjustment to the
valuation allowance could affect the effective tax rate in subsequent quarters.
Liquidity and Capital Resources
At June 30, 2002, combined cash, cash equivalents and investments totaled $168.7
million, a decrease of $3.5 million from December 31, 2001. Cash provided by
operating activities during the six months ended June 30, 2002 totaled $5.7
million and resulted primarily from an increase in unearned maintenance revenue
related to prepaid maintenance contracts, an increase in accounts payable, net
income and additions to net income for depreciation and amortization expense,
offset by increases in accounts receivable and an increase in prepaid expenses.
Cash used for investing activities totaled $36.1 million and included capital
expenditures of $6.5 million, a $1.9 million note receivable from officer, $9.4
million for the eGrail acquisition, and net purchases of marketable securities
of $18.4 million. Cash provided by financing activities totaled $2.7 million and
was a result of proceeds received from the exercise of employee stock options
and stock purchases under the employee stock purchase plan offset by payments on
capital lease obligations. Exchange rate changes during the second quarter
provided an increase in cash of $4.4 million
Accounts receivable increased to $53.4 million at June 30, 2002 from $36.9
million at December 31, 2001. This increase is primarily a result of higher days
sales outstanding due to slightly slower overall collections.
18
Current liabilities increased to $95.3 million at June 30, 2002 from $79.6
million at December 31, 2001. This increase in current liabilities from $31.0
million at December 31, 2001 to $43.0 million at June 30, 2002 is primarily a
result of a significant increase in unearned maintenance revenue due to a large
portion of our customer base renewing their annual maintenance in the first
quarter of 2002.
We have a $5.0 million multi-currency revolving line of credit available until
June 27, 2003. Borrowings under the arrangement are unsecured and bear interest
at one hundred and twenty-five basis points over the London Interbank Offered
Rate. A standby letter of credit fee of one hundred and twenty five basis points
per annum and a commitment fee of fifty basis points is assessed against any
undrawn amounts. There were no borrowings outstanding at June 30, 2002. We are
subject to certain financial covenants that include, but are not limited to,
compliance with specific balance sheet ratios, no two consecutive quarterly
losses, an aggregate loan limit to the officers not to exceed $5.0 million, and
a capital expenditure limit under this line of credit. As of June 30, 2002, we
were in compliance with all covenants.
We expect capital expenditures to be slightly above current levels for the
remainder of 2002. We anticipate that our present cash balances together with
internally generated funds and credit lines will be sufficient to meet our
working capital and capital expenditure needs for at least the next twelve
months.
Other Financial Instruments
We enter into forward foreign exchange contracts as a hedge against the effects
of fluctuating currency exchange rates on monetary assets and liabilities
denominated in currencies other than the functional currency of the relevant
entity. We are exposed to market risk on the forward exchange contracts as a
result of changes in foreign exchange rates; however, the market risk should be
offset by changes in the valuation of the underlying exposures. Gains and losses
on these contracts, which equal the difference between the forward contract rate
and the prevailing market spot rate at the time of valuation, are recognized in
the consolidated statement of operations. These contracts mature every three
months at the end of each quarter. We open new hedge contracts on the last
business day of each quarter that will mature at the end of the following
quarter. The counterparties to these contracts are major financial institutions.
We use commercial rating agencies to evaluate the credit quality of the
counterparties and do not anticipate nonperformance by any counterparties. We do
not anticipate a material loss resulting from any credit risks related to any of
these institutions.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended, is effective for
fiscal years beginning after June 15, 2000. SFAS 133, as amended, established
accounting and reporting standards for derivative instruments including certain
derivative instruments embedded in other contracts that were not formerly
considered derivatives and now may meet the definition of a derivative.
Additionally, this standard requires all derivatives to be reported on the
balance sheet at fair value. For derivatives that are fair value hedges, changes
in the fair value of derivatives are offset by the change in fair value of the
hedged assets, liabilities, or firm commitments. We adopted this standard
effective January 1, 2001 and it has had no significant effect on our results of
operations, financial position, or cash flows.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which was
effective immediately. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001;
and it eliminated the pooling-of-interests method. The adoption of this standard
did not have a significant impact on our consolidated financial statements. Our
April 2002 acquisition of certain assets of eGrail, Inc. was accounted for in
compliance with this pronouncement (see Note 3 for details).
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which we adopted January 1, 2002. SFAS No. 142 requires that goodwill
and other intangible assets with indefinite useful lives no longer be amortized,
but instead be tested for impairment at least annually and written down when
impaired. SFAS No. 142 requires purchased intangible assets other than goodwill
to be amortized over their useful live unless these lives are determined to be
indefinite. In accordance with this Standard, we no longer amortize goodwill and
indefinite life intangible assets but evaluate their carrying value annually or
when events or circumstances indicate that their carrying value may be impaired.
Assembled workforce no longer meets the definition of a separately-identified
intangible asset under the provisions of SFAS No. 141, Business Combinations,
and the balance of $182,000 was reclassified as goodwill at January 1, 2002. We
ceased amortizing the goodwill balance of $10.1 million from our 2000
acquisition of Applications Partner Inc. as of January 1, 2002. In accordance
with SFAS No. 142, we are required to perform a two-step transitional impairment
review. We completed the first step of this review by June 30, 2002 with the
19
determination of the fair value of our reporting units in order to identify
whether the fair value of each reporting unit is less than its carrying amount.
In the event that the fair value of the reporting unit is less than the carrying
amount, the second step of the test would be required to determine if the
carrying value of goodwill exceeds the implied value. We determined that we did
not have a transitional impairment of goodwill. We had no indefinite life
intangible assets as of January 1, 2002. If estimates change, a materially
different impairment conclusion could result.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial accounting
and reporting for the impairment of long-lived assets and for the disposal of
long-lived assets and discontinued operations. SFAS No. 144 superseded SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and is effective for fiscal years beginning after
December 15, 2001. The adoption of this Standard on January 1, 2002 did not have
a material impact on our financial position and results of operations.
In November 2001, the FASB announced Emerging Issues Task Force ("EITF") Topic
No. D-103, "Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expense Incurred", is required to be applied in financial
reporting periods beginning after December 15, 2001. The EITF requires companies
to characterize reimbursements received for out-of-pocket expenses as revenues
in the statement of operations. Historically, we have netted reimbursements
received for out-of-pocket expenses against the related expenses in the
statement of operations. Application of this EITF requires that comparative
financial statements for prior periods be reclassified to comply with the
guidance. We adopted this EITF as of January 1, 2002 and have reclassified our
prior period consolidated financial statements to conform to the current
presentation. The adoption of this EITF did not have a material effect on total
revenues or gross margin percentages and has no impact on results of operations
as it required an equivalent increase to both revenue and cost of revenue.
Revenue and cost of revenue for the three months ended June 30, 2001 increased
by $642,000 and increased by $1.2 million for the six months ended June 30,
2001.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities," which addresses financial accounting and reporting
for costs associated with exit or disposal activities and supersedes EITF Issue
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that costs associated with exit or disposal
activities be recognized when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 also establishes that the
liability should initially be measured and recorded at fair value. We will adopt
the provisions of SFAS 146 for exit or disposal activities that are initiated
after December 31, 2002.
Other Matters
European Monetary Union. On January 1, 1999, 11 of the 15 member countries of
the European Union established fixed conversion rates between their existing
sovereign currencies and the euro. These countries agreed to adopt the euro as
their common legal currency from that date. The legacy currencies remained legal
tender in these countries as a denomination of the euro between January 1, 1999
and January 1, 2002. Beginning on January 1, 2002, euro-denominated bills and
coins are now issued for cash transactions. For a period of up to six months
from this date, both legacy currencies and the euro were legal tender. By July
1, 2002, the participating countries withdrew all legacy currencies and now use
the euro.
We have made the necessary changes to our internal business systems to support
transactions denominated in the euro, including establishing euro price lists
for affected countries. We have been transacting in the euro currency since 1999
and have evaluated the impact the euro has had on our financial condition and
results of operations. Based on this evaluation to date, we currently do not
believe that there has been or will be a material impact on our financial
condition or results of operations as a result of the euro conversion.
Environmental Matters. We are not aware of any issues related to environmental
matters that have, or are expected to have, a material affect on our business.
20
Risk Factors That May Affect Future Results
Our business, financial condition, operating results and prospects can be
impacted by a number of factors, including but not limited to those set forth
below and elsewhere in this report, any one of which could cause our actual
results to differ materially from recent results or from our anticipated future
results. Factors that may affect our business, financial condition and results
of operations include:
Our quarterly operating results may fluctuate in future periods and are not
predictable and, as a result, we may fail to meet expectations of investors and
analysts, causing our stock price to fluctuate or decline. Prior growth rates in
our revenue and operating results should not necessarily be considered
indicative of future growth or operating results. Our operating results have
fluctuated in the past and we anticipate our future operating results will
continue to fluctuate due to many factors, some of which are largely beyond our
control. These factors include, but are not limited to, the following:
o the industry-wide slow down in IT spending;
o general domestic and international economic and political
conditions;
o the discretionary nature of our customers' budget and purchase
cycles and the absence of long-term customer purchase
commitments;
o the tendency to realize a substantial percentage of our revenue
in the last weeks, or even days, of each quarter;
o the potential for delays or deferrals of customer orders;
o the budget cycles of our customers;
o the size, complexity and timing of individual transactions;
o changes in foreign currency exchange rates and the impact of
the euro currency;
o the length of our sales cycle;
o variations in the productivity of our sales force;
o the level of software product sold and price competition;
o the timing of new software introductions and software enhancements
by us and our competitors;
o the mix of sales by products, software, services and distribution
channels;
o project overruns associated with fixed-price contracts;
o acquisitions by us and our competitors;
o our ability to develop and market new software products and
control costs;
o the quality of our customer support; and
o the level of international sales.
The decision to implement our products is subject to each customer's resources
and budget availability. Our quarterly sales generally include a mix of medium
sized orders, along with several large individual orders, and as a result, the
loss or delay of an individual large order could have a significant impact on
our quarterly operating results and revenue. Our operating expenses are based on
projected revenue trends and are generally fixed. Therefore, any shortfall from
projected revenue may cause significant fluctuations in operating results from
quarter to quarter. As a result of these factors, revenues and operating results
for any quarter are subject to fluctuations and are not predictable with any
significant degree of accuracy. Therefore, we believe that period-to-period
comparisons of our results of operations should not be relied upon as
indications of future performance. Moreover, such factors could cause our
operating results in a given quarter to be below the expectations of public
market analysts and investors. In either case, the price of our common stock
could decline materially.
The markets in which we operate are highly competitive and we cannot be sure
that we will be able to continue to compete effectively, which could result in
lost market share and reduced revenue. The markets we serve are highly
competitive and we expect competition to intensify. Our future financial
performance will depend primarily on the continued growth of the markets for our
software products and services as well as the purchase of our products by
customers in these markets. If the markets we serve fail to grow or grow more
slowly than we currently anticipate, our business, financial condition and
operating results would be harmed. These intensely competitive markets are
highly fragmented and rapidly changing and there are certain competitors of ours
with substantially greater sales, marketing, development and financial
resources. Our present or future competitors may be able to develop software
products comparable or superior to those offered by us, offer lower priced
products or adapt more quickly than we do to new technologies or evolving
customer requirements. In order to be successful in the future, we must respond
to technological change, customer requirements and competitors' current software
products and innovations. We cannot assure that we will be able to continue to
compete effectively in our target markets or that future competition will not
have a material adverse effect on our business, financial condition or results
of operations. In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
21
parties to increase the ability of their products to address the needs of the
markets we serve. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
Increased competition may result in price reductions, reduced gross margins and
loss of market share, any of which could have a material adverse effect on our
business, financial condition and results of operations.
We must develop and sell new products to keep up with rapid technological change
in order to achieve future revenue growth and profitability. The market for our
software and services is characterized by rapid technological developments,
evolving industry standards, changes in customer requirements and frequent new
product introductions and enhancements. Our ability to continue to sell products
will be dependent upon our ability to continue to enhance our existing software
and services offerings, develop and introduce, in a timely manner, new software
products incorporating technological advances and respond to customer
requirements. Our future success also depends, in part, on our ability to
execute on our strategy of developing a framework for Business Process
Management solutions for the ECM market. This strategy may require us to develop
and maintain relations with technology partners. We may not be successful in
maintaining these relationships or in developing, marketing and releasing new
products or new versions of our products that respond to technological
developments, evolving industry standards or changing customer requirements. We
may also experience difficulties that could delay or prevent the successful
development, introduction and sale of these products and enhancements. In
addition, these products and enhancements may not adequately meet the
requirements of the marketplace and may not achieve any significant degree of
market acceptance. If we fail to successfully maintain or establish
relationships with technology partners or to execute on our integrated product
solution strategy, or if release dates of any future products or enhancements
are delayed, or if these products or enhancements fail to achieve market
acceptance when released, our business operating results and financial condition
could be materially harmed. In the past, we have experienced delays in the
release dates of enhancements and new releases to our products and we cannot
assure that we will not experience significant future delays in product
introduction. From time to time, our competitors or we may announce new software
products, capabilities or technologies that have the potential to replace or
shorten the life cycles of our existing software products. We cannot assure that
announcements of currently planned or other new software products will not cause
customers to delay their purchasing decisions in anticipation of such software
products, and such delays could have a material adverse effect on our business
and operating results.
Protection of our intellectual property and other proprietary rights is limited,
which could result in the use of our technology by competitors or other third
parties. There is risk of third-party claims of infringement, which could expose
us to litigation and other costs. Our success depends, in part, on our ability
to protect our proprietary rights to the technologies used in our principal
products. We rely on a combination of copyrights, trademarks, trade secrets,
patents, confidentiality procedures and contractual provisions to protect our
proprietary rights in our software products. We cannot assure that our existing
or future copyrights, trademarks, trade secrets, patents or other intellectual
property rights will have sufficient scope or strength to provide meaningful
protection or a commercial advantage to us. In addition, the laws of some
foreign countries do not protect our proprietary rights to the same extent, as
do the laws of the United States. Our inability to protect our intellectual
property may have a material adverse effect on our business, financial condition
and results of operations.
We may, from time to time, be notified that we are infringing certain patent or
intellectual property rights of others. While there are no material actions
currently pending against us for infringement of patent or other proprietary
rights of third parties, we cannot assure that third parties will not initiate
infringement actions against us in the future. Combinations of technology
acquired through past or future acquisitions and our technology will create new
software products and technology that also may give rise to claims of
infringement. Infringement actions can result in substantial costs and diversion
of resources, regardless of the merits of the actions. If we were found to
infringe upon the rights of others, we cannot assure that we could redesign the
infringing products or could obtain licenses on acceptable terms, if at all.
Additionally, significant damages for past infringement could be assessed or
future litigation relative to any such licenses or usage could occur. An adverse
disposition of any claims or the advent of litigation arising out of any claims
of infringement may have a material adverse effect on our business, financial
condition and results of operations.
We depend on certain strategic relationships in order to license third-party
products and revenue related to these products could be at risk if we were
unable to maintain these relationships. In order to expand the distribution of
our products and broaden our product offerings, we have established strategic
relationships with a number of indirect channel partners and other consultants
that provide marketing and sales opportunities for us. We have entered into key
formal and informal agreements with other companies such as IBM Crossworlds,
Microsoft Corporation, SAP AG, Siebel Systems Inc, Sun Microsystems, Inc., BEA,
and Verity, Inc. Certain of these agreements do not have minimum purchase
requirements and/or are cancelable at will. We cannot assure that these
companies will not reduce or discontinue their relationships with, or support
of, FileNET and our products. Our failure to maintain these relationships, or to
establish new relationships in the future, could harm our business, financial
condition and results of operations.
22
We currently license certain software from third parties, including software
that is integrated with internally developed software and used in our products
to perform key functions. In the past, we have had difficulty renewing certain
licenses. The failure to continue to maintain these licenses would prohibit us
from selling certain products. We cannot assure that such third parties will
remain in business, that they will continue to support their software products
or that their software products will continue to be available to us on
acceptable terms. The loss or inability to maintain any of these software
licenses could result in shipment delays or reductions in software shipments
until equivalent software can be developed, identified, licensed, and
integrated. This could adversely affect our business, financial condition or
results of operations.
We must retain and attract key executives and personnel who are essential to our
business, which could result in increased personnel expenses. Our success
depends to a significant degree upon the continued contributions of our key
management, as well as other marketing, technical and operational personnel. The
loss of the services of one or more key employees could have a material adverse
effect on our operating results. We also believe our future success will depend
in large part upon our ability to attract and retain additional highly skilled
management, technical, marketing, product development and operational personnel
and consultants. There is competition for such personnel, particularly software
developers, professional service consultants and other technical personnel, and
pay scales in the software industry have significantly increased. We cannot
assure that in the future we will be successful in attracting and retaining such
personnel.
A significant percent of our revenue is derived internationally and we are
subject to many risks internationally, which could put our revenue at risk.
Historically, we have derived approximately 25%-30% of our total revenue from
international sales through our worldwide network of subsidiaries and channel
partners. International business is subject to certain risks including, but not
limited to, the following:
o tariffs and trade barriers;
o varying technical standards;
o political and economic instability;
o reduced protection for intellectual property rights in certain
countries;
o difficulties in staffing and maintaining foreign operations;
o difficulties in managing foreign distributors;
o varying requirements for localized products;
o potentially adverse tax consequences;
o currency restrictions and currency exchange fluctuations including
those related to the euro;
o the burden of complying with a wide variety of complex foreign
laws, regulations and treaties;
o the possibility of difficulties in collecting accounts receivable;
and
o longer payment cycles.
Any of these factors could have a material adverse effect on our business,
financial condition or results of operations in the future.
If our software contains errors we could incur unplanned expenses and delays
which could result in reduced revenue, lower profits and harmful publicity.
Software and products as complex as those we sell are susceptible to errors or
failures, especially when first introduced or when new versions are released.
Our software products are often intended for use in applications that are
critical to a customer's business. As a result, our customers may rely on the
effective performance of our software to a greater extent than the market for
software products generally. Despite internal testing and testing by current and
potential customers, new products or enhancements may contain undetected errors
or performance problems that are discovered only after a product has been
installed and used by customers. Errors or performance problems could cause
delays in product introduction and shipments or could require design
modifications, either of which could lead to a loss in or delay of revenue.
These problems could cause a diversion of development resources, harm our
reputation or result in increased service or warranty costs, or require the
payment of monetary damages, any of which could harm our business, operating
results and financial condition. While our license agreements with customers
typically contain provisions designed to limit our exposure to potential product
liability claims, it is possible that such limitation of liability provisions
may not be effective under the laws of certain jurisdictions.
Our stock price has been and may continue to be volatile causing fluctuations in
the market price of our stock, which would impact shareholder value. The trading
price of our common stock has fluctuated in the past and is subject to
significant fluctuations in response to the following factors, among others,
some of which are beyond our control:
o variations in quarterly operating results;
o fluctuations in our order levels;
23
o changes in earnings estimates by analysts;
o announcements of technological innovations or new products or
product enhancements by us or our competitors;
o key management changes;
o changes in joint marketing and development programs;
o developments relating to patents or other intellectual property
rights or disputes;
o developments in our relationships with our customers, resellers
and suppliers;
o our announcements of significant contracts, acquisitions,
strategic partnerships or joint ventures;
o general conditions in the software and computer industries;
o fluctuations in general stock market prices and volume, which
are particularly common among highly volatile securities of
Internet and software companies; and
o other general economic and political conditions.
In recent years, the stock market, in general, has experienced extreme price and
volume fluctuations that have affected the market price for many companies in
industries similar to ours. Some of these fluctuations have been unrelated to
the operating performance of the affected companies. These market fluctuations
may decrease the market price of our common stock in the future.
Acquisitions of companies or technologies may result in disruptions to our
business and diversion of management attention, which could cause our financial
performance to suffer. As part of our business strategy, we frequently evaluate
strategic acquisition opportunities. For example, on April 2, 2002, we acquired
certain assets and assumed certain liabilities of eGrail, Inc., a Web content
management company, for a purchase price of $9.0 million in cash. We anticipate
that our future growth may depend in part on our ability to identify and acquire
complementary businesses, technologies or product lines. Acquisitions involve
significant risks and could divert management's attention from the day-to-day
operations of our ongoing business. Additionally, such acquisitions may include
numerous other risks, including, but not limited to the following:
o difficulties in the integration of the operations, products and
personnel of the acquired companies;
o the incurrence of debt;
o liabilities and risks that are not known or identifiable at the
time of the acquisition;
o difficulties in retaining the acquired company's customer base;
and
o the potential loss of key personnel of the acquired company.
If we fail to successfully manage future acquisitions or fully integrate future
acquired businesses, products or technologies with our existing operations, we
may not receive the intended benefits of the acquisitions and such acquisitions
may harm our business and financial results.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates primarily
to our investment portfolio. We have not used derivative financial instruments
in our investment portfolio. We place our investments with high-quality issuers
and, by policy, limit the amount of credit exposure to any one issuer. We
protect and preserve our invested funds by limiting default, market and
reinvestment risk. Our investments in marketable securities consist primarily of
high-grade corporate and government securities with maturities of less than
three years. Investments purchased with an original maturity of three months or
less are considered to be cash equivalents. We classify all of our investments
as available-for-sale. Available-for-sale securities are carried at fair value,
with unrealized gains and losses, net of tax, reported in a separate component
of stockholders' equity.
The following table provides information about our cash and cash equivalents and
our investment portfolio at June 30, 2002 (dollars in thousands):
Weighted
Average
Portfolio Balance Yield
Cash and Equivalents-Domestic $ 30,542 1.81 %
Cash and Equivalents-International 46,269 3.05 %
Short Term Municipals - Taxable 10,881 2.05 %
24
Commercial Paper 6,045 1.87 %
Corporate 8,462 2.43 %
Governments/Agencies 66,494 2.50 %
Total 2.47 %
$ 168,693
Foreign Currency Fluctuations and Inflation
Our performance can be affected by changes in foreign currency values relative
to the U.S. dollar in relation to the Company's revenue and operating expenses.
As of June 30, 2002, we had forward foreign exchange contracts outstanding
totaling approximately $1,192,809 in eight currencies. These contracts are
opened on the last business day of the quarter and mature within three months.
Cumulative other comprehensive loss decreased $5.0 million for the six months
ended June 30, 2002 due to unrealized foreign currency translation gains
resulting from the strengthening of the euro against the U.S. dollar during the
second quarter of 2002.
Management believes that inflation has not had a significant impact on the
prices of our products, the cost of our materials, or our operating results for
the three and six months ended June 30, 2002 and 2001.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Notes to Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 2002 Annual Meeting of Stockholders of the Company was held at 9:00
a.m. on May 22, 2002, in Costa Mesa, California.
(b) At the annual meeting, the following six individuals were elected to the
Company's Board of Directors, constituting all members of the Board of
Directors:
Nominee Affirmative Votes Votes Withheld
L. George Klaus 31,395,051 350,011
William P. Lyons 31,395,305 349,757
Lee D. Roberts 31,390,443 354,619
John C. Savage 31,407,971 337,091
Roger S. Siboni 30,550,236 1,194,826
Theodore J. Smith 31,307,695 437,367
(c) The Company's stockholders were asked to approve the 2002 Incentive Award
Plan pursuant to which an aggregate of 1,400,000 shares would be available
for issuance hereunder. This proposal was approved in accordance with the
following vote of stockholders:
Broker
Votes For Votes Against Abstentions Non-Votes
17,875,173 5,706,252 66,770 8,096,867
(d) The Company's stockholders were asked to approve an amendment to the 1998
Employee Stock Purchase Plan (the "1998 Purchase Plan") to increase the
number of shares of Common Stock issuable under the 1998 Purchase Plan by
an additional 1,100,000 shares. This proposal was approved in accordance
with the following vote of stockholders:
Broker
Votes For Votes Against Abstentions Non-Votes
21,948,564 1,635,177 64,424 8,096,897
25
(e) The Company's stockholders were asked to ratify the Company's appointment
of Deloitte and Touche LLP as independent accountants of the Company for
the fiscal year ending December 31, 2002. This proposal was approved in
accordance with the following vote of stockholders:
Votes For Votes Against Abstentions
30,957,296 743,428 44,338
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The list of exhibits contained in the accompanying Index to
Exhibits is herein incorporated by reference.
(b) Reports on Form 8-K
On April 12, 2002, the Registrant filed a report on
Form 8-K relating to the Registrant's acquisition of certain assets and
certain liabilities of eGrail, Inc., which report was amended on June 11,
2002.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FILENET CORPORATION
August 14, 2002
Date
By: /s/ Sam M. Auriemma
Sam M. Auriemma, Senior Vice President, Finance
(Principal Financial and Accounting Officer)
and Chief Financial Officer
27
Index to Exhibits
Exhibit
No. Exhibit Description
3.1* Restated Certificate of Incorporation, as amended (filed as Exhibit 3.1 to
Registrant's Form S-4 filed on January 26, 1996; Registration No. 333-00676).
3.1.1* Certificate of Amendment of Restated Certificate of Incorporation (filed as
Exhibit 3.1.1 to Registrant's Form S-4 filed on January 26, 1996; Registration
No. 333-00676).
3.2* Bylaws (filed as Exhibit 3.2 of the Registrant's registration statement on
Form S-1, filed on July 21, 1987; Registration No. 33-15004).
4.1* Form of certificate evidencing Common Stock (filed as Exhibit 4.1 to
Registrant's registration statement on Form S-1, filed on July 21, 1987;
Registration No. 33-15004).
4.2* Rights Agreement, dated as of November 4, 1988 between FileNET Corporation
and the First National Bank of Boston, which includes the form of Rights
Certificate as Exhibit A and the Summary of Rights to Purchase Common Shares
as Exhibit B (filed as Exhibit 4.2 to Registrant's registration statement on
Form S-4 filed on January 26, 1996; Registration No. 333-00676).
4.3* Amendment One dated July 31, 1998 and Amendment Two dated November 9, 1998 to
Rights Agreement dated as of November 4, 1988 between FileNET Corporation and
BANKBOSTON, N.A. formerly known as The First National Bank of Boston (filed
as Exhibit 4.3 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998).
4.4* Amendment Three dated November 30, 2001 to Rights Agreement dated as of
November 4, 1988 between FileNET Corporation and Equiserve Trust Company, N.A.,
successors to BANKBOSTON, N.A. (filed as Exhibit 4.4 to Registrant's Annual
Report on Form 10-K filed for the year ended December 31, 2001).
10.1* Second Amended and Restated Credit Agreement (Multi-currency) by and between
the Registrant and Bank of America National Trust and Savings Association dated
June 30, 1999, effective June 30, 1999 (filed as Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999) as amended
by a Waiver and First Amendment to Credit Agreement dated as of June 29, 2001
and by a letter amendment dated as of April 5, 2002.
10.1.1* Waiver and First Amendment to Credit Agreement (Multi-currency) by and
between the Registrant and Bank of America, N.A., formerly known as Bank of
America National Trust and Savings Association, dated June 29, 2001, effective
June 29, 2001 (filed as Exhibit 10.1 to Registrant's Annual Report on Form 10-K
filed for the year ended December 31, 2001).
10.1.2 Letter amendment dated as of April 5, 2002 and Third Amendment to Credit
Agreement (Multi-currency) by and between the Registrant and Bank of
America, N.A., dated as of June 28, 2002.
10.2*+ Amended and Restated 1995 Stock Option Plan of FileNET (filed as Exhibit 99.1
to Registrant's registration statement on Form S-8 filed on October 15, 2001;
Registration No. 333-71598).
10.3*+ Second Amended and Restated 1986 Stock Option Plan of FileNET Corporation,
together with the forms of Incentive Stock Option Agreement and Non-Qualified
Stock Option Agreement (filed as Exhibits 4(a), 4(b) and 4(c), respectively,
to the Registrant's registration statement on Form S-8, filed on June 10, 1992;
Registration No. 33-48499), the first Amendment thereto (filed as Exhibit 4(d)
to the Registrant's registration statement on Form S-8, filed on October 4, 1993;
Registration No. 33-69920), and the Second Amendment thereto (filed as
Appendix A to the Registrant's Definitive Proxy Statement on Schedule 14A for
the Registrant's 1994 Annual Meeting of Stockholders, filed on April 29, 1994).
10.4*+ Non-Statutory Stock Option Agreement(with Notice of Grant of Stock Option and
Special Addendum) between Registrant and Mr. Lee Roberts (filed as Exhibit 99.17
to Registrant's registration statement on Form S-8 filed on August 20, 1997).
10.5*+ Non-Statutory Stock Option Agreement (with Notice of Grant of Stock Option
and Special Addendum) between Registrant and Mr. Ron Ercanbrack (filed as
Exhibit 99.19 to Registrant's registration statement on Form S-8 filed on
August 20, 1997).
10.6*+ Amended and Restated FileNET Corporation 1998 Employee Stock Purchase Plan
(filed as Appendix B to Registrant's Definitive Proxy Statement on Schedule
14A, for the Registrant's 2002 Annual Meeting of Stockholders, filed on
April 18, 2002).
10.7*+ FileNET Corporation International Employee Stock Purchase Plan (filed as
Appendix C to Registrant's Definitive Proxy Statement on Schedule 14A,for the
Registrant's 2002 Annual Meeting of Stockholders, filed on April 18, 2002).
28
10.8* Lease between the Registrant and C. J. Segerstrom and Sons for the
headquarters of the Company, dated September 1, 1999 (filed as
Exhibit 10.23 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999).
10.9* Asset Purchase Agreement between the Registrant and Application Partners, Inc.
dated May 18, 2000 (filed as Exhibit 10.24 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000).
10.10*+ Written Compensation Agreement and Non-Statutory Stock Option Agreement(with
Notice of Grant of Stock Option and Special Addendum) between Registrant and
Mr. Sam Auriemma (filed as Exhibit 99.1 and 99.2 to Registrant's registration
statement on Form S-8, filed on April 20, 2001; Registration No. 333-59274).
10.11* Asset Purchase Agreement, dated April 2, 2002 by and between 3565 Acquisition
Corporation and eGrail, Inc. (filed as Exhibit 10.1 to Registrant's Current
Report on Form 8-K, filed on April 12, 2002).
10.12 Secured Promissory Note between Registrant and Mr. Lee D Roberts, dated
June 14, 2002.
10.13 Option Exchange Agreement between Registrant and Mr. Ron L. Ercanbrack, dated
May 22, 2002, together with form of Incentive Stock Option Agreement and Grant
Notice.
10.14 The 2002 Incentive Award Plan, as approved by stockholders at the Registrant's
Annual Meeting on May 22, 2002, together with the forms of Incentive Option
Agreement and Non-Qualified Stock Option Agreement for Independent Directors.
* Incorporated herein by reference
+ Management contract, compensatory plan or arrangement
29
EXHIBIT 10.1.2
[Bank of America Letterhead]
[Office of Kevin McMahon]
April 10, 2002
Ms. Behshid Amini-Rad
Manager Treasury Operations
Filenet Corporation
3565 Harbor Blvd.
Costa Mesa, CA 92626-1420
Re: Extension of Bank Guarantee
Dear Behshid:
At your request, Bank of America, N.A., did not send a notice of
non-renewal which could have been sent April 5, 2002, with respect to Bank of
America's Guarantee #851271 issued to Engels-Hollandse Beleggingstrust N.V. as
beneficiary (the "Guarantee") on July 6, 2000 in the amount of EUR 106,000. The
consequence of not sending that notice was to permit the automatic extension of
the expiry date of the Guarantee from July 6, 2002, to July 6, 2003.
The Guarantee was issued pursuant to that certain Amended and Restated
Credit Agreement (Multicurrency) dated as of June 30, 1999, as amended by a
Waiver and First Amendment to Credit Agreement dated as of June 29, 2001 (the
"Credit Agreement") to which we are both parties. Section 2.06(b)(i) of the
Credit Agreement states that each Bank Guarantee shall expire no later than the
Final Maturity date which in respect of Bank Guarantees is June 28, 2003.
Notwithstanding Section 2.06(b)(i) Bank of America permitted the extension of
the Guarantee to July 6, 2003, at your request, and both Bank of America and
Filenet Corporation agree that Section 2.06(b)(i) of the Credit Agreement is
hereby amended solely to permit the extension of the expiry date of the
Guarantee to July 6, 2003. Except as amended hereby, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full force and effect
and constitute the legal, valid and binding obligations of Filenet Corporation
enforceable against it in accordance with its terms.
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Please confirm your acknowledgement and agreement to the foregoing by
countersigning and returning a copy of this letter. As always, we are pleased to
assist you.
Very truly yours,
Bank of America, N.A.
Acknowledged and agreed:
Filenet Corporation
By: /s/ Kevin M. McMahon
By: /s/ Sam M. Auriemma Name: Kevin M. McMahon
Name: Sam M. Auriemma Title: Managing Director
Title: Sr. Vice President and CFO
By: /s/ Lee D. Roberts
Name: Lee D. Roberts
Title: Chairman and CEO
Date: April ___, 2002
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
June 28, 2002, is entered into by and between FILENET CORPORATION (the
"Company") and