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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1996 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 0-15997
FILENET CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-3757924
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3565 Harbor Boulevard, Costa Mesa, California 92626
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (714) 966-3400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange which registered
Common stock, $0.01 par value Nasdaq
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark whether the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Based on the closing sale price of March 21, 1997, the aggregate market value of
the 14,835,635 shares of voting stock of the Registrant held by nonaffiliates of
the Registrant on such date was $237,370,160. For purposes of such calculation,
only executive officers, board members and beneficial owners of more than 10% of
the Company's outstanding common stock are deemed to be affiliates.
The number of shares outstanding of the Registrant's common stock was 15,085,811
at March 21, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement for its 1997 Annual Meeting
are incorporated by reference into Part III as set forth herein. Portions of
Registrant's Annual Report to Stockholders for the fiscal year ended December
31, 1996 are incorporated by reference into Parts II, III and IV as set forth
herein.
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FILENET CORPORATION
FORM 10-K
For the Fiscal Year Ended December 31, 1996
INDEX
Page
PART I
Item 1. Business.............................................................................. 3
Item 2. Properties............................................................................ 10
Item 3. Legal Proceedings..................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders................................... 10
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.............. 10
Item 6. Selected Financial Data............................................................... 11
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition. 12
Item 8. Financial Statements and Supplementary Data........................................... 12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 12
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 12
Item 11. Executive Compensation............................................................... 12
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 12
Item 13. Certain Relationships and Related Transactions....................................... 12
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K...................... 13
Signatures.................................................................................... 18
2
PART I
Item 1. Business
GENERAL
FileNet Corporation ("FileNet" or the "Company") develops, markets and services
an open, integrated family of workflow, document-imaging, electronic
document-management and computer output to laser disk ("COLD") client/server
product solutions which control and manage the movement of document images,
data, text and other information throughout an enterprise. In August 1995, the
Company acquired Watermark Software Inc. ("Watermark"), a leader in
document-imaging software for the Microsoft Windows NT platform. In the first
quarter of 1996, the Company acquired Saros Corporation ("Saros"), one of the
leading suppliers of enterprise electronic document-management software, and
International Financial Systems, Ltd. ("IFSL"), whose Greenbar(TM) product is an
innovative COLD software application for archiving computer-generated reports.
The current product line enables FileNet to offer a broad range of software and
support capabilities to customers who are seeking a single vendor to manage
their unstructured business information.
MARKETS AND APPLICATIONS
With its recent acquisitions, the Company now offers a family of complementary
products which will enable users to manage the storage, processing and workflow
for all documents and other unstructured information, including scanned images,
faxes, text, spreadsheets, graphics, drawings, photographs, computer output
reports, voice, and video on an enterprise-wide basis. Because the Company's
products provide an integrated document-management architecture that can be
implemented on a modular basis, organizations can choose one, some, or all of
the Company's products to build the system that most effectively meets their
needs. The Company's products include workflow and document-imaging software for
those organizations which have large, active paper document files, process large
numbers of documents in their day-to-day operations, or have complex,
mission-critical business processes for a variety of applications such as
mortgage loan servicing, credit card customer service, insurance claims
processing, retirement account management, technical document management and
change control, and the management of personnel, accounts payable, traffic,
property and criminal records. Additionally, the Company's products address ad
hoc business processes at the departmental and workgroup levels to improve
overall enterprise productivity.
The Company markets its products through a direct sales force in Australia,
Canada, France, Germany, the United Kingdom and the United States. In addition,
the Company markets in the United States and in 60 other countries through its
Valuenet(R) partner program consisting of systems integrators, resellers and
distributors. A number of firms, including Andersen Consulting and American
Management Systems, operate as third-party resellers under the Company's
ValueNet program and combine FileNet products with vertical market-specific
value-added services to provide turnkey solutions and complex systems
integration for customers. Other firms such as Tech Data, Law Cypress, IAI
Canada, Image Choice and Paperlink are distributors of the Company's products
selling to hundreds of resellers throughout the world. The Company also has OEM
agreements with other firms involving the Company's software and hardware
products.
The Company offers software maintenance service for its products in the United
States and in countries where it has direct international operations. Its
international resellers offer maintenance in the countries they serve. The
Company subcontracts hardware maintenance to Hewlett-Packard Corporation ("HP")
and other third parties.
In June 1995, the Company entered into a joint venture development partnership
and distribution agreement with Novell, Inc. ("Novell") to provide workflow
software components for Novell's Groupwise software product family. A version of
this software is also being marketed by FileNet directly as of November 1996.
In September 1995, the Company entered into an alliance with SAP AG to deliver
data archiving and document solutions for their client/server-based R/3
enterprise application systems environment. Deliveries of this product commenced
in December 1995.
The Company also has porting and licensing agreements with HP and Sun
Microsystems, Inc. ("Sun") to co-market versions of FileNet's document-imaging
and workflow software products to users of those companies' products. Sales of
the HP based product commenced in December 1993 and the Sun based product in
March 1995. In 1996, the Company became a Global Partner with HP's General
Systems Division.
3
The Company is a Certified Microsoft Solutions Developer and will continue to
develop products for the Microsoft BackOffice computing environment.
PRODUCTS
SOFTWARE
The following software products are currently being offered by the Company:
Document Imaging
The Company's Image Management Services ("IMS") software is used for organizing,
storing and accessing multiple types of information including document images,
data, text, graphics, voice and photographs from different sources. IMS software
currently supports the Microsoft Windows NT Server operating system and the
AIX/6000, HP-UX, and Solaris operating environments which are IBM Corporation's
("IBM"), HP's, and Sun's implementation of the UNIX operating system,
respectively. IMS software operates on high performance servers attached to
Token-Ring, Ethernet and FDDI local area networks utilizing TCP/IP and SPX/IPX
communication protocols.
The Company's WorkForce Desktop(R) Software is a suite of document-imaging and
workflow management products which run on IBM and IBM compatible personal
computers running Microsoft Corporation's ("Microsoft") Windows operating
environments or IBM's OS/2 operating system. The suite provides search and
access features, image viewing, and manipulation capabilities for stored images.
Additionally, the user can develop custom applications for the WorkForce Desktop
products using one of the following software development tools and application
programming interfaces:
WorkFlo(R)--a proprietary application development software product that
enables users to develop business process automation programs by defining
individual processing tasks and process flows using a series of high level
language commands. WorkFlo programs can be easily modified by the user to
respond to new business requirements. In addition, the software enables
users to create standard electronic forms for entering information in
prescribed formats.
WorkFlo Controls--a software development tool that integrates with
Microsoft's Visual Basic programming system to increase productivity when
developing custom document-imaging and workflow applications.
WorkFlo Power Libraries--a software development tool that integrates with
Sybase/Powersoft's PowerBuilder programming system and C language programs
to increase productivity when developing custom document-imaging and
workflow applications.
WorkFlo Application Libraries--a standard application programming interface
layer to FileNet's IMS software for various workstations, network and
application environments including Microsoft Windows, OS/2, Sun Solaris,
HP-UX, and IBM AIX/6000.
The Company's FileNet:WorkGroup(TM) software is a midrange document-imaging and
work management product based on a subset of the above products combined with
certain prepackaged software applications.
The Company's Document Warehouse(TM) for SAP software product is a document and
data archiving application, certified by SAP, for use with the popular R/3
Enterprise Resource Planning (ERP) application suite.
FileNet Image View II(TM) is a client software product introduced in 1996 that
integrates with and accesses documents stored in FileNet's IMS server and the
Watermark Image Server products to enable the use of scanned documents and faxes
with any OLE-compatible Windows application, such as spreadsheets, workflows,
forms, databases, e-mail, etc.
The Company's Watermark(R) software products enable users worldwide to exchange,
process and share scanned images, faxes and other electronic documents within
departments and workgroups of large enterprises and throughout midsize and small
business environments. Watermark documents and folders are easily integrated
into existing line-of-business applications and take advantage of the latest
Microsoft operating systems, database technologies and Internet capabilities.
The Watermark family consists of the following products:
4
Watermark Client software replaces document handling procedures with
integrated electronic processing of scanned images, faxes and other
electronic documents. The software provides easy-to-use tools for document
capturing, filing, viewing, annotation and OCR that image enable any OLE-
or ODMA- compatible Windows application, such as e-mail, databases and
workflows.
Watermark Image Server software is used for organizing, storing and
optimizing shared network access to scanned documents, faxes and electronic
files. The software intelligently captures the business rules governing
document security, version control, migration and storage through easy
client-based administration and reporting tools designed for Microsoft
Backoffice.
Watermark Hierarchical Storage Manager software extends the document
storage and retrieval capacity of the Watermark Image Server by providing
Windows NT services to migrate documents to and from high-density optical
disks.
Watermark Fax Router software is a fax management solution that streamlines
inbound fax communications with customers, suppliers and other business
partners. The software delivers documents electronically to the intended
recipient and immediately routes for processing. Faxes are securely managed
side-by-side with all other business documents.
Watermark Developer's Toolkit software allows a developer to build
client/server and intranet applications by taking advantage of the full
power and range of Watermark functionality via OLE Objects and ActiveX
Controls specifically designed to simplify application building.
Workflow
The Company's Visual WorkFlo(R) software provides an open, flexible, component
software framework for workflow application development. This product enables
users and ValueNet partners to automate business processes using object-oriented
programming technology, and supports standard tools such as C++, Visual Basic,
PowerBuilder, Microsoft Windows-compatible tools, and FileNet's other WorkFlo
products. All work management functions, including routing, queuing, exception
handling, and management control, are managed by Visual WorkFlo using standard
Windows interfaces and graphical tools.
FileNet Ensemble(TM) is a general purpose workflow tool introduced in 1996 that
automates a wide range of everyday business processes and is integrated with
Microsoft Exchange and Novell Groupwise to enhance these messaging (e-mail)
system products. FileNet markets this product through all of its direct and
indirect sales channels worldwide. A version of this software will be marketed
by Novell starting in 1997 under the product name "Groupwise Workflow."
Electronic Document Management
The Company's Saros(R) software products simplify the management and maintenance
of electronic documents and other unstructured information, ensuring the right
information is always available. Needed information is readily accessible,
providing total manageability and security. The Saros family consists of the
following products:
Saros Mezzanine(R) is a server software product that enables electronic
document management applications across large enterprise LANs and WANs. It
acts as a network librarian, simplifying the management and maintenance of
all files on the user's network.
Saros Document Manager is a client-based ready-to-use document management
system based on Saros Mezzanine. Saros Document Manager provides the user
with tools to create, communicate and control electronic documents.
Saros @mezzanine(TM) is a software product used to organize, protect and
maintain documents published on the World Wide Web. @mezzanine provides
improved organization and access methods to the Web browser and special
document management features such as version control, security and
archiving needed by the Web server.
Saros Document Server for BackOffice is a special version of the Mezzanine
software and is designed expressly for the Microsoft BackOffice server
platform. Saros Document Server for BackOffice takes advantage of the full
power of Microsoft Windows NT Server to create an enterprise-wide
electronic information library.
5
COLD
The Company's Greenbar software product stores and retrieves computer-generated
reports to replace the use of printed reports and computer output to microfiche.
It also enables the user to search for specific information located in one or
more reports and extract the information to use with popular desktop software
applications. It is a client/server software product running on servers using
the Microsoft Windows NT Server operating system and PC workstations running
Microsoft Windows. It also integrates with FileNet's IMS software product to
provide large capacity archival storage capabilities.
HARDWARE
The Company markets an optional integration service, offering customers the
option to purchase complete solutions, including industry standard hardware,
directly from FileNet. The Company also manufactures and markets an optical
storage and retrieval library (OSAR(R)) based on 12-inch optical disk storage
technology.
All named products mentioned in this Form 10-K, other than the Company's named
products, are trademarks or registered trademarks of the respective holder.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are focused on software
product development. Research and development expenditures were $36.5 million,
$24.7 million and $18.3 million for the fiscal years ended December 31, 1996,
December 31, 1995, and January 1, 1995, respectively. The Company believes that
its future success depends upon its ability to continue to enhance its existing
software products and to develop new software products that satisfactorily meet
market needs. Accordingly, the Company intends to continue to make substantial
investments in its research and development activities.
BACKLOG
The Company typically ships its products within a short period of time after
acceptance of orders, which is common in the computer software industry. The
Company does not consider the level of backlog to be a significant or important
indicator of future revenue or earnings.
SERVICES, SUPPORT AND MANUFACTURING
The Company maintains service and support organizations which provide both
pre-sales and post-sales services in the United States and the foreign countries
where the Company has direct operations.
The Company's integration facilities in Costa Mesa, California and Dublin,
Ireland, conduct software manufacturing, integration, test and quality control.
In those cases in which the customer requests that FileNet provide a turnkey
solution, the Company uses standard products and components which are available
from multiple vendors. Certain parts and components are purchased from sole
sources, including optical disk drives for its OSAR product. The Company is
dependent upon the ability of vendors to deliver these items in accordance with
the Company's specifications and delivery schedules. Scanners, printers,
magnetic disks, memory circuits, frames, panels and harnesses are available from
a number of domestic sources. The failure of certain suppliers to deliver on
schedule could delay or interrupt the Company's delivery of products and thereby
adversely affect the Company's operating results. To date, the Company has not
experienced any delays in deliveries from its suppliers which have had a
material impact on its business.
EMPLOYEES
As of December 31, 1996, the Company had 1,443 full-time employees of which 364
were employed in research and development; 853 in sales, marketing, professional
services and customer support; 96 in operations; and 130 in finance and
administration. Employees in the Company's German subsidiary are represented by
a labor union. No other employees are represented by labor unions, and the
Company has never experienced a work stoppage. The Company believes that it
enjoys good employee relations.
6
COMPETITION
The market for the Company's products is highly competitive. The Company's
principal competitors for its various product lines include the following
companies: 1) Workflow and document imaging-- Banctec, Inc., IBM, Keyfile,
Optika, Unisys Corporation, Mosaix, Wang Laboratories, Inc., 2) Electronic
Document Management--Documentum, IBM, Interleaf, Novasoft, Novell, Open Text, PC
DOCS, and 3) COLD--Computron, IBM and Microbank. Numerous smaller software
vendors also compete in each product area. The Company also experiences
competition from systems integrators who configure hardware and software into
customized systems.
In addition, RDBMS vendors, such as Oracle, Sybase and Informix, may compete
with the Company in the future. Oracle has announced products that compete with
the Company's document management products. It is also possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. The Company also expects that competition will
increase as a result of software industry consolidations. To the extent one or
more of the Company's competitors introduce products that more fully address
customer requirements, the Company's business and operating results could be
adversely affected.
PATENTS AND LICENSES
The Company holds three patents for its OSAR product which expire August 26,
2003, June 23, 2004 and August 4, 2004, respectively. The Company has also
entered into non-exclusive license arrangements with a number of organizations,
including IBM and Oracle, which permit the Company and its resellers to grant
sublicenses to end users of the Company's systems to use software developed by
these third-party vendors.
CERTAIN CONSIDERATIONS
This report and the Company's Annual Report to Stockholders for the year ended
December 31, 1996 contains forward-looking statements that involve risks and
uncertainties, including those discussed below and in the Management's
Discussion and Analysis of Financial Condition and Results of Operations section
and Notes to Consolidated Financial Statements in the Company's Annual Report to
Stockholders incorporated herein by reference as set forth in Items 7 and 8 of
this report. The actual results that the Company achieves may differ materially
from any forward-looking statements due to such risks and uncertainties. All
such factors should be considered by investors in the Company.
Rapid Technological Change; Product Development. The market for the
Company's products is characterized by rapid technological developments,
evolving industry standards, changes in customer requirements and frequent new
product introductions and enhancements. The Company's continued success will be
dependent upon its ability to continue to enhance its existing products, develop
and introduce, in a timely manner, new products incorporating technological
advances and respond to customer requirements. To the extent one or more of the
Company's competitors introduce products that more fully address customer
requirements, the Company's business could be adversely affected. There can be
no assurance that the Company will be successful in developing and marketing
enhancements to its existing products or new products on a timely basis or that
any new or enhanced products will adequately address the changing needs of the
marketplace. If the Company is unable to develop and introduce new products or
enhancements to existing products in a timely manner in response to changing
market conditions or customer requirements, the Company's business and operating
results could be adversely affected. From time to time, the Company or its
competitors may announce new products, capabilities or technologies that have
the potential to replace or shorten the life cycles of the Company's existing
products. There can be no assurance that announcements of currently planned or
other new products will not cause customers to delay their purchasing decisions
in anticipation of such products, which could have a material adverse effect on
the Company's business and operating results.
Uncertainty of Future Operating Results; Fluctuations in Quarterly
Operating Results. Prior growth rates in the Company's revenue and operating
results should not necessarily be considered indicative of future growth or
operating results. Future operating results will depend upon many factors,
including the demand for the Company's products, the effectiveness of the
Company's efforts to continue to integrate various products it has developed or
acquired through acquisition of others and to achieve the desired levels of
sales from such product integration, the level of product and price competition,
the length of the Company's sales cycle, seasonality of individual customer
buying patterns, the size and timing of individual transactions, the delay or
deferral of customer implementations, the budget cycles of the Company's
customers, the timing of new product introductions and product enhancements by
the Company and its competitors, the mix of sales by products, services and
distribution channels, levels of international sales, acquisitions by
competitors, changes in foreign currency exchange rates, the ability of the
Company to develop and market new products and control costs, and general
domestic and international economic and political conditions. As a result of
these factors, revenues and operating results for any quarter are subject to
variation and are not predictable with any significant degree of accuracy.
Therefore, the Company believes that period-to-period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Moreover, such factors could cause the
Company's operating results in a given quarter to be below the expectations of
public market analysts and investors. In either case, the price of the Company's
common stock could be materially adversely affected.
7
Competition. The document imaging, workflow, COLD and document management
software markets are highly competitive, and there are certain competitors of
the Company with substantially greater sales, marketing, development and
financial resources. The Company believes that the competitive factors affecting
the market for its products and services include vendor and product reputation;
product quality, performance and price; the availability of products on multiple
platforms; product scalability; product integration with other enterprise
applications; product functionality and features; product ease-of use; and the
quality of customer support services and training. The relative importance of
each of these factors depends upon the specific customer involved. While the
Company believes it competes favorably in each of these areas, there can be no
assurance that it will continue to do so. Moreover, the Company's present or
future competitors may be able to develop products comparable or superior to
those offered by the Company, offer lower price products or adapt more quickly
than the Company to new technologies or evolving customer requirements.
Competition is expected to intensify. In order to be successful in the future,
the Company must respond to technological change, customer requirements and
competitors' current products and innovations. There can be no assurance that it
will be able to continue to compete effectively in its market or that future
competition will not have a material adverse effect on its business, operating
results and financial condition.
Intellectual Property and Other Proprietary Rights. The Company's success
depends in part on its ability to protect its proprietary rights to the
technologies used in its principal products. The Company relies on a combination
of copyrights, trademarks, trade secrets, confidentiality procedures and
contractual provisions to protect its proprietary rights. There can be no
assurance that the Company's existing or future copyrights, trademarks, trade
secrets or other intellectual property rights will be of sufficient scope or
strength to provide meaningful protection or commercial advantage to the
Company. FileNet has no software patents. Also, in selling certain of its
products, the Company relies on "shrink wrap" licenses that are not signed by
licensees and, therefore, may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that such factors would not have a material
adverse effect on the Company's business or operating results.
The Company may from time to time be notified that it is infringing certain
patent or intellectual property rights of others. Combinations of technology
acquired through past or future acquisitions and the Company's technology will
create new products and technology which may give rise to claims of
infringement. While no actions other than the ones discussed below are currently
pending against the Company for infringement of patent or other proprietary
rights of third parties, there can be no assurance that third parties will not
initiate infringement actions against the Company in the future. Infringement
actions can result in substantial cost to and diversion of resources of the
Company. If the Company were found to infringe upon the rights of others, no
assurance can be given that licenses would be obtainable on acceptable terms or
at all, that significant damages for past infringement would not be assessed or
that further litigation relative to any such licenses or usage would not occur.
The failure to successfully defend any claims or obtain necessary licenses or
other rights, the ultimate disposition of any claims or the advent of litigation
arising out of any claims of infringement, could have a material adverse effect
on the Company's business, financial condition or results of operations.
In October 1994, Wang Laboratories, Inc. ("Wang") filed a complaint in the
United States District Court for the District of Massachusetts alleging that the
Company is infringing five patents held by Wang. On June 23, 1995, Wang amended
its complaint to include an additional related patent. On July 2, 1996, Wang
filed a complaint in the same court alleging that Watermark, formerly a
wholly-owned subsidiary that was merged into the Company, is infringing three of
the same patents asserted in the initial complaint. On October 9, 1996, Wang
withdrew its claim that one of the patents it initially asserted is infringed by
the Company's products which were commercialized before the initial complaint
was filed. Wang reserved the right to assert that patent against the Company's
products commercialized after that date in a separate lawsuit. Based on the
Company's analysis of these Wang patents and their respective file histories,
the Company believes that it has meritorious defenses to Wang's claims; however,
the ultimate outcome or any resulting potential loss cannot be determined at
this time.
In January 1997, Wang and Eastman Kodak Company ("Kodak") announced that
they have entered into an agreement under which Kodak will acquire the Wang
business unit that has responsibility for this litigation. The acquisition is
scheduled to close in March-April 1997 and the Company can not predict what, if
any, impact this will have on the litigation. If it should be determined that
the patents at issue in the litigation are valid and are infringed by any of the
Company's products, including Watermark products, the Company will, depending on
the product, redesign the infringing products or seek to obtain a license to
market the products. There can be no assurance that the Company will be able to
obtain such a license on acceptable terms.
Dependence on Certain Relationships The Company has entered into a number
of co-marketing relationships with other companies such as Microsoft
Corporation, Compaq Computer Corporation, SAP AG, Hewlett-Packard Company ("HP")
and Sun Microsystems, Inc. There can be no assurance that these companies will
not reduce or discontinue their relationships with or support of the Company and
its products. Disruption of these relationships could have a material adverse
effect on the Company's business and operating results.
8
Dependence on Key Management and Technical Personnel. The Company's success
depends to a significant degree upon the continued contributions of its key
management, marketing, technical and operational personnel, including members of
senior management and technical personnel of acquired companies. The Company has
no agreements providing for the employment of any of its key employees or any
fixed term contracts and the Company's key employees may voluntarily terminate
their employment with the Company at any time. The loss of the services of one
or more key employees, including key employees of acquired companies, could have
a material adverse effect on the Company's operating results. The Company also
believes its future success will depend in large part upon its ability to
attract and retain additional highly skilled management, technical, marketing,
product development and operational personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel.
International Sales. Historically, the Company has derived approximately
one-third of its total revenues from international sales. International business
is subject to certain risks including varying technical standards, tariffs and
trade barriers, political and economic instability, reduced protection for
intellectual property rights in certain countries, difficulties in staffing and
maintaining foreign operations, difficulties in managing foreign distributors,
potentially adverse tax consequences, currency exchange fluctuations, the burden
of complying with a wide variety of complex operations, foreign laws,
regulations and treaties and the possibility of difficulties in collecting
accounts receivable. There can be no assurance that any of these factors will
not have a material adverse effect on the Company's business or operating
results.
Acquisition-Related Risks. The Company recently completed the acquisitions
of Watermark, Saros and IFSL. These recent acquisitions by the Company have
presented and will continue to present it with numerous challenges, including
difficulties in the assimilation of the operations, technologies and products of
the acquired companies and managing separate geographic operations. The
challenges have absorbed and may continue to absorb significant management
attention that would otherwise be available for the ongoing development of the
Company's business. If the Company's management does not respond to these
challenges effectively, the Company's results of operations could be adversely
affected. Moreover, there can be no assurance that the anticipated benefits of
the acquisitions will be realized. The Company and the acquired companies could
experience difficulties or delays in integrating their respective technologies
or developing and introducing new products. In particular, one of the reasons
for FileNet's acquisition of Saros was the perceived market potential for Saros'
new products, including the recently announced @mezzanine and Saros Document
Server for BackOffice, which have yet to be proven in the marketplace, as well
as other products currently under development. Delays in or non-completion of
the development of these new products, or lack of market acceptance of such
products, could have an adverse impact on the Company's future results of
operations and result in a failure to realize anticipated benefits of the
acquisitions.
Product Liability. The Company's license agreements with customers
typically contain provisions designed to limit their exposure to potential
product liability claims. However, it is possible that such limitation of
liability provisions may not be effective under the laws of certain
jurisdictions. Although the Company has not experienced any product liability
claims to date, the sale and support of products by them may entail the risk of
such claims, and there can be no assurance that the Company will not be subject
to such claims in the future. A successful product liability claim brought
against the Company could have a material adverse effect upon the Company's
business, operating results and financial condition.
Stock Price Volatility. The Company believes that a variety of factors
could cause the price of its common stock to fluctuate, perhaps substantially,
including quarter-to-quarter variations in operating results; announcements of
developments related to its business; fluctuations in its order levels; general
conditions in the technology sector or the worldwide economy; announcements of
technological innovations, new products or product enhancements by the Company
or its competitors; key management changes; changes in joint marketing and
development programs; developments relating to patents or other intellectual
property rights or disputes; and developments in the Company's relationships
with its customers, distributors and suppliers. In addition, in recent years the
stock market in general, and the market for shares of high technology stocks in
particular, has experienced extreme price fluctuations which have often been
unrelated to the operating performance of affected companies. Such fluctuations
could adversely affect the market price of the Company's common stock.
9
Item 2. Properties
The Company currently leases 250,000 square feet of office, development and
manufacturing space in Costa Mesa, California; 42,000 square feet of office and
development space in Bellevue, Washington; 12,500 square feet of office and
development space in Burlington, Massachusetts. The Company also leases sales
and support offices in 41 locations in the United States, 13 in Europe, 2 in
Australia, 3 in Canada, and 3 in Asia. The Company believes that the Costa Mesa,
Bellevue and Burlington facilities will be adequate for the Company's
anticipated needs through 1997.
Item 3. Legal Proceedings
In October 1994, Wang filed a complaint in the United States District Court for
the District of Massachusetts alleging that the Company is infringing five
patents held by Wang. On June 23, 1995, Wang amended its complaint to include an
additional related patent. On July 2, 1996, Wang filed a complaint in the same
court alleging that Watermark, formerly a wholly-owned subsidiary that was
merged into the Company, is infringing three of the same patents asserted in the
initial complaint. On October 9, 1996, Wang withdrew its claim that one of the
patents it initially asserted is infringed by the Company's products which were
commercialized before the initial complaint was filed. Wang reserved the right
to assert that patent against the Company's products commercialized after that
date in a separate lawsuit. Based on the Company's analysis of these Wang
patents and their respective file histories, the Company believes that it has
meritorious defenses to Wang's claims; however, the ultimate outcome or any
resulting potential loss cannot be determined at this time.
In January 1997, Wang and Kodak announced that they have entered into an
agreement under which Kodak will acquire the Wang business unit that has
responsibility for this litigation. The acquisition is scheduled to close in
March-April 1997 and the Company cannot predict what, if any, impact this will
have on the litigation. If it should be determined that the patents at issue in
the litigation are valid and are infringed by any of the Company's products,
including Watermark products, the Company will, depending on the product,
redesign the infringing products or seek to obtain a license to market the
products. There can be no assurance that the Company will be able to obtain such
a license on acceptable terms.
On December 20, 1996, plaintiff Michael I. Goldman filed a class action
complaint against the Company and certain of its officers and directors in the
Superior Court of California, County of Orange. The action was purportedly filed
on behalf of a class of purchasers of the Company's common stock during the
period October 19, 1995 through July 2, 1996. Plaintiff alleges that the Company
and other defendants violated Cal. Corp. Code Sections 25400 and 25500, Cal.
Civ. Code Sections 1709-1710 and Cal. Bus. & Prof. Code Sections 17200 et seq.
in connection with various public statements made by the Company and certain of
its officers and directors during the putative class period. The complaint seeks
unspecified compensatory and punitive damages, interest, payment of attorney's
fees and costs, and equitable or injunctive relief; however, at this time it is
not possible to determine the potential liability, if any. The Company has not
yet responded to the complaint. The Company believes the complaint is without
merit and intends to defend the action vigorously.
The Company, in the normal course of business, is subject to various other legal
matters. While the results of litigation and claims cannot be predicted with
certainty, the Company believes that the final outcome of these other matters
will not have a materially adverse effect on the Company's consolidated results
of operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
There is hereby incorporated herein by reference the information appearing under
the caption "Stock Market and Dividend Information," which appears on page 42 of
the Registrant's Annual Report to Stockholders for the year ended December 31,
1996 and is filed herewith as Exhibit 13.1.
10
Item 6. Selected Financial Data 1
The following table summarizes certain selected financial data:
For Fiscal Years Ended
--------------------------------------------------------------------------------------
Dec. 31, 1996 Dec. 31, 1995 Jan. 1, 1995 Jan. 2, 1994 Jan. 3, 1993
---------------- ---------------- --------------- ---------------- ---------------
(1996) (1995) (1994) (1993) (1992)
------ ------ ------ ------ ------
(In thousands, except per share amounts)
Consolidated statements of operations data:
Revenue:
Software revenue $140,659 $116,052 $ 81,102 $ 54,067 $ 34,089
Service revenue 82,118 67,174 60,753 60,933 45,803
Hardware revenue 46,136 46,152 50,480 51,410 62,608
---------------------------------- ---------------- ----------------- ----------------
Total revenue 268,913 229,378 192,335 166,410 142,500
Costs and expenses:
Cost of software revenue 16,464 15,146 12,472 7,831 6,324
Cost of service revenue 53,568 44,277 41,645 42,812 36,650
Cost of hardware revenue 29,633 28,800 30,999 34,116 28,330
Research and development 36,502 24,711 18,274 15,247 15,142
Selling, general and administrative 117,761 96,499 71,267 61,711 59,277
Merger, restructuring and write-off of
purchased in-process research and
development costs 16,011 6,393 -- -- 10,044
--------------------------------------------------------------------------------------
Total costs and expenses 269,939 215,826 174,657 161,717 155,767
--------------------------------------------------------------------------------------
Operating income (loss) (1,026) 13,552 17,678 4,693 (13,267)
Other income 2,838 2,780 1,821 333 348
--------------------------------------------------------------------------------------
Income (loss) before income taxes 1,812 16,332 19,499 5,026 (12,919)
Provision (benefit) for income taxes 4,456 8,116 5,356 4,760 (1,827)
--------------------------------------------------------------------------------------
Net income (loss) $ (2,644) $ 8,216 $ 14,143 $ 266 $(11,092)
================= ================= ================ ================= ===============
Net income (loss) per share $ (0.18) $ 0.52 $ 0.95 $ 0.02 $ (0.95)
Weighted average common and common
equivalent shares outstanding 15,007* 15,856 14,834 13,178 11,705*
*Excludes common share equivalents
Consolidated balance sheet data:
Working capital $ 89,339 $ 86,354 $ 63,149 $ 47,819 $ 46,292
Total assets 195,679 189,682 152,642 124,986 104,350
Long-term debt, excluding
current portion -- -- -- 163 68
Stockholders' equity 132,806 131,158 101,006 78,383 71,346
1 All historical data has been restated to reflect the acquisition of Saros
Corporation on March 1, 1996 which was accounted for as a pooling of interests.
Certain reclassifications have been made to the prior years' selected
financial data to conform with the current year's presentation.
11
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
There is hereby incorporated herein by reference the information appearing under
the caption "Management's Discussion and Analysis of Results of Operations and
Financial Condition," which appears on pages 18 through 24 of the Registrant's
Annual Report to Stockholders for the year ended December 31, 1996 and is filed
herewith as Exhibit 13.2.
Item 8. Financial Statements and Supplementary Data
There is hereby incorporated herein by reference the information appearing on
pages 25 through 39 of the Registrant's Annual Report to Stockholders for the
year ended December 31, 1996 and is filed herewith as Exhibit 13.3. The
accompanying Independent Auditors' Report is also incorporated herein by
reference and filed herewith as Exhibit 13.3.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
There is hereby incorporated herein by reference the information appearing under
the caption "Election of Directors," under the caption "Executive Officers of
the Company," and under the caption "Compliance with Securities Laws" of the
Registrant's definitive Proxy Statement for its 1997 Annual Meeting to be filed
with the Securities and Exchange Commission.
Item 11. Executive Compensation
There is hereby incorporated herein by reference the information appearing under
the caption "Executive Compensation" and under the caption "Election of
Directors" of the Registrant's definitive Proxy Statement for its 1997 Annual
Meeting to be filed with the Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management
There is hereby incorporated herein by reference the information appearing under
the caption "Voting Securities and Principal Holders Thereof" of the
Registrant's definitive Proxy Statement for its 1997 Annual Meeting to be filed
with the Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions
There is hereby incorporated herein by reference the information appearing under
the caption "Note 11: Related Party Transaction," which appears on page 38 of
the Registrant's Annual Report to Stockholders for the year ended December 31,
1996 and is filed herewith as part of Exhibit 13.4.
12
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) Financial statements
1. The list of financial statements contained in the accompanying
Index to Consolidated Financial Statements covered by the
Independent Auditors' Report is herein incorporated by reference.
2. Financial statement schedule
The listed financial statement schedule contained in the
accompanying Index to Consolidated Financial Statements covered
by the Independent Auditors' Report is herein incorporated by
reference.
3. Exhibits
The list of exhibits contained in the accompanying Index to
Exhibits is herein incorporated by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of fiscal
1996.
Index to Consolidated Financial Statements Covered
by Independent Auditors' Report
Item 14(a) (1) and (2)
Page Reference
---------------------------
1996 Annual
Report to
Form 10-K Stockholders
The information under the following captions, which is included in the 1996
Annual Report to Stockholders, is incorporated herein by reference:
Independent Auditors' Report 39
Consolidated balance sheets at December 31, 1996 and December 31, 1995 25
Consolidated statements of operations for each of the years ended
December 31, 1996, December 31, 1995 and January 1, 1995 26
Consolidated statements of stockholders' equity for each of the years ended
December 31, 1996, December 31, 1995 and January 1, 1995 27
Consolidated statements of cash flows for each of the years ended
December 31, 1996, December 31, 1995 and January 1, 1995 28
Notes to consolidated financial statements 29
Independent Auditors' Report on Schedule 14
Schedule for each of the three years ended December 31, 1996,
December 31, 1995 and January 1, 1995
II. Valuation and qualifying accounts and reserves 15
13
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Stockholders and the Board of Directors of FileNet Corporation:
We have audited the consolidated financial statements of FileNet Corporation and
its subsidiaries as of December 31, 1996 and 1995 and for each of the three
years in the period ended December 31, 1996, and have issued our report thereon
dated February 10, 1997. Such consolidated financial statements and report are
included in your 1996 Annual Report to Stockholders and are incorporated herein
by reference. Our audits also included the consolidated financial statement
schedule of FileNet Corporation and its subsidiaries, listed in Item 14. The
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
February 10, 1997
Costa Mesa, California
14
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
($ in thousands)
Balance at Additions-
Beginning of Charged to Costs Balance at End
Description Period and Expenses Deductions of Period
- ----------------------------------- ----------------------------------------------------------------------
Year ended January 1, 1995:
Inventory reserves $ 771 $ 532 $ 652 (1) $ 651
Allowance for doubtful accounts 562 222 53 (2) 731
Reserve for returned systems 3,418 489 1,160 (3) 2,747
Year ended December 31, 1995:
Inventory reserves 651 482 560 (1) 573
Allowance for doubtful accounts 731 857 48 (2) 1,540
Reserve for returned systems 2,747 869 463 3,153
Year ended December 31, 1996:
Inventory reserves 573 635 548 (1) 660
Allowance for doubtful accounts 1,540 1,205 605 (2) 2,140
Reserve for returned systems 3,153 32 - 3,185
(1) Consists primarily of the write-off of excess/obsolete inventories.
(2) Consists primarily of uncollectible invoice amounts.
(3) Includes an amount attributable to the resolution of a specific customer
dispute. Such amount was recognized in revenue in 1994.
15
Index to Exhibits
Exhibit
No. Description
- ------- ----------------------------------------------------------------------
3.1* Restated Certificate of Incorporation, as amended (filed as Exhibit
3.1 to 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 Form S-4 filed on January 26, 1996,
Registration No. 333-00676).
3.2* Bylaws (filed as Exhibit 3.2 of the Registrant's registration
statement on Form S-1, Registration No. 33-15004 (the "Form S-1")).
4.1* Form of certificate evidencing Common Stock (filed as Exhibit 4.1 to
the Form S-1, Registration No. 33-15004).
4.2* Rights Agreement, dated as of November 4, 1988 between FileNet
Corporation and the First National Bank of Boston, which includes the
form of Rights Certificate as Exhibit A and the Summary of Rights to
Purchase Common Shares as Exhibit B (filed as Exhibit 4.2 to Form S-4
filed on January 26, 1996; Registration No. 333-00676).
10.1* Amended and Restated Credit Agreement (Multicurrency) by and among the
Registrant and Bank of America National Trust and Savings Association
dated August 8, 1995, effective May 1, 1995 (filed as Exhibit 10.1 to
Form 10-Q for the quarter ended July 2, 1995).
10.2 Waiver and Second Amendment dated December 18, 1996, to the Amended
and Restated Credit Agreement (Multicurrency) by and among the
Registrant and Bank of America National Trust and Savings Association
dated August 8, 1995.
10.3* Business Alliance Program Agreement between the Registrant and Oracle
Corporation dated July 1, 1996, as amended by Amendment One thereto
(filed as Exhibit 10.4 to Form 10-QA for the quarter ended June 30,
1996).
10.4* Runtime Sublicense Addendum between the Registrant and Oracle
Corporation dated July 1, 1996, as amended by Amendment One thereto
(filed as Exhibit 10.4 to Form 10-QA for the quarter ended June 30,
1996).
10.5* Full Use and Deployment Sublicense Addendum between the Registrant and
Oracle Corporation dated July 1, 1996, as amended by Amendment One
thereto (filed as Exhibit 10.4 to Form 10-QA for the quarter ended
June 30, 1996).
10.6* Lease between the Registrant and C. J. Segerstrom & Sons for the
headquarters of the Company, dated April 30, 1987 (filed as Exhibit
10.19 to the Form S-1).
10.7 Third Amendment to the Lease between the Registrant and C. J.
Segerstrom & Sons dated April 30, 1987, for additional facilities at
the headquarters of the Company, dated October 1, 1992.
10.8* 1989 Stock Option Plan for Non-Employee Directors of FileNet
Corporation, as amended by the First Amendment, Second Amendment,
Third Amendment thereto (filed as Exhibit 10.9 to Form S-4 filed on
January 26, 1996; Registration No. 333-00676).
10.9* Amended and Restated 1995 Stock Option Plan of FileNet Corporation as
approved by stockholders at the Registrant's Annual Meeting on May 8,
1996 (filed as Exhibit 99.1 to Form S-8 filed on July 29, 1996).
10.10* Second Amended and Restated Stock Option Plan of FileNet Corporation,
together with the forms of Incentive Stock Option Agreement and
Non-Qualified Stock Option Agreements (filed as Exhibits 4(a), 4(b)
and 4(c), respectively, to the Registrant's Registration Statement on
Form S-8, Registration No. 33-48499), and an Amendment thereto (filed
as Exhibit 4(d) to the Registrant's Registration Statement on Form
S-8, Registration No. 33-69920), and the Second Amendment thereto
(filed as Appendix A to the Registrant's Proxy Statement for the
Registrant's 1994 Annual Meeting of Stockholders, filed on April 29,
1994).
- --------------------------------------------
* Incorporated herein by reference
16
Exhibit No. Description
- ----------------------- --------------------------------------------------------
10.11* Agreement for the Purchase of IBM products dated December 20, 1991
(filed on May 5, 1992 with the Form 8 amending the Company's Form 10-K
for the fiscal year ended December 31, 1991).
10.12 Amendment #A1011-941003-01 dated September 30, 1994, to the Agreement
for the Purchase of IBM products dated December 20, 1991.
10.13* Development and Initial Supply Agreement between the Registrant and
Quintar Company dated August 20, 1992 (filed as Exhibit 10.21 to Form
10-K for the year ended January 3, 1993).
10.14* Amendment dated December 22, 1992 to the Development and Initial
Supply Agreement between the Registrant and Quintar Company dated
August 20, 1992 (filed as Exhibit 10.22 to Form 10-K for the year
ended January 3, 1993).
10.15* Product License Agreement between the Registrant and Novell, Inc.
dated May 16, 1995 (filed as Exhibit 10.26 to Form 10-Q for the
quarter ended July 2, 1995).
10.16* Agreement and Plan of Merger between the Registrant and Watermark
Software Inc. dated July 18, 1995 (filed as Exhibit 10.27 to Form 10-Q
for the quarter ended July 2, 1995).
10.17* Agreement and Plan of Merger between the Registrant and Saros
Corporation, as amended, dated January 17, 1996 (filed as Exhibits
2.1, 2.2, 2.3, and 2.4 to Form 8-K on March 13, 1996).
10.18* Stock Purchase Agreement by and Among FileNet Corporation, IFS
Acquisition Corporation, Jawaid Khan and Juergen Goersch dated January
17, 1996 and Amendment 1 to Stock Purchase Agreement dated January 30,
1996 (filed as Exhibit 10.2 to form 10-K for the year ended December
31, 1995).
13.1 Market for the Registrant's Common Stock and Related Stockholder
Matters incorporated by reference to page 42 of the 1996 Annual
Report.
13.2 Management's Discussion and Analysis of Results of Operations and
Financial Condition incorporated by reference to pages 18 through 24
of the 1996 Annual Report.
13.3 Financial Statements incorporated by reference to pages 25 through 39
of the 1996 Annual Report.
13.4 Certain Relationships and Related Transactions incorporated by
reference to page 38 of the 1996 Annual Report.
21.1 List of subsidiaries of Registrant (filed as FileNet Corporation
Subsidiary Information).
23.1 Consent of Deloitte & Touche LLP (filed as Independent Auditors'
Consent).
27 Financial Data Schedule
- ---------------------------------------------
* Incorporated herein by reference
17
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FILENET CORPORATION
Date: April 2, 1997 By: /s/ T. J. Smith
--------------------------------------------
T. J. Smith
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: April 2, 1997 By: /s/ T. J. Smith
--------------------------------------------
T. J. Smith
President
(Principal Executive Officer) Director
Date: April 2, 1997 By: /s/ Mark S. St. Clare
--------------------------------------------
Mark S. St. Clare
Chief Financial Officer and
Sr. Vice President, Finance
(Principal Financial Officer)
Date: April 2, 1997 By: /s/ William R. Hughes
--------------------------------------------
William R. Hughes
Chief Accounting Officer and Controller
Date: April 2, 1997 By: /s/ Frederick K. Fluegel
--------------------------------------------
Frederick K. Fluegel
Director
Date: April 2, 1997 By: /s/ J. Burgess Jamieson
--------------------------------------------
J. Burgess Jamieson
Director
Date: April 2, 1997 By: /s/ John C. Savage
--------------------------------------------
John C. Savage
Director
Date: April 2, 1997 By: /s/ William P. Lyons
--------------------------------------------
William P. Lyons
Director
18