[FileNet Corporation logo] NOTICE OF ANNUAL MEETING OF STOCKHOLDERS MAY 7, 2003 The 2003 Annual Meeting of Stockholders of FileNet Corporation (the "Company") will be held at 9:00 a.m. Pacific time, on May 7, 2003, at The Mondavi Center, 1570 Scenic Avenue, Costa Mesa, California 92626, for the following purposes: 1. To elect six directors for the ensuing year or until the election and qualification of their respective successors; 2. To approve an amendment to the Company's 2002 Incentive Award Plan to increase the number of shares of Common Stock available for issuance thereunder by an additional 1,400,000 shares, from 1,400,000 to 2,800,000 shares; 3. To ratify the appointment of Deloitte and Touche LLP as the independent accountants of the Company for its year ending December 31, 2003; and 4. To transact such other business as may properly come before the meeting or any postponement or adjournment thereof. Only stockholders of record at the close of business on March 12, 2003, the record date, will be entitled to notice of, and to vote at, the 2003 Annual Meeting and any postponement or adjournment thereof. By Order of the Board of Directors, /s/ Sam M. Auriemma Costa Mesa, California Sam M. Auriemma April 2, 2003 Secretary ALL STOCKHOLDERS ARE INVITED TO ATTEND THE ANNUAL MEETING. WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR REPRESENTATION AT THE ANNUAL MEETING. A POSTAGE-PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. YOU MAY INSTEAD VOTE YOUR PROXY ELECTRONICALLY OR BY TELEPHONE. PLEASE REFER TO PAGE 2 OF THE FOLLOWING PROXY STATEMENT AND THE ENCLOSED VOTING FORM FOR INSTRUCTIONS. YOUR PROXY MAY BE REVOKED AT ANY TIME PRIOR TO THE ANNUAL MEETING. IF YOU DECIDE TO ATTEND THE ANNUAL MEETING AND WISH TO CHANGE YOUR PROXY VOTE, YOU MAY DO SO BY VOTING IN PERSON AT THE ANNUAL MEETING.[FileNet Corporation logo] 3565 Harbor Boulevard Costa Mesa, California 92626 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 7, 2003 PROXY STATEMENT SOLICITATION OF PROXIES The accompanying proxy is solicited on behalf of the Board of Directors of FileNet Corporation (the "Company") for use at the Annual Meeting of Stockholders to be held at The Mondavi Center, 1570 Scenic Avenue, Costa Mesa, California 92626, on May 7, 2003 at 9:00 a.m. Pacific time, and at any and all adjournments or postponements thereof (the "Annual Meeting"). All shares represented by each properly executed, unrevoked proxy received in time for the Annual Meeting will be voted in the manner specified therein. If the manner of voting is not specified in an executed proxy received by the Company, the proxy will be voted FOR (i) the election of the six nominees for election to the Board of Directors listed in the proxy; (ii) the approval of an amendment to the Company's 2002 Incentive Award Plan to increase the number of shares of Common Stock available for issuance thereunder by an additional 1,400,000 shares, from 1,400,000 to 2,800,000 shares; and (iii) the ratification of the appointment of Deloitte and Touche LLP as the independent accountants of the Company for its year ending December 31, 2003. Any stockholder has the power to revoke his or her proxy at any time before it is voted. A proxy may be revoked by delivering a written notice of revocation to the Secretary of the Company, by presenting a later-dated proxy executed by the person who executed the prior proxy, or by attendance at the meeting and voting in person by the person who executed the proxy. Attendance at the meeting will not, by itself, revoke a proxy. This proxy statement is being mailed to the Company's stockholders on or about April 2, 2003. The total cost of this solicitation will be borne by the Company. In addition to use of the mails, proxies may be solicited by officers, directors and regular employees of the Company personally by telephone or oral communication. The Company has also retained Corporate Investor Communications, Inc. to assist it in solicitation of proxies, and has agreed to pay approximately $14,000 plus reimbursement of certain expenses for such services. 1 OUTSTANDING SHARES AND VOTING RIGHTS Votes Required Only holders of record of the approximately 35,957,315 shares of the Company's Common Stock outstanding at the close of business on the record date, March 12, 2003, will be entitled to notice of and to vote at the Annual Meeting or any adjournment or postponement thereof. On each matter to be considered at the Annual Meeting, each stockholder will be entitled to cast one vote for each share of the Company's Common Stock held of record by such stockholder on March 12, 2003. In order to constitute a quorum for the conduct of business at the Annual Meeting, a majority of the outstanding shares of the Common Stock of the Company entitled to vote at the Annual Meeting must be present or represented at the Annual Meeting. Pursuant to Delaware law, directors are elected by a plurality vote. The other matters submitted for stockholder approval at the Annual Meeting will be decided by the affirmative vote of a majority of shares present in person or represented by proxy at the Annual Meeting and entitled to vote on such matters. With regard to the election of directors, votes may be cast in favor of or withheld from each nominee; votes that are withheld will be excluded entirely from the vote and will have no effect. Abstentions may be specified on all proposals except the election of directors, and will be counted as present for purposes of determining the existence of a quorum regarding the item on which the abstention is noted and will also be counted as a vote against such item for purposes of determining whether stockholder approval of that item has been obtained. Shares that are not voted by the broker who is the record holder of the shares because the broker is not instructed to vote and does not have discretionary authority to vote (i.e., Broker Non-Votes) and shares that are not voted in other circumstances in which proxy authority is defective or has been withheld, will be counted for purposes of establishing a quorum but with respect to any matter, those non-voted shares will not be deemed to be entitled to vote for purposes of determining whether stockholder approval of that matter has been obtained and thus will have no effect on the outcome of such matter. Voting Electronically via the Internet or Telephone If your shares are registered directly with EquiServe you may vote your shares either via the Internet or by calling EquiServe. Specific instructions for voting via the Internet or telephone are set forth on the enclosed proxy card. The Internet and telephone voting procedures are designed to authenticate the stockholder's identity and to allow stockholders to vote their shares and confirm that their instructions have been properly recorded. If your shares are registered in the name of a bank or brokerage firm, you may be eligible to vote your shares electronically over the Internet or by telephone. A large number of banks and brokerage firms are participating in the ADP Investor Communication Services online program. This program provides eligible stockholders who receive a paper copy of the Annual Report and Proxy Statement the opportunity to vote via the Internet or by telephone. If your bank or brokerage firm is participating in ADP's program, your voting form will provide instructions. If your voting form does not reference Internet or telephone information, please complete and return the enclosed paper Proxy in the self-addressed postage paid envelope provided. 2 VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF The following table sets forth as of March 12, 2003 the number and percentage of the outstanding shares of the Common Stock of the Company which, according to the information supplied to the Company, are beneficially owned by (i) each person who, to the knowledge of the Company, is the beneficial owner of more than 5% of the Company's outstanding Common Stock, (ii) each person who is currently a director of the Company or is a nominee for election as a director of the Company, (iii) each named executive officer in the Summary Compensation Table that appears below and (iv) all current directors and executive officers of the Company as a group. Except to the extent indicated in the footnotes to the following table, the person or entity listed has sole voting and dispositive power with respect to the shares that are deemed beneficially owned by such person or entity, subject to community property laws, where applicable. Percentage of Total Outstanding Outstanding Common Stock Name and Address Common Stock Options(1) Beneficially Owned(2) 5% Holders: Berger Small Cap Value Fund............ 3,000,000 - 8.36% 210 University Blvd Denver, CO 80206(3) Perkins Wolf McDonnell and Co.......... 2,655,644 - 7.39 53 W. Jackson Blvd., Suite 722 Chicago, IL 60604(4) Merrill Lynch and Co., Inc. ........... 2,194,513 - 6.1 4 World Financial Center New York, NY 10080(5) Directors: Lee D. Roberts(6)...................... - 777,023 * Theodore J. Smith(7)................... 10,000(7) 138,750 * John C. Savage......................... 8,564 73,933 * William P. Lyons(8).................... 2,000 61,500 * L. George Klaus........................ - 44,250 * Roger S. Siboni........................ - 20,500 * Named Executive Officers: Sam M. Auriemma........................ - 150,939 * David D. Despard....................... 200 183,646 * Ron L. Ercanbrack...................... - 210,106 * Royce Murphy 1,088 14,583 * All executive officers and directors 44,745 2,298,015 6.12 as a group (20 persons)(9)............. * Represents less than 1%. (1) Represents shares of Common Stock that the holder may acquire upon exercise of currently vested options or options that will become vested within 60 days after March 12, 2003. 3 (2) Shares of Common Stock subject to options which are currently exercisable or which will become exercisable within 60 days after March 12, 2003 are deemed to be beneficially owned by the person holding such options for the purpose of computing the percentage of ownership of such person but are not treated as outstanding for the purpose of computing the percentage of any other person. (3) Pursuant to a Schedule 13G filed on December 31, 2002, Berger Small Cap Value Fund has shared dispositive and shared voting power over 3,000,000 shares. (4) Pursuant to a Schedule 13G filed on February 28, 2003, Perkins Wolf McDonnell and Co. has sole dispositive and sole voting power over 12,544 shares and has shared dispositive and shared voting power over 2,643,100 shares. (5) Pursuant to a Schedule 13G filed on January 8, 2003, Merrill Lynch and Co. has shared dispositive and shared voting power over 2,194,513 shares. Merrill Lynch and Co. is a parent holding company. The following asset management subsidiaries hold certain of these shares of common stock deemed beneficially owned by Merrill Lynch and Co.: Fund Asset Management, L.P., Merrill Lynch Investment Managers Limited, Merrill Lynch Investment Managers, L.P., and QA Advisor L.L.C. (6) Mr. Roberts is also a Named Executive Officer. (7) Represents shares held by the Theodore J. Smith Family Trust as to which shares Mr. Smith, as co-trustee for this trust, has shared voting and dispositive power. (8) Includes 2,000 shares held by the William P. Lyons Family Trust as to which shares Mr. Lyons, as co-trustee for this trust, has shared voting and dispositive power. (9) Includes shares held by the Theodore J. Smith Family Trust and William P. Lyons Family Trust (see footnotes 7 and 8). Excludes shares held by Royce Murphy whose employment with us terminated December 31, 2002. 4 EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth, as of March 12, 2003, the executive officers of the Company. Name Age Position Lee D. Roberts 50 Chairman of the Board of the Company since December 2000 and Chief Executive Officer since April 1998. Mr. Roberts served as our President from May 1997 to October 2000 and as our Chief Operating Officer from May 1997 until April 1998. Mr. Roberts has also served as a director of the Company since May 1998. Prior to joining the Company in May 1997, Mr. Roberts was employed by International Business Machines Corporation ("IBM") for over 20 years, serving most recently as General Manager and Vice President, Worldwide Marketing and Sales for the Networking Division of IBM. Mr. Roberts also currently serves on the Board of Directors of Onyx Software. Sam M. Auriemma 50 Senior Vice President, Chief Financial Officer and Secretary of the Company since September 2000. Before joining the Company, Mr. Auriemma served as the Executive Vice President and Chief Financial Officer of Wonderware Corporation, which specializes in providing software solutions for industrial and process automation applications, between April 1996 and September 2000. Martyn D. Christian 41 Senior Vice President, Worldwide Field Marketing of the Company since January 2003. From January 2002 to December 2002, Mr. Christian served as our Senior Vice President Corporate Marketing, and from August 2000 to December 2001, he served as our Senior Vice President of Worldwide Corporate and Applications Marketing. From November 1998 to August 2000, Mr. Christian served as the Company's Vice President of Solutions Sales and Marketing and from September 1996 to November 1998 he served as our Vice President, Marketing Programs. From March 1991 to September 1996, he served in various sales and marketing positions with the Company. David D. Despard 47 Senior Vice President, Global Professional Services of the Company since July 1998. Prior to joining the Company, Mr. Despard served as the Vice President, Customer Services of Wall Data, Inc. from 1995. Frederick P. Dillon 53 Vice President, Sales Operations of the Company since January 1999. From December 1997 to January 1999, Mr. Dillon served as Director, Worldwide Sales Operations and from November 1987 to December 1997 he served as Director, Sales Operations. Karl J. Doyle 38 Vice President, Business Development of the Company since August 2000. From October 1998 to August 2000, Mr. Doyle served as the Company's Director of Corporate Strategy. From March 1992 to October 1998, Mr. Doyle was employed in sales and marketing with the Company. 5 Ron L. Ercanbrack 48 President of the Company since October 2000. Mr. Ercanbrack served as Executive Vice President, Worldwide Sales and Marketing of the Company from April 1999 to October 2000. Mr. Ercanbrack served as our Senior Vice President, Worldwide Sales from October 1997 until April 1999. From June 1997 to October 1997, Mr. Ercanbrack served as our Senior Vice President, International. Prior to joining the Company in June 1997, Mr. Ercanbrack was employed by IBM for over 19 years, serving most recently as Vice President, Worldwide Sales, Channel and OEM for the Networking Hardware Division of IBM. Michael W. Harris 41 Senior Vice President, Product Marketing, Strategy and Corporate Communications of the Company since August 2000. From April 1999 to August 2000, Mr. Harris served as the Company's Vice President, Product Marketing, and from December 1997 to April 1999 he was the Company's Director, Product Marketing. From March 1995 through December 1997, Mr. Harris held several executive management positions with Stac Software, Inc., a provider of storage and communication software utilities. Mr. Harris joined Stac as a result of the acquisition of Rememory Corporation, a storage management software company that he founded in 1993. Mr. Harris was also the President and Chief Executive Officer of Rememory Corporation. William J. Kreidler 58 Senior Vice President, Customer Technical Operations and Services of the Company since July 1997. From August 1992 to July 1997, Mr. Kreidler served as Vice President, Operations of the Company. From 1993 to July 1998, he was also responsible for Professional Services. Chas W. Kunkelmann 53 Senior Vice President, Worldwide Channel Operations of the Company since October 2002. From November 2001 to October 2002, Mr. Kunkelmann served as Vice President, Brightspire of the Company and, from November 1999 to November 2001, he served as the Eastern Regional Vice President of the Company. Prior to joining the Company between November 1996 and November 1999, Mr. Kunkelmann served as Vice President of North American Operations for Internet Dynamics, Inc., which specialized in internet security and access control software. Katharina M. Mueller 37 Vice President, General Counsel of the Company since April 2002 and Assistant Secretary of the Company since August 2000. Ms. Mueller served as Acting General Counsel from August 2000 to March 2002, and as Assistant General Counsel from May 2000 through July 2000. From 1999 to 2000, Ms. Mueller served as in-house counsel at Aprisma Technologies, Inc., a division of Cabletron Systems, Inc. From 1993 to 1998, Ms. Mueller maintained a private practice in the areas of corporate, business litigation and real estate law. Philip L. Rugani 46 Mr. Rugani joined the Company on January 12, 2003 as Senior Vice President, Sales - The Americas. From September 2000 to June 2002, Mr. Rugani served as Executive Vice President for Altavista Software, a division of AltaVista Company, which provides search services and software and, from January 1999 to June 2000, as Senior Vice President Americas for Informix Corporation, a supplier of data base and e-business software solutions. Mr. Rugani also served from November 1995 to January 1999 as Group Vice President-General Business and Alliances for Oracle Corporation a supplier of data base and application software. Audrey N. Schaeffer 58 Vice President, Human Resources of the Company since January 1993 and Assistant Secretary of the Company since April 1988. 6 Daniel S. Whelan 45 Vice President and Chief Technology Officer of the Company since May 2000. From January 1994 to May 2000, Mr. Whelan served as a Computer Scientist and Section Manager in the Company's Product Development department. Franz X. Zihlmann 56 Senior Vice President of Software Development of the Company since January 2000. From September 1996 to January 2000, Mr. Zihlmann was the Company's Vice President of Product Development and from January 1991 to September 1996 Mr. Zihlmann was the Vice President, Engineering Systems. 7 EXECUTIVE COMPENSATION The following table sets forth certain information regarding the annual and long-term compensation earned for services rendered in all capacities to the Company for the last three completed fiscal years (i.e., years ended December 31, 2000, 2001, 2002) by the Company's Chief Executive Officer, and each of the other four most highly compensated executive officers of the Company who were serving as executive officers at the end of fiscal year 2002. Summary Compensation Table Long-Term Compensation Annual Compensation Awards Stock All Other Option Compen- Name and Principal Position Year Salary(1) Bonus (Shares) sation(2) Lee D. Roberts 2002 $525,000 $252,000 - $5,946 2001 525,000 - 400,000 5,945 Chief Executive Officer, Chairman of 2000 454,875 529,200 80,000 4,876 the Board and Director Ron L. Ercanbrack 2002 375,000 180,000 100,000 3,587 President 2001 375,000 - 45,000 3,586 2000 337,420 347,069 240,000 3,173 Royce Murphy(3) 2002 284,288 125,566 - 15,346 Senior Vice President, EMEA 2001 63,892 32,549 50,000 3,472 David D. Despard 2002 275,000 110,000 40,000 5,370 Senior Vice President, Worldwide 2001 275,000 - 70,000 5,370 Professional Services 2000 274,500 254,800 35,000 4,460 Sam M. Auriemma(4) 2002 275,000 110,000 60,000 2,100 Senior Vice President, Chief Financial 2001 275,000 - 75,000 2,100 Officer and Secretary 2000 82,500 66,624 175,000 2,100 (1) Includes amounts deferred under (a) the Company's Employee Savings and Investment Plan, a tax-qualified plan under Section 401(k) of the Internal Revenue Code, and (b) the Company's Deferred Compensation Plan. (2) For fiscal year 2002, consists of (a) premiums paid by the Company in the amounts of $5,946, $1,486 and $3,270 on certain term-life insurance policies maintained for Messrs. Roberts, Ercanbrack and Despard, respectively, under which such individuals designate their own beneficiaries, and (b) contributions by the Company of $2,100 on behalf of each of Messrs. Ercanbrack, Despard and Auriemma to the Company's Section 401(k) Plan, and (c) a contribution to the Company's defined contribution pension plan maintained in the United Kingdom for Mr. Murphy in the amount of $15,346. During fiscal year 2002, no premiums were paid by the Company for life insurance for Messrs. Auriemma and Murphy and no Company contributions under the Company's Section 401(k) Plan were made on behalf of Mr. Roberts. (3) Mr. Murphy joined the Company as an executive officer in October 2001. Mr. Murphy ceased to be an executive officer and employee of the Company on December 31, 2002. (4) Mr. Auriemma joined the Company and was first appointed an executive officer in September 2000. 8 Option Grants in Last Fiscal Year The following table provides information on option grants made in fiscal year 2002 to the Named Executive Officers. No stock appreciation rights were granted during such year to the Named Executive Officers. Individual Grants Number of % of Total Potential Realizable Value Securities Options at Assumed Annual Rates of Underlying Granted to Stock Price Appreciation for Options Employees Exercise Option Term(1) Granted in Fiscal Price Expiration Name (#)(2) Year ($/Sh) Date 5% 10% Lee D. Roberts(3).......... - - N/A N/A - - Ron L. Ercanbrack.......... 100,000 6.4% $12.85 12/04/12 $808,130 $2,047,959 Royce Murphy............... - - N/A N/A - - David D. Despard........... 40,000 2.6 13.63 07/01/12 342,873 868,908 Sam M. Auriemma............ 35,000 2.3 13.63 07/01/12 300,014 760,295 25,000 1.6 13.21 12/11/12 207,693 526,334 (1) The assumed 5% and 10% annual rates of stock price appreciation are for illustrative purposes only. Actual stock prices will vary from time to time based upon market factors and the Company's financial performance. No assurance can be given that such rates will be achieved. Unless the market price of the Common Stock appreciates over the option term, no value will be realized from the option grants made to the Named Executive Officers. (2) Options were granted under the Company's 2002 Incentive Award Plan to Messrs. Auriemma and Despard , and options were granted under the Company's 1995 Stock Option Plan to Mr. Ercanbrack. Mr. Ercanbrack's 100,000 option shares were granted On December 4, 2002 in exchange for the prior cancellation of 100,000 option shares in May 2002 that had an exercise price of $35.16 per share. Options granted to our executive officers become exercisable as to twenty-five percent (25%) of the option shares after twelve (12) months of service with the Company from the grant date and the balance of the shares are exercisable in thirty-six (36) successive equal monthly installments upon completion of each additional month of service. Each option will become fully exercisable in certain events. Each option has a maximum term of ten years, subject to earlier termination following the optionee's termination of employment, permanent disability or death. (3) Mr. Roberts received a grant of 200,000 shares in December 2001 in lieu of a grant of shares in 2002. 9 Aggregated Option Exercises in Last Fiscal Year and Year End Option Value The following table sets forth certain information with respect to the Named Executive Officers concerning their exercise of options during 2002 and the unexercised options held by them at the close of such year. No stock appreciation rights were held or exercised by the Named Executive Officers at any time during 2002. Number of Unexercised Value of Unexercised Options at Fiscal In-the-Money Year End Options at Shares (Number of Shares) Fiscal Year End(1) Acquired Value Name on Exercise(#) Realized($)(2) Exercisable/Unexercisable Exercisable/Unexercisable Lee D. Roberts........ - + 668,690/321,667 $1,995,276/$- Ron L. Ercanbrack..... - + 191,772/191,978 348,037/21,719 Royce Murphy(3) ...... - - 14,583/35,417 41,562/100,938 David D. Despard...... 12,500 $92,126 173,438/96,562 94,225/7,850 Sam M. Auriemma....... - + 129,376/180,624 -/- (1) Calculated on the basis of the average of the high and low selling prices of the Company's Common Stock on December 31, 2002 ($12.35), the last trading day in 2002, minus the exercise price of the in-the-money option, multiplied by the number of shares subject to the option. (2) The excess of the fair market value of the purchased shares on the date of exercise over the exercise price paid for such shares. (3) Mr. Murphy ceased employment with us on December 31, 2002. Equity Compensation Plans The following tables summarizes information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our compensation plans as of December 31, 2002. The following is a list of our equity compensation plans under which we are authorized to make future grants, all of which were approved by our stockholders: 1995 Stock Option Plan of FileNet Corporation, as amended and restated on March 28, 2001; FileNet Corporation 1998 Employee Stock Purchase Plan, as amended and restated on May 1, 2002; International Employee Stock Purchase Plan, as amended and restated on May 1, 2002; and 2002 Incentive Award Plan of FileNet Corporation. 10 Number of securities Number of securities remaining to be issued upon Weighted average available for future issuance under exercise of exercise price of equity compensation plans outstanding options, outstanding options, (excluding securities reflected in warrants and rights warrants and rights column (a)) Plan Category (a) (b) (c) Equity compensation plans approved by security holders...... 8,170,534 $ 15.44 459,327 Employee compensation plans not approved by security holders...... 535,782(1) 10.55 - Employee stock purchase plans approved by security holders...... N/A N/A 1,134,434 Total............................. 8,706,316 $ 15.12 1,593,761 (1) Includes amounts granted under Non-Qualified Stock Option Agreements with each of Messrs. Roberts, Ercanbrack, and Auriemma: on May 22, 1997, Mr. Roberts was granted an option to purchase 600,000 shares with an exercise price of $7.16 per share; on June 18, 1997, Mr. Ercanbrack was granted an option to purchase 160,000 shares with an exercise price of $7.53 per share; and on September 13, 2000, Mr. Auriemma was granted an option to purchase 140,000 shares with an exercise price of $20.03 per share. Such option shares were granted as inducement to accept employment with the Company. The number of securities listed in the chart underlying the number of options granted to Messrs. Roberts and Ercanbrack gives effect to the May 15, 1998 stock split. Ten-Year Option Repricings Due to the option exchange with Mr. Ercanbrack that occurred during 2002, the Company has set forth information concerning all repricing or cancellation and reissuance of options held by any executive officer since January 1, 1993. Length of original option term Securities remaining underlying Market Exercise at date of Date of number of price of price at repricing cancellation options stock at time of New or or repriced time of repricing exercise amendment Name and Principal Position (4) amendment (1) repricing (2) price (2) (3) Martyn D. Christian 08/08/96 8,000 $18.75 $26.75 $13.00 9.7 Senior Vice President, 07/11/97 4,000 18.75 13.57 9.00 6.8 Worldwide Field Marketing 07/11/97 4,000 18.75 12.25 9.00 7.3 07/11/97 8,000 18.75 13.00 9.00 9.1 Frederick P. Dillon 08/08/96 12,000 26.25 26.76 13.00 9.8 Vice President, Sales 07/11/97 7,200 18.75 11.75 9.00 6.7 Operations 07/11/97 12,000 18.75 13.00 9.00 9.1 Karl J. Doyle 08/08/96 2,400 26.25 20.88 13.00 9.3 Vice President, Business 07/11/97 2,400 18.75 13.00 9.00 9.1 Development 11 Length of original option term Securities remaining underlying Market Exercise at date of Date of number of price of price at repricing cancellation options stock at time of New or or repriced time of repricing exercise amendment Name and Principal Position (4) amendment (1) repricing (2) price (2) (3) Ron L. Ercanbrack 05/22/02 100,000 15.97 35.16 12.85 7.8 President William J. Kreidler 07/11/97 16,000 18.75 9.19 9.00 6.5 Senior Vice President, 07/11/97 20,000 18.75 12.44 9.00 7.4 Customer Technical 07/11/97 20,000 18.75 20.41 9.00 8.5 Operations and Services 07/11/97 20,000 18.75 17.57 9.00 9.5 Audrey N. Schaeffer 07/11/97 6,400 18.75 10.69 9.00 5.5 Vice President, Human 07/11/97 12,800 18.75 9.19 9.00 6.5 Resources 07/11/97 16,000 18.75 12.44 9.00 7.4 07/11/97 16,000 18.75 20.41 9.00 8.5 07/11/97 16,000 18.75 17.57 9.00 9.5 Daniel S. Whelan 07/11/97 5,000 18.75 12.25 9.00 7.3 Vice President and Chief 07/11/97 3,000 18.75 13.07 9.00 9.3 Technology Officer Franz X. Zihlmann 08/08/96 20,000 26.25 20.41 13.00 8.5 Senior Vice President of 07/11/97 8,000 18.75 10.69 9.00 5.5 Development 07/11/97 20,000 18.75 12.44 9.00 7.4 07/11/97 20,000 18.75 13.00 9.00 9.1 07/11/97 20,000 18.75 13.07 9.00 9.3 07/11/97 20,000 18.75 17.57 9.00 9.5 (1) The securities underlying the number of options repriced gives effect to the May 15, 1998 stock split. (2) The exercise price for the cancelled and replacement options is equal to the average of the high and low selling price per share of the Company's common stock at the close of market on the Nasdaq National Market on the grant date of the replacement grant and gives effect to the May 15, 1998 stock split. (3) Expressed in years and fractions thereof. (4) Excludes executive officers whose employment was terminated as of December 31, 2002. Employment Contracts, Termination of Employment and Change in Control Agreements Change in Control Severance Program In 2001, the Compensation Committee of the Board of Directors reviewed, revised and consolidated the Company's previously approved program concerning severance payments for terminations relating to a change-in-control (the "Change-in-Control Severance Program") for the Company's CEO and certain other executive officers. Under the Change-in-Control Severance Program, each eligible executive officer will be entitled to certain benefits in the event his or her employment with the Company is involuntarily terminated, other than for "Cause" (as defined), or if such executive officer resigns for "Good Reason" (as defined), in either case within 18 months following a "change in control" of the Company (as defined). Mr. Roberts is entitled to receive a cash lump sum payment 12 equal to twelve months of applicable base salary and target bonus (discussed below) plus twelve months of continuation payments of such salary and bonus; Messrs. Ercanbrack and Auriemma are each entitled to receive a cash lump sum payment equal to nine months of the applicable base salary and target bonus plus nine months of continuation payments of such salary and bonus; and all other eligible executive officers are entitled to receive a cash lump sum payment equal to six months of the applicable base salary and target bonus plus six months of continuation payments of such salary and bonus. The cash lump sum and continuation payments to be provided to an eligible executive officer are based upon the monthly equivalent of (A) the annual base salary in effect for such executive officer immediately before the change in control or, if greater, at the time of termination or resignation, plus (B) the annual incentive bonus that such executive officer would have been entitled to receive under the Company's officer bonus plan for the calendar year in which the termination occurs or, if greater, the calendar year in which the change in control occurs, plus the pro-rata portion of the bonus earned by such executive officer during the calendar year in which the change of control occurs. The continuation payments are to be made at bi-weekly intervals. Each eligible executive officer is also entitled to a lump sum payment equal to 12, 18 or 24 months, depending upon his or her position, of the then-current monthly Internal Revenue Code 4980B medical premium ("COBRA") for that officer and his or her eligible dependents, plus, if applicable, the then-current life insurance premium paid by the Company. Mr. Roberts is entitled to receive a cash lump sum equal to 24 months of medical and life insurance premiums; Messrs. Ercanbrack and Auriemma are each entitled to receive a cash lump sum equal to 18 months of medical and life insurance premiums; and all other eligible executive officers are each entitled to receive a cash lump sum equal to 12 months of medical and life insurance premiums. In addition, under the Change-in-Control Severance Program, any shares of Common Stock that are then subject to outstanding options held by an eligible executive officer will automatically vest in full on an accelerated basis. CEO Severance Program In October 2001, the Compensation Committee implemented its previously approved CEO Severance Program originally adopted in 1999, by entering into the CEO Severance Agreement with Mr. Roberts, the Company's Chief Executive Officer (the "CEO"). Under this Agreement, the CEO would be entitled to receive certain severance payments and option acceleration upon the involuntary termination of the CEO's employment under certain circumstances. The benefits include a cash lump sum severance payment equal to one year of base salary, together with the CEO's target bonus that would otherwise be earned by the CEO for the year of termination but for the occurrence of the termination (which bonus is limited to 50% of the eligible annual award if the CEO has completed less than six months of service during the bonus year). The CEO would also be provided a lump sum payment equal to one year of COBRA benefits, and one year of Group Universal Life insurance premiums. In addition, a pro-rata portion of all unvested option shares would vest, to, in effect, provide for option vesting on a monthly basis through the date of termination. No benefits are payable under this Agreement in the event of the death or Permanent disability of the CEO, or in the event of termination of the CEO's employment for Cause or in connection with a Change in Control. Compensation Committee Interlocks and Insider Participation The Compensation Committee is composed of Messrs. Klaus and Lyons. No member of the Compensation Committee was at any time during 2002, or at any other time, an officer or employee of the Company. No executive officer of the Company served on the board of directors or compensation committee of any entity that has one or more executive officers serving as members of the Company's Board of Directors or Compensation Committee. Compensation Committee Report on Executive Compensation It is the duty of the Compensation Committee of the Company to review and determine the salaries and bonuses of executive officers of the Company, including the Chief Executive Officer, and to establish the general compensation policies for such individuals. The Compensation Committee also has the authority 13 to make discretionary option grants to the Company's executive officers and other employees under the Company's 1995 Stock Option Plan and 2002 Incentive Award Plan. The Compensation Committee believes that the compensation programs for the Company's executive officers should reflect the Company's performance and the value created for the Company's stockholders. In addition, the compensation programs should support the short-term and long-term strategic goals and values of the Company and should reward individual contribution to the Company's success. The Company is engaged in a very competitive industry, and the Company's success depends upon its ability to attract and retain qualified executives through the competitive compensation packages it offers to such individuals. General Compensation Policy. The Compensation Committee's policy is to provide the Company's executive officers with compensation opportunities that are based upon the financial performance of the Company and the individual's contribution to that performance, and which are competitive enough to attract and retain highly skilled individuals. Each executive officer's compensation package is comprised of three elements: (i) base salary that is competitive with the market and reflects individual performance, (ii) annual variable performance awards payable in cash and tied to the Company's achievement of annual financial performance goals, and (iii) long-term stock-based incentive awards designed to strengthen the mutuality of interests between the executive officers and the Company's stockholders. As an officer's level of responsibility increases, a greater proportion of his or her total compensation will be dependent upon the Company's financial performance and stock price appreciation. The Company has, at such times in the past as it deemed necessary, retained the services of an independent compensation consulting firm to advise the Compensation Committee as to how the Company's executive compensation compares to that of companies within and outside of its industry. The Company also subscribes to and participates in compensation surveys of the companies in its industry. The principal factors that were taken into account in establishing each executive officer's compensation package for 2002 are described below. However, the Compensation Committee may in its discretion apply entirely different factors, such as different measures of financial performance, for future years. Base Salary. The Compensation Committee's philosophy is that the base salary of each executive officer, including the Chief Executive Officer, should reflect the salary levels for comparable positions in the industry and the comparative group of companies, as well as the individual's personal performance and internal alignment considerations. In addition, the Company's performance and profitability should be a factor in determining the base salaries of executive officers. Given the difficult economic environment, the senior management team elected and the Compensation Committee agreed that no salary increases would be made in 2002 or 2003. Current base salaries were established in December 2000 based, in part, on the Compensation Committee's review of relevant published compensation surveys and an independent survey conducted by WestWard Pay Strategies. Annual Incentives. The annual incentive bonus for our Chief Executive Officer and most other executive officers is based on a percentage of base pay (i.e., ranging from 20% to 60% for 2002) and is adjusted to reflect the actual financial performance of the Company in comparison to the Company's business plan, which for 2002 was measured in terms of the Company's achievement against targeted earnings per share. For example, no bonus is paid if the Company's attainment of the target earnings per share is less than 70% of plan; 100% of the bonus is paid if the Company's attainment of the target goal is 100% of plan and 200% of the bonus is paid if the Company's attainment of the target goal is equal to or greater than 125% of plan. The actual bonus is calculated on a pro rata basis between these points. In connection with the Company's acquisition of eGrail in April 2002, the Compensation Committee adjusted target earnings per share for 2002 to reflect the anticipated effects of the eGrail acquisition on the Company's earnings. The Company's actual earnings per share compared to the adjusted target resulted in bonuses payable to our executives, including our Chief Executive Officer. In making the final bonus determination, the Compensation Committee reviewed both (i) the Company's financial performance against plan, and (ii) the Company's performance as compared to that of the Company's competitors. The Compensation Committee specifically considered the Company's software revenue growth, market share growth, cash growth and customer loyalty/satisfaction indices. The Compensation Committee also considered the fact that there have not been any salary increases for officers since salaries were last established in December 2000. Based on the foregoing, the Compensation Committee set bonuses at approximately 80% of targeted bonus. As a result of 14 this decision, 2002 bonuses increased all executive officers as a group from approximately $1,170,000 which was payable in accordance with the bonus formula, to approximately $1,337,000. Long Term Incentives. Generally, stock option grants are made annually by the Compensation Committee to each of the Company's executive officers. During 2002, special performance options were granted to Messrs. Auriemma, Harris, Despard, Kreidler and Doyle to recognize their exceptional contributions to the Company. Each option grant is designed to align the interests of the executive officer with those of the stockholders and provide each individual with a significant incentive to manage the Company from the perspective of an owner with an equity stake in the business. Each grant allows the officer to acquire shares of the Company's Common Stock at a fixed price per share (the fair market value on the grant date) over a specified period of time (up to ten years). Each option granted in 2002 becomes exercisable in installments equal to 25% of the option shares on the first anniversary of grant, and for the balance of the option shares in 36 successive equal monthly installments thereafter. Accordingly, the options will provide a return to the executive officer only if he or she remains employed by the Company during the vesting periods, and then only if the market price of the shares appreciates over the option term. The size of the option grant to each executive officer, including the Chief Executive Officer, is set by the Compensation Committee at a level that is intended to create a meaningful opportunity for stock ownership based upon the individual's current position with the Company, the individual's personal performance in recent periods, and his or her potential for future responsibility and promotion over the option term. The Compensation Committee also takes into account the number of unvested options held by the executive officer and considers the potential impact that a grant can have on an executive's motivation and future performance with the desire to maintain an appropriate level of equity incentive for that individual. The relevant weight given to each of these factors varies from individual to individual. Option Exchange. In May 2002, the Compensation Committee agreed with Mr. Ercanbrack, President of the Company, to cancel 100,000 option shares granted to him in February 2000 (the "2000 Option Shares") in exchange for new options to be granted at a later time. The 2000 Option Shares had an exercise price of $35.16, which was significantly higher than the then current market price of the Company's common stock ($15.97). The Committee believed that the 2000 Option Shares were unlikely to be exercised in the foreseeable future, which did not serve the purpose of such options (i) to promote the long-term success of the Company and the creation of stockholder value by encouraging Mr. Ercanbrack to focus on critical long-range objectives, (ii) to encourage the retention of Mr. Ercanbrack, and (iii) to link his interests directly to those of stockholders through increased stock ownership. Additionally, the Committee believed that the 2000 Option Shares failed to provide Mr. Ercanbrack with a meaningful incentive to extend his best efforts on behalf of the Company and its stockholders, and that it was in the best interests of the Company and its stockholders to encourage maximum performance by Mr. Ercanbrack. The Committee reviewed a proposed exchange agreement (the "Exchange Agreement") and subsequently approved the terms of the Exchange Agreement. The Exchange Agreement provided for the following: (i) cancellation of the 2000 Option Shares, (ii) the return of such Option Shares to the pool of shares available for grant of new options under the plan, (iii) a replacement option grant covering 100,000 shares, granted under the Plan on the first business day that is at least six months and one day from the date of option cancellation, at an exercise price equal to the average of the high and low selling price per share of the Company's common stock on the Nasdaq National Market on the grant date of the replacement grant, (iv) the replacement option is contingent upon Mr. Ercanbrack remaining an executive officer of the Company through the date that the replacement option is granted and compliance with applicable law, (v) the replacement option, once granted, will commence vesting on the replacement option grant date and will vest as to twenty-five percent (25%) of the shares subject to the replacement option on the one year anniversary of the replacement grant date and 1/36 each month thereafter until the replacement option is fully vested on the fourth anniversary of the replacement option grant date, and (vi) the replacement option will be designated a non-qualified stock option. 15 In December 2002, Mr. Ercanbrack received a replacement option grant covering 100,000 shares with an exercise price of $12.85 per share, pursuant to the terms and conditions of the Exchange Agreement outlined above. CEO Compensation. As with all of our other executive officers and at Mr. Roberts recommendation, the Compensation Committee decided to keep 2002 base salary of Mr. Roberts, our Chief Executive Officer, at the level established in December 2000 of $525,000. In setting the total compensation package of Mr. Roberts at that time, the Compensation Committee sought to make his compensation competitive when compared with the base salary levels in effect for similarly situated chief executive officers of companies in the comparison group and competitive with the surveyed values. The Compensation Committee also strived to assure that a significant percentage of Mr. Roberts' total compensation package is tied to Company performance, as measured in terms of the achievement of the Company's target earnings per share. In 2002, the Compensation Committee treated Mr. Roberts in the same manner as the other senior executives and elected to pay his annual bonus at 80% of targeted bonus, which resulted in Mr. Roberts' bonus increasing from $220,000 (which would have been payable pursuant to the bonus formula) to $252,000. The Compensation Committee made an additional grant of options covering 200,000 shares to Mr. Roberts in December 2001 in recognition of his personal performance and leadership role in the Company. The grant in December 2001 was made instead of the expected 2002 grant. All of these options vest 50% on each of the second and third anniversary of the grant date and are intended to tie a significant portion of his total compensation to stockholder value since the value of those grants will depend upon the future appreciation in the market price of the Company's Common Stock. In July 2001, the Compensation Committee offered Mr. Roberts a secured loan by the Company to enable Mr. Roberts to purchase a home in Orange County, California. The Compensation Committee forwarded its recommendation to the Board to approve, in principle, a loan in the amount of $1.2 million to Mr. Roberts. In September 2001, upon request of Mr. Roberts, the Compensation Committee approved, in principle, an increase in the previously approved 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 First Trust Deed 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. 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. The $1.9 million loan bears interest at 2.89% per annum (applicable short-term Federal interest rate) and is secured by the home purchased by Mr. Roberts. Accrued interest on the principal balance 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 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. Additionally, the Company is named as the loss payee in the insurance policy for mortgagee interests on this property. Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the Internal Revenue Code disallows a tax deduction to publicly held companies for compensation paid to certain of their executive officers, to the extent that compensation exceeds $1 million per covered officer in any year. The limitation applies only to compensation that is not considered to be performance-based. The cash compensation paid to the Company's executive officers for 2002 that did not qualify as "performance based compensation" did not exceed the $1 million limit per officer. The option grants made in 2002 were structured so that any compensation would not be subject to the $1 million limitation, and the compensation deemed paid in connection with the exercise of those options will qualify as performance-based compensation which will not be subject to the $1 million limitation. It is the opinion of the Compensation Committee that the executive compensation policies and plans provide the necessary total remuneration program to properly align the Company's performance and the interests of the Company's stockholders through the use of competitive and equitable executive compensation in a balanced and reasonable manner, for both the short and long-term. 16 Submitted by the Compensation Committee of the Company's Board of Directors: William P. Lyons L. George Klaus Notwithstanding anything to the contrary set forth in any of the Company's previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, which might incorporate future filings made by the Company under those statutes, neither the preceding Compensation Committee Report on Compensation, nor the following Stock Price Performance Graph will be incorporated by reference into any of those prior filings, nor will such report or graph be incorporated by reference into any future filings made by the Company under those statutes. 17 Stock Price Performance Graph The following graph compares the five-year cumulative total stockholder return on the Company's Common Stock against the cumulative total return of the Nasdaq Stock Market Index and the Nasdaq Computer and Data Processing Services Index for the period from December 31, 1997 to December 31, 2002. FileNet Nasdaq Nasdaq Comp Computer Measurement Period Corporation Stock And Data (fiscal year covered) Stock Market Index Processing Measurement Point 12/31/97 $ 100.00 $ 100.00 $ 100.00 FYE 12/31/98 $ 76.13 $ 140.57 $ 178.95 FYE 12/31/99 $ 169.27 $ 254.51 $ 377.37 FYE 12/31/00 $ 180.88 $ 157.56 $ 181.32 FYE 12/31/01 $ 134.68 $ 125.02 $ 145.38 FYE 12/31/02 $ 80.98 $ 86.36 $ 100.27 ASSUMES $100 INVESTED ON DECEMBER 31, 1997 ASSUMES DIVIDENDS REINVESTED YEAR ENDED DECEMBER 31, 2002 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors, executive officers and persons who own more than 10% of a registered class of the Company's equity securities to file initial reports of ownership and reports of changes in ownership with the SEC and the Nasdaq National Market. Such persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of copies of such forms received with respect to the year 2002 and the written representations received from certain reporting persons that no other reports were required, the Company believes that all directors, executive officers and persons who own more than 10% of the Company's Common Stock have complied with the reporting requirements of Section 16(a). 18 RELATED PARTY TRANSACTIONS On June 5, 2002, the Board approved a secured loan by the Company of $1.9 million to enable Mr. Roberts, the Company's Chief Executive Officer, to purchase a home in Orange County, California. The loan bears interest at 2.89% per annum (applicable short-term Federal interest rate). 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 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 outstanding balance as of December 31, 2002 is $1.9 million and Mr. Roberts paid the February 15, 2003 interest payment. Mr. John Savage, a member of our Board and Audit Committee, is one of the Managing Directors of Alliant Partners who acted as financial advisor to eGrail in connection with FileNet's acquisition of eGrail and Alliant Partners was paid approximately $500,000 by eGrail. Accordingly, Mr. Savage recused himself from all discussions related to the acquisition between FileNet and eGrail and abstained from voting on the transaction. 19 Proposal 1 ELECTION OF DIRECTORS The Company's stockholders are being asked to elect six directors for the ensuing year or until the election and qualification of their respective successors. Directors are elected at each Annual Meeting of Stockholders and hold office until their successors are duly elected and qualified at the next Annual Meeting of Stockholders. Pursuant to the Company's Bylaws and a resolution adopted by a majority of the authorized number of directors, the authorized number of members of the Board of Directors has been set at six. Based upon the recommendation of the Nominating Committee, the following persons have been nominated for re-election to the Board of Directors at this 2003 Annual Meeting of Stockholders. The following table sets forth certain information concerning the nominees for election to the Board of Directors. Name, Age, Principal Occupation or Position, Year Became and Directorships of Other Publicly Owned Companies Director L. George Klaus, 62, Chairman, President and Chief Executive Officer of Epicor 1998 Software Corporation (formerly Platinum Software Corporation) since February 1996. Mr. Klaus also currently serves as a director of Epicor Software. William P. Lyons, 58, President, Chief Executive Officer and a director of 1992 Caminus Corporation, an integrated software company providing solutions for the energy markets, since July 2002. From January 2001 to July 2002, when it was sold to Ratimal Software, Mr. Lyons served as President, Chief Executive Officer and a director of NeuVis Inc., an Internet Rapid Application Development (I-Rad) company . From February 1998 to January 2001, Mr. Lyons served as President, Chief Executive Officer and a director of Finjan Software, Inc. Lee D. Roberts, 50, Chairman of the Board of the Company since December 2000 and 1998 Chief Executive Officer since April 1998. Mr. Roberts served as our President from May 1997 to October 2000 and as our Chief Operating Officer from May 1997 until April 1998. Mr. Roberts has also served as a director of the Company since May 1998. Prior to joining the Company in May 1997, Mr. Roberts was employed by IBM for over 20 years, serving most recently as General Manager and Vice President, Worldwide Marketing and Sales for the Networking Division of IBM. Mr. Roberts also currently serves as a director of Onyx Software. John C. Savage, 55, Managing Director of Alliant Partners, an investment banking 1982 firm, since June 1998. Since the acquisition of Alliant Partners by Silicon Valley Bankshares in September 2001, Mr. Savage has been a Managing Director of Alliant Partners. From 1990 to July 1998, Mr. Savage served as Managing Partner of Glenwood Capital Partners and Managing Director of its successor, Redwood Partners, LLC, both venture buy-out firms. Roger S. Siboni, 48, President, Chief Executive Officer and a director of 1998 Epiphany, Inc. since August 1998. From October 1996 to August 1998, Mr. Siboni was Deputy Chairman and Chief Operating Officer of KPMG Peat Marwick LLP, a member firm of KPMG International. From 1993 to October 1996, Mr. Siboni was Managing Partner of KPMG Peat Marwick LLP, Information, Communication and Entertainment practice. Mr. Siboni also currently serves as a director of Cadence Design Systems, Inc. 20 Theodore J. Smith, 73, Chairman of the Board of the Company from its inception 1982 in 1982 to December 2000 and has been a director of the Company since 1982. Mr. Smith served as the Chief Executive Officer of the Company from its inception in 1982 to April 1998, and President of the Company from 1982 to May 1997. Mr. Smith is also currently a director of Intershop Communications, A.G. Except as otherwise indicated, during the past five years, each of the nominees has held the same position with the same entities as listed above. The Board of Directors held seven meetings during the year ended December 31, 2002. All of our directors attended or participated in at least 75% of the aggregate number of meetings of the Board of Directors. Each director attended at least 75% of the aggregate number of meetings of those committees of the Board of Directors on which such person served, which were held during such period. The Company has standing Audit, Compensation and Nominating/Corporate Governance Committees. Committees of the Board of Directors Audit Committee. The Audit Committee currently consists of three directors, Messrs. Lyons, Savage and Siboni, each of whom is independent (as defined in Rule 4200(a)(15) of the National Association of Securities Dealers' listing standards). The Audit Committee held five meetings during the year ended December 31, 2002. The Audit Committee's responsibilities include recommending the selection of the Company's independent public accountants to the Board of Directors, as well as reviewing (i) the scope and results of the audit engagement with the independent public accountants and management, (ii) the adequacy of the Company's internal accounting control procedures, (iii) the independence of the independent public accountants, and (iv) the range of audit and non-audit fees charged by the independent public accountants. The Board of Directors of the Company adopted an Audit Committee charter in December 2000; during 2003, the Audit Committee and the Board of Directors expect to review this charter and the responsibilities of the Audit Committee and make appropriate revisions to satisfy the applicable requirements of the Sarbanes-Oxley Act of 2002 and the Nasdaq. Compensation Committee. During 2002, Messrs. Lyons and Klaus comprised the Compensation Committee. The Compensation Committee held three meetings during the year ended December 31, 2002. The compensation committee is responsible for, among other things: o Reviewing, establishing and revising the compensation policy for our officers; o Producing an annual report on executive compensation for inclusion in our annual proxy statement, in accordance with applicable rules and regulations; o Reviewing and approving corporate goals and objectives relevant to the compensation of the chief executive officer and other senior officers, evaluating the performance of these officers in light of those goals and objectives and setting the compensation of these officers based on the evaluation, and other relevant factors; o Reviewing and approving our benefit plans and perquisites and making recommendations to the board of directors; o Acting as administrator of the Company's 1998 Employee Stock Purchase Plan, as amended, 1995 Stock Option Plan, as amended, and 2002 Incentive Award Plan; o Making awards under the 1995 Stock Option Plan and 2002 Incentive Award Plan to the Company's executive officers; and 21 o Performing other related functions upon request of the Board of Directors. In addition, in December 1999, the Board of Directors appointed Mr. Roberts as the sole member of a Special Stock Option Committee which has separate but concurrent authority with the Compensation Committee to make discretionary option grants to eligible individuals, other than executive officers and non-employee Board members, subject to a limitation of 20,000 shares per individual employee grant. The Special Stock Option Committee acted by written consent on 12 occasions during 2002. The Nominating/Corporate Governance Committee. The Nominating Committee was formed in December of 2001 and, in November 2002, the Board expanded the Committee's duties to include oversight of corporate governance and changed the name of the Committee to reflect inclusion of corporate governance responsibilities. The Board also increased the number of members on the Committee. The Nominating/Corporate Governance Committee currently consists of Messrs. Siboni, Savage, Smith and Klaus. The Nominating/Corporate Governance Committee will be responsible for, among other things: o Identifying individuals who are qualified to be members of the board of directors and selecting, or recommending that the board select, the nominees for directorships; o Developing and recommending to the board of directors a set of corporate governance principles applicable to the Company; o Establishing the criteria and procedures for selecting new directors; o Overseeing the process for evaluating the board of directors and management; o Reviewing and evaluating, at least annually, the performance of the nominating and corporate governance committee and its members, including the compliance of the nominating and corporate governance committee with its charter; and o Making recommendations regarding director fees to the Board of Directors. The Company's Bylaws allow stockholders entitled to vote in the election of directors to submit nominations for the election of directors. Nominations must forwarded in writing to the Corporate Secretary of the Company so that the nomination is received no later than 90 days prior to the annual meeting. In the event less than 100 days notice of the date of the meeting is given to stockholders, notice must be received no later than the tenth day following the day on which notice of the meeting is given. Each notice must set forth (a) the name and address of the stockholder and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Company; (c) a description of all arrangements or understandings between the stockholder and each nominee; (d) other information regarding each nominee as is required to be disclosed in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated by the Board of Directors; and (e) the consent of each nominee to serve as a director of the Company if elected. Please refer to our Bylaws for complete information. Notices should be directed to the attention of the Corporate Secretary, FileNet Corporation, 3565 Harbor Boulevard, Costa Mesa, California 92626. Board Compensation and Benefits Each director who is not an employee of the Company is reimbursed for actual expenses incurred in attending Board meetings. In addition, each non-employee director received the following compensation for his Board service during 2002: (i) an annual retainer fee of $24,000; (ii) a fee of $3,000 for each Board meeting attended; and (iii) a fee of $2,000 for each Committee meeting attended which was not held on the same day as a Board meeting. 22 At the 2002 Annual Stockholders Meeting held on May 22, 2002, Messrs. Lyons, Klaus, Savage, Smith and Siboni each automatically received, upon their reelection to the Board, a stock option to purchase 7,000 shares of the Company's Common Stock under the automatic option grant provisions in effect for non-employee Board members under the 2002 Incentive Award Plan. Each option has an exercise price of $16.14 per share, representing the fair market value per share of Common Stock on the grant date. Each option vests in four successive equal annual installments on the anniversary of option grant date, subject to the optionee's continued service on the Board. The option has a maximum term of ten years measured from the grant date, subject to earlier termination following the optionee's cessation of Board service. Required Vote for Approval and Recommendation of the Board of Directors Directors will be elected by an affirmative vote of a plurality of the shares of voting stock present and entitled to vote, in person or by proxy, at the Annual Meeting. Abstentions or Broker Non-Votes as to the election of directors will not affect the election of the candidates receiving the plurality of votes. Unless instructed to the contrary, the shares represented by the proxies will be voted FOR the election of the six nominees named above as directors. Although it is anticipated that each nominee will be able to serve as a director, should any nominee become unavailable to serve, the proxies will be voted for such other person or persons as may be designated by the Company's Board of Directors. As of the date of this Proxy Statement, the Board of Directors is not aware of any nominee who is unable or will decline to serve as a director. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF ALL SIX NOMINEES NAMED ABOVE. 23 Proposal 2 APPROVAL OF AMENDMENT TO THE 2002 INCENTIVE AWARD PLAN The Company's stockholders are being asked to approve an amendment to the 2002 Incentive Award Plan (the "2002 Incentive Plan") that will increase the number of shares of Common Stock issuable under the 2002 Incentive Plan by an additional 1,400,000 shares, from 1,400,000 to 2,800,000 shares. As of March 12, 2003, 125,070 shares remain available for grant under the 2002 Incentive Plan. The purpose of the share increase is to ensure that the Company will continue to have a sufficient reserve of Common Stock available under the 2002 Incentive Plan to provide eligible employees of the Company and its participating affiliates with the opportunity to acquire a proprietary interest in the Company through participation in a comprehensive equity incentive program. The 2002 Incentive Award Plan was adopted by the Board of Directors on March 28, 2002 and became effective on May 22, 2002 (the "Effective Date"). The amendment to the 2002 Incentive Plan that is the subject of this Proposal was adopted by the Board on February 26, 2003. The following is a summary of the principal features of the 2002 Incentive Plan. The summary, however, does not purport to be a complete description of all the provisions of the 2002 Incentive Plan. Any stockholder of the Company who wishes to obtain a copy of the actual plan document may do so upon written request to the Corporate Secretary at the Company's principal executive offices in Costa Mesa, California. General Nature of the 2002 Incentive Award Plan The principal purposes of the 2002 Incentive Plan are to provide incentives for independent directors, consultants and key employees of the Company and its subsidiaries to further the growth, development and financial success of the Company by personally benefiting through the ownership of Company stock, and to obtain and retain the services of such individuals who are considered essential to the long range success of the Company through the grant or issuance of options, restricted stock, stock appreciation rights, performance awards, dividend equivalents, deferred stock and stock payments (collectively, "Awards"). Shares Reserved Under the 2002 Incentive Plan, the aggregate number of shares of Common Stock that may be issued upon the exercise of options or any other Award is 2,800,000 shares, which includes the 1,400,000 share increase for which stockholder approval is sought under this proposal. As previously approved under the original 2002 Incentive Plan, only 140,000 shares may be issued as Restricted Stock. Additionally, the 2002 Incentive Plan limits the number of Awards that may be granted to any one individual during any calendar year to 400,000 shares and the amount of performance awards is limited to $750,000 per employee during any calendar year. On March 12, 2003, the average of the high and low price of a share of the Company's Common Stock on the Nasdaq Stock Market was $11.44. The shares of Common Stock available for issuance under the 2002 Incentive Plan may be either previously authorized and unissued shares or treasury shares. The 2002 Incentive Plan provides for appropriate adjustments in the number and kind of shares subject to the 2002 Incentive Plan and to outstanding Awards thereunder in the event of a stock split, stock dividend and certain other types of transactions. Available for future issuance under the Plan are (i) shares subject to expired, exchanged or canceled Options; (ii) shares subject to restricted stock or other Awards which are forfeited by the Participant or repurchased by the Company; (iii) shares subject to Awards which terminate without payment being made; and (iv) shares delivered by the Participant or withheld by the Company upon exercise or purchase of any Award in payment of the exercise or purchase price of such Award or any related tax-withholding obligation. 24 Administration The 2002 Incentive Plan is generally administered by the Compensation Committee, consisting of at least two members of the Board who are both "non-employee" directors for purposes of Section 16-b of the Exchange Act and "outside directors" under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code. However, with respect to grants under the 2002 Incentive Plan to independent directors, the Board as a whole shall administer the 2002 Incentive Plan. The Compensation Committee, however, has the power to delegate authority for administration of the Plan as to Awards made to certain employees to a committee comprised of one or more of our executive officers. The Committee, the subcommittee and the Board are collectively referred to as the "Administrator" herein. The Administrator is authorized to determine the individuals who will receive Awards (the "Participants"), when they will receive Awards, the number of shares to be subject to each Award, whether Options are to be incentive stock options or non-qualified stock options and whether an Award is to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Internal Revenue Code; the price of the Awards granted, payment terms, payment method, vesting requirements, including any specific performance goals and any Performance Criteria (as defined) to be used, any vesting acceleration provisions and the expiration date applicable to each Award. The Administrator is also authorized to adopt, amend and rescind rules relating to the administration of the 2002 Incentive Plan. Eligibility Awards under the 2002 Incentive Plan may be granted to employees of the Company or any of its present or future subsidiaries, consultants to the Company and Independent Directors. More than one Award may be granted to an employee, consultant or Independent Director. As of March 12, 2003, fifteen executive officers, five non-employee Board members and approximately 1,657 other employees and consultants were eligible to participate in the 2002 Incentive Plan Awards Under the 2002 Incentive Plan The 2002 Incentive Plan provides that the Committee may grant options (both incentive stock options ("ISOs") within the meaning of Section 422 of the Internal Revenue Code and options that do not qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code ("NSOs" or "non-qualified options") and restricted stock. Each Award grant will be set forth in both a notice of grant and option agreement with the person receiving the Award and will indicate the type, terms and conditions of the Award. For purposes of the 2002 Incentive Plan, "fair market value" means the average of the high and low selling prices of a share of Common Stock as of a given date. Nonqualified Stock Options. Nonqualified Stock Options provide for the right to purchase Common Stock at a specified price which may not be less than 85% of the fair market value of our common stock on the date of grant, and usually will become exercisable (in the discretion of the Committee) in one or more installments after the grant date. NSOs may be granted for any term not exceeding ten years after the grant date, as specified by the Committee. Incentive Stock Options. Incentive Stock Options ("ISOs") will be designed to comply with the provisions of the Internal Revenue Code and will be subject to certain restrictions contained in the Internal Revenue Code. Among such restrictions, ISOs must have an exercise price not less than the fair market value of a share of Common Stock on the date of grant, may only be granted to employees, must expire within a specified period of time following the optionee's termination of employment, and must be exercised within ten years after the date of grant; but may be subsequently modified to disqualify them from treatment as ISOs. In the case of an ISO granted to an individual who owns (or is deemed to own) at least 10% of the total combined voting power of all classes of stock of the Company, the 2002 Incentive Plan provides that the exercise price must be at least 110% of the fair market value of a share of Common Stock on the date of grant and the ISO must expire no later than the 25 fifth anniversary of the date of its grant. The aggregate fair market value (determined at the time of grant) of shares with respect to which an ISO (as defined herein) is first exercisable by an optionee (i.e., "vests") during any calendar year cannot exceed $100,000. Automatic Grant of Options to Independent Directors. The 2002 Incentive Plan provides for automatic grants to Independent Directors of NSOs to purchase 7,000 shares on the date of each annual meeting of stockholders at which the Independent Director is reelected to the Board. Additionally, during the term of the 2002 Incentive Plan, the Plan automatically grants to any person who is initially elected or appointed to the Board after May 22, 2002 and who is an Independent Director at the time of such initial election or appointment (1) an option to purchase 25,000 shares on the date of such initial election or appointment and (2) an option to purchase 7,000 shares on the date of each annual meeting of stockholders at which the Independent Director is elected to the Board, provided such person has served as an Independent Director for at least 6 months prior to the annual meeting of stockholders. Options automatically granted to Independent Directors have an exercise price equal to the fair market value of our common stock on the date of grant, and vest in equal annual installments of 25% from the date of grant, subject to accelerated vesting upon the happening of certain events including any change in control or corporate transactions (as defined). The Independent Director shall have until the earlier of (i) ten years following option grant date or (ii) 12 months following cessation of Board Service, to exercise his or her vested options. The Board may also grant options to Independent Directors from time to time, on such terms as the Board deems appropriate. Restricted Stock. Restricted stock may be sold to Participants at various prices or granted in connection with the performance of services and made subject to such restrictions as may be determined by the Administrator. Restricted stock, typically, may be repurchased by the Company at the original purchase price or otherwise subject to forfeiture, if the conditions or restrictions are not met. In general, restricted stock may not be sold, or otherwise transferred or hypothecated, until restrictions are removed or expire. Purchasers of restricted stock, unlike recipients of options, will have voting rights and will receive dividends prior to the time the restrictions lapse. To the extent that the Administrator determines that it is desirable for a grant of restricted stock to qualify as "performance based" under Internal Revenue Code Section 162(m), such grant of restricted stock shall be subject to vesting only upon attainment of performance goals, which are pre-established by the Administrator. Such performance goals may be based upon any of the following business criteria with respect to the Company, any subsidiary or any division or operating unit thereof, as the Administrator may determine: (1) net income; (2) pre-tax income; (3) operating income; (4) cash flow; (5) earnings per share; (6) return on equity; (7) return on invested capital or assets; (8) cost reductions or savings; (9) funds from operations; (10) appreciation in the fair market value of Common Stock; or (11) earnings before any one or more of interest, taxes, depreciation or amortization (the "Performance Criteria"). Stock Appreciation Rights. A Stock Appreciation Right ("SAR") may be granted in connection and simultaneously with the grant of an option, or with respect to a previously granted option, or independent of an option. The Administrator determines the terms and conditions of a Stock Appreciation Right. A coupled SAR is related to a particular option, is granted for no more than the number of shares subject to the simultaneously or previously granted option, and is exercisable only when and to the extent that the Participant may exercise the related option. An independent SAR is unrelated to any option, and has terms (including the number of shares of common stock covered and the vesting installments) that are set by the Administrator. Payment for SARs may be in cash, common stock or a combination of both, as determined by the Administrator. Deferred Stock. Deferred stock may be awarded to Participants, typically without payment of consideration, but subject to vesting conditions based upon a vesting schedule or performance criteria established by the Administrator. Unlike restricted stock, deferred stock will not be issued until the deferred stock award has vested, and recipients of deferred stock generally will have no voting or dividend rights prior to the time the vesting conditions are satisfied. Performance Awards. The value of a Performance Award may be linked either to the Performance Criteria specified in the 2002 Incentive Plan or to any other performance criteria determined appropriate by the Administrator. In making such determinations, the Administrator considers, among other factors, the Participant's contributions, responsibilities and other compensation received. The maximum amount of cash bonuses that may be paid as a Performance Award is limited to $750,000 per calendar year per person. 26 Dividend Equivalents. Dividend Equivalents are based on the dividend declared on our common stock and are credited as of dividend payment dates, as specified in the 2002 Incentive Plan. Such Dividend Equivalents are converted to cash or additional shares of our common stock by such formula, at such time and subject to such limitations as may be determined by the Administrator. Stock Payments. The number of shares for Stock Payments awarded under the 2002 Incentive Plan is determined by the Administrator and may be linked to the market value, book value, net profits or other measure of the value of common stock or other specific Performance Criteria determined to be appropriate by the Administrator. Payment for Shares The exercise price for all options may be paid in full in cash at the time of exercise, or if permitted by the Committee in its discretion (1) by delay in payment for up to 30 days, (2) by delivery of Common Stock owned by the Participant for at least six months, or the surrender of shares of common stock then issuable upon exercise of the option, in each case having a fair market value on the date of exercise equal to the aggregate exercise price of the exercised option; (3) by a full recourse promissory note bearing interest at a market rate of interest; (4) by an irrevocable instruction to a broker to deliver to the Company sale or loan proceeds to pay for all of the Common Stock acquired by exercising the options and any tax withholding obligations resulting from such exercise, (5) by delivery of other property of any kind which constitutes good and valuable consideration, or (6) any combination of the foregoing. In the discretion of the Administrator, restricted stock awards may be made for a purchase price or in consideration of performance of prior services for the Company or any subsidiary. Amendment and Termination The Administrator may terminate the 2002 Incentive Plan at any time. The Administrator may also amend the Plan wholly or in part at any time, however, the board of directors must obtain stockholder approval in order to (i) increase the number of shares of common stock subject to the 2002 Incentive Plan or the maximum number of shares of common stock which may be awarded to any individual during any calendar year, except for any increase or other change due to stock dividends, split-ups, consolidations, recapitalizations, reorganization or like events; or (ii) amend the 2002 Incentive Plan in a manner that requires stockholder approval under applicable law. Amendments of the 2002 Incentive Plan will not, without the consent of the Participant, affect such person's rights under an Award previously granted, unless the Award itself otherwise expressly so provides. No Awards may be granted under the 2002 Incentive Plan after February 13, 2012. The Board may terminate the 2002 Incentive Plan at any time prior to such date with respect to the shares that are not then subject to Awards. Termination of the 2002 Incentive Plan will not affect the rights and obligations of any Participant with respect to Awards granted before termination. Terms of Awards The dates on which options or other Awards under the 2002 Incentive Plan first become exercisable and on which they expire will be set forth in individual Award notices and agreements setting forth the terms of the Awards. These Agreements generally will provide that options and other Awards expire upon termination of the Participant's employment, although the Administrator may provide that such options or other Awards continue to be exercisable following a termination, or because of the grantee's retirement, death, disability or otherwise. Similarly, restricted stock granted under the 2002 Incentive Plan which has not vested generally will be subject to repurchase by the Company in the event of the grantee's termination of employment, although the Administrator may make exceptions, based on the reason for termination, or on other factors. In the event of certain stated events in the 2002 Incentive Plan which may affect the Company, such as merger, consolidation, liquidation, dissolution or sale of all or substantially all the assets of the Company, the Administrator in its sole discretion may take certain actions with respect to Awards under the 2002 Incentive Plan, including acceleration of the exercisability of any options or the vesting in any restrictions on restricted stock, the purchase of 27 outstanding Awards, the substitution, assumption or replacement of any awards, and other similar adjustments to facilitate any such transactions. The Administrator may also provide that all Awards shall cease to be outstanding following such events. In consideration of the granting of a stock option or shares of restricted stock, the Participant must agree in the written agreement embodying such Award to remain in the employ of or to continue to be of service to, the Company or a subsidiary. No Award under the 2002 Incentive Plan may be assigned or transferred by the Participant, except by will or the laws of interstate succession, or, with the consent of the Administrator, pursuant to a Domestic Relations Order or to certain family member trusts without consideration therefore. Miscellaneous Provisions In the event that the outstanding shares of Common Stock of the Company are changed into or exchanged for a different number or kind of shares of capital stock or other securities of the Company by reason of merger, reorganization, consolidation, recapitalization, reclassification, stock split, reverse stock split, stock dividend, combination of shares, or otherwise, the number and kind of shares covered by the 2002 Incentive Plan, the maximum number of shares that may be granted during any calendar year, the number and kind of shares covered by, and the exercise or purchase price of, each outstanding option and other award, and other limitations on shares applicable under the 2002 Incentive Plan, shall be proportionately adjusted. Certain Federal Income Tax Consequences The federal income tax consequences of the 2002 Incentive Plan under current federal income tax law are summarized in the following discussion that deals with the general tax principles applicable to the 2002 Incentive Plan, and is intended for general information only. In addition, the tax consequences described below are subject to the limitations of Internal Revenue Code Section 162(m), as discussed in further detail below. Alternative minimum tax and other federal taxes and foreign, state and local income taxes are not discussed, and may vary depending on individual circumstances and from locality to locality. Nonqualified Stock Options. For federal income tax purposes, the recipient of NSOs granted under the 2002 Incentive Plan will not have taxable income upon the grant of the option, nor will the Company then be entitled to any deduction. Generally, upon exercise of NSOs the optionee will realize ordinary income, and the Company will be entitled to a deduction, in an amount equal to the difference between the option exercise price and the fair market value of the stock at the date of exercise. Incentive Stock Options. An optionee generally will not recognize taxable income upon either the grant or exercise of an ISO. However, the amount by which the fair market value of the shares at the time of exercise exceeds the exercise price will be an "item of tax preference" for the optionee. Generally, upon the sale or other taxable disposition of the shares of Common Stock acquired upon exercise of an ISO, the optionee will recognize income taxable as capital gains in an amount equal to the excess, if any, of the amount realized in such disposition over the option exercise price, provided that no disposition of the shares has taken place within either (a) two years from the date of grant of the ISO or (b) one year from the date of exercise. If the shares of Common Stock are sold or otherwise disposed of before the end of the one-year and two-year periods specified above, the difference between the ISO exercise price and the fair market value of the shares on the date of exercise generally will be taxable as ordinary income; the balance of the amount realized from such disposition, if any, generally will be taxed as capital gain. If the shares of Common Stock are disposed of before the expiration of the one-year and two-year periods and the amount realized is less than the fair market value of the shares at the date of exercise, the optionee's ordinary income generally is limited to the excess, if any, of the amount realized in such disposition over the option exercise price paid. The Company (or other employer corporation) generally will be entitled to a tax deduction with respect to an ISO only to the extent the optionee has ordinary income upon sale or other disposition of the shares of Common Stock. An Option will only qualify as an incentive stock option to the extent that the aggregate fair market value of the shares with respect to which the Option becomes exercisable for the first time in any calendar year is equal to or less 28 than $100,000. For purposes of this rule, the fair market value of shares shall be determined as of the date the incentive stock option is granted. To the extent an incentive stock option is exercisable for shares in excess of this $100,000 limitation, the excess shares shall be taxable under the rules for "Non-Qualified Stock Options," described above. Restricted Stock and Deferred Stock. A Participant to whom restricted or deferred stock is issued will not have taxable income upon issuance and we will not then be entitled to a deduction, unless in the case of restricted stock an election is made under Section 83(b) of the Internal Revenue Code. However, when restrictions on shares of restricted stock lapse, such that the shares are no longer subject to repurchase by us, the Participant will realize ordinary income and we will be entitled to a deduction in an amount equal to the fair market value of the shares at the date such restrictions lapse, less the purchase price therefor. Similarly, when deferred stock vests and is issued to the Participant, the Participant will realize ordinary income and we will be entitled to a deduction in an amount equal to the fair market value of the shares at the date of issuance. If an election is made under Section 83(b) with respect to restricted stock, the employee will realize ordinary income at the date of issuance equal to the difference between the fair market value of the shares at that date less the purchase price therefore and we will be entitled to a deduction in the same amount. The Internal Revenue Code does not permit a Section 83(b) election to be made with respect to deferred stock. Stock Appreciation Rights. No taxable income is generally recognized by the Participant upon the receipt of an SAR, but upon exercise of the SAR the fair market value of the shares (or cash in lieu of shares) received generally will be taxable as ordinary income to the Participant in the year of such exercise. The Company generally will be entitled to a compensation deduction for the same amount that the Participant recognizes as ordinary income. Dividend Equivalents. A recipient of a dividend equivalent award will not realize taxable income at the time of grant, and we will not be entitled to a deduction at that time. When a dividend equivalent is paid, the Participant will recognize ordinary income, and we will be entitled to a corresponding deduction. Performance Awards. A Participant who has been granted a performance award will not realize taxable income at the time of grant, and we will not be entitled to a deduction at that time. When an award is paid, whether in cash or common shares, the Participant will have ordinary income, and we will be entitled to a corresponding deduction. Stock Payments. A Participant who receives a stock payment in lieu of a cash payment that would otherwise have been made will be taxed as if the cash payment has been received, and we will have a deduction in the same amount. Section 162(m). Under Internal Revenue Code Section 162(m), in general, income tax deductions of publicly-traded companies may be limited to the extent total compensation (including base salary, annual bonus, stock option exercises and nonqualified benefits paid in 1994 and thereafter) for certain executive officers exceeds $1 million in any one taxable year. However, under Internal Revenue Code Section 162(m), the deduction limit does not apply to certain "performance-based" compensation established by an independent compensation committee which conforms to certain restrictive conditions stated under the Internal Revenue Code and related regulations. The 2002 Incentive Plan has been structured with the intent that Awards granted under the 2002 Incentive Plan may meet the requirements for "performance-based" compensation and Internal Revenue Code Section 162(m). To the extent granted, a fair market value exercise price, options granted under the 2002 Incentive Plan are intended to qualify as "performance-based" under Section 162(m) of the Internal Revenue Code. Restricted Stock granted under the 2002 Incentive Plan may qualify as "performance-based" under Internal Revenue Code Section if it vests based solely upon the Performance Criteria. Required Vote for Approval and Recommendation of the Board of Directors The affirmative vote of a majority of the Company's voting stock present or represented and entitled to vote at the Annual Meeting is required for approval of the amendment to the 2002 Incentive Plan providing for a 1,400,000 share increase under the 2002 Incentive Plan. Abstentions on this proposal will be 29 counted for purposes of determining the total number of shares that voted on the proposal and thus will have the effect of a vote against the proposal. Broker Non-Votes will not be deemed to be entitled to vote for purposes of determining whether stockholder approval of this proposal has been obtained and will have no effect on the outcome of this proposal. Should stockholder approval not be obtained, then the 1,400,000 share increase will not be implemented, and any options granted on the basis of that increase will immediately terminate. No additional options will be granted on the basis of such share increase, and the 2002 Incentive Plan will terminate once the existing share reserve has been issued. THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR APPROVAL OF THE AMENDMENT TO THE 2002 INCENTIVE AWARD PLAN. 30 AUDIT COMMITTEE REPORT The following is the report of the Audit Committee with respect to FileNet Corporation's audited financial statements for the year ended December 31, 2002, which include the consolidated balance sheets of the Company as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2002, and the notes thereto. Review with Management. The Audit Committee has reviewed and discussed the Company's audited financial statements with management. Review and Discussions with Independent Accountants. The Audit Committee has discussed with Deloitte and Touche LLP, the Company's independent accountants, the matters required to be discussed by SAS 61 (Codification of Statements on Accounting Standards) which includes, among other items, matters related to the conduct of the audit of the Company's financial statements. The Audit Committee has also received written disclosures and the letter from Deloitte and Touche LLP required by Independence Standards Board Standard No. 1 (which relates to the accountant's independence from the Company and its related entities) and has discussed with Deloitte and Touche LLP their independence from the Company. Conclusion. Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the Company's audited financial statements be included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Submitted by the Audit Committee of the Company's Board of Directors: John C. Savage William P. Lyons Roger S. Siboni Notwithstanding anything to the contrary set forth in any of the Company's previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, which might incorporate future filings made by the Company under those statutes, the preceding Audit Committee Report will not be incorporated by reference into any of those prior filings, nor will such report be incorporated by reference into any future filings made by the Company under those statutes. FEES BILLED TO US BY DELOITTE AND TOUCHE LLP DURING 2002 Audit Fees. The aggregate fees billed by Deloitte and Touche LLP, the member firms of Deloitte Tomatsu, and their respective affiliates (collectively, "Deloitte") for professional services rendered for the audit of the Company's annual financial statements for 2002 and for the review of the financial statements included in the Company's Quarterly Reports on Form 10-Q for 2002 were approximately $470,893. Financial Information Systems Design and Implementation Fees. The Company did not engage Deloitte to provide services regarding financial information systems design and implementation during the year ended December 31, 2002. All Other Fees. The aggregate fees billed by Deloitte for professional services rendered to the Company, other than the services described above under "Audit Fees", for the year ended December 31, 2002 were approximately $369,113 and can be subcategorized as follows: Audit-Related Fees. The aggregate fees billed by Deloitte for professional services rendered to the Company for the audit of employee benefit plans, 31 internal control reviews, consultation concerning financial accounting and reporting standards, and audits related to mergers and acquisitions, for the year ended December 31, 2002, were approximately $109,068. Tax Fees. The aggregate fees billed by Deloitte for professional services rendered to the Company for tax compliance, tax planning, general tax advice, employee benefit plans, requests for rulings or technical advice from taxing authorities, and tax advice related to international tax matters and mergers and acquisitions, for the year ended December 31, 2002, were approximately $260,045. The audit committee has considered whether the provision of non-audit services is compatible with maintaining the principal accountant's independence. RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS The firm of Deloitte and Touche LLP, the Company's independent accountants for the year ended December 31, 2002, was selected by the Board of Directors, upon recommendation of the Audit Committee, to act in the same capacity for the year ending December 31, 2003. Neither the firm nor any of its members has any relationship with the Company or any of its affiliates except in the firm's capacity as the Company's auditor. In the event that the stockholders do not approve the selection of Deloitte and Touche LLP, the appointment of the independent accountants will be reconsidered by the Board of Directors. Even if the selection is ratified, the Board of Directors in its discretion may direct the appointment of a different independent accounting firm at any time during the year if the Board of Directors believes that such a change would be in the best interests of the Company and its stockholders. Representatives of Deloitte and Touche LLP are expected to be present at the Annual Meeting and will have the opportunity to make statements if they so desire and respond to appropriate questions from the stockholders. Stockholder Ratification The affirmative vote of a majority of the Company's voting stock present or represented and entitled to vote at the Annual Meeting is required for ratification of the appointment of Deloitte and Touche LLP to serve as the Company's independent accountants for 2003. Abstentions on this proposal will be counted for purposes of determining the total number of shares that voted on the proposal and thus will have the effect of a vote against the proposal. Broker Non-Votes will not be deemed to be entitled to vote for purposes of determining whether stockholder approval of this proposal has been obtained and will have no effect on the outcome of this proposal. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF DELOITTE AND TOUCHE LLP AS THE COMPANY'S INDEPENDENT ACCOUNTANTS. STOCKHOLDER PROPOSALS FOR 2004 ANNUAL MEETING It is currently contemplated that the Company's 2004 Annual Meeting of Stockholders will be held on or about May 19, 2004. In the event that a stockholder desires to have a proposal considered for presentation at the 2004 Annual Meeting of Stockholders, and inclusion in the proxy statement and form of proxy used in connection with such meeting, the proposal must be forwarded in writing to the Corporate Secretary of the Company so that it is received no later than December 4, 2003. Any such proposal must comply with the requirements of the Company's Bylaws and Rule 14a-8 promulgated under the Exchange Act. If a stockholder, rather than including a proposal in the Company's proxy statement as discussed above, commences his or her own proxy solicitation for the 2004 Annual Meeting of Stockholders or seeks to nominate a candidate for 32 election or propose business for consideration at such meeting, the Company must receive notice of such proposal no later than February 19, 2004. If the notice is not received by such date, it will be considered untimely under the Company's Bylaws, and the Company will have discretionary voting authority under proxies solicited for the 2004 Annual Meeting of Stockholders with respect to such proposal, if presented at the meeting. Proposals and notices should be directed to the attention of the Corporate Secretary, FileNet Corporation, 3565 Harbor Boulevard, Costa Mesa, California 92626. OTHER MATTERS As of the date of this Proxy Statement, the Board of Directors knows of no other matters that may be presented for consideration at the Annual Meeting. However, if any other matter is presented properly for consideration and action at the Annual Meeting, or any adjournment or postponement thereof, it is intended that the Proxies will be voted with respect thereto in accordance with the best judgment and in the discretion of the proxy holders. April 2, 2003 By Order of the Board of Directors, /s/ Sam M. Auriemma Sam M. Auriemma Secretary 33 APPENDIX A AMENDMENT TO THE 2002 INCENTIVE AWARD PLAN OF. FILENET CORPORATION This Amendment to the 2002 Incentive Award Plan of FileNet Corporation ("Amendment") is adopted by FileNet Corporation, a Delaware corporation (the "Company"), effective as of May 7, 2003. RECITALS The 2002 Incentive Award Plan of FileNet Corporation (the "Plan") was approved by the Board of Directors on March 28, 2002 and by the stockholders on May 22, 2002. Section 11.2 of the Plan provides that the Plan may be amended by the Board of Directors to increase the maximum number of securities that may be issued under the Plan, subject to obtaining stockholder approval. Capitalized terms used in this Amendment shall have the meanings assigned to them in the Plan. AMENDMENT Subsection (a) of Section 2.1 of the Plan is hereby amended in its entirety as follows: 2.1. Shares Subject to Plan. (a) The shares of stock subject to Awards shall be Common Stock, initially shares of the Company's Common Stock. Subject to adjustment as provided in Section 11.3, the aggregate number of such shares which may be issued upon exercise of such Options or rights or upon any other Awards under the Plan shall not exceed Two Million Eight Hundred Thousand (2,800,000) shares, and the aggregate number of shares that may be issued as Restricted Stock shall not exceed One Hundred and Forty Thousand (140,000) shares. The shares of Common Stock issuable upon exercise of such Options or rights or upon any other Awards may be either previously authorized but unissued shares or treasury shares." The undersigned, Sam M. Auriemma, Senior Vice President, Chief Financial Officer and Secretary of the Company, hereby certifies that the Board adopted the foregoing Amendment on February 26, 2003, and the stockholders approved the foregoing Amendment on May 7, 2003. Executed at , California this day of May 2003. FileNet Corporation, a Delaware corporation By: Sam. M. Auriemma Senior Vice President, Chief Financial Officer and Secretary 34 [FileNet Corporation logo] Dear Stockholder: Please fill out, sign and return your Proxy card promptly or use our telephone or Internet voting capabilities. Your vote is very important. Thank you for your cooperation. FileNet Corporation DETACH HERE PROXY FILENET CORPORATION 3565 Harbor Boulevard Costa Mesa, California 92626 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints Sam Auriemma and Lee Roberts as Proxy holders, or either of them acting alone, each with the power to appoint his substitute, and hereby authorizes them to represent and vote, as designated below, all of the shares of Common Stock of FileNet Corporation (the "Company"), held of record by the undersigned on March 12, 2003, at the 2003 Annual Meeting of Stockholders to be held at 9:00 a.m., Pacific time, on May 7, 2003, at The Mondavi Center, 1570 Scenic Avenue, Costa Mesa, California 92626, and any adjournment thereof (the "Annual Meeting"). ALL STOCKHOLDERS ARE INVITED TO ATTEND THE ANNUAL MEETING. WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR REPRESENTATION AT THE ANNUAL MEETING. A POSTAGE-PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. SEE REVERSE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE SIDE SEE REVERSE SIDE SIDE FILENET CORPORATION C/O EQUISERVE TRUST COMPANY, N.A. P.O. BOX 8694 EDISON, NJ 08818-8694 Voter Control Number Your vote is important. Please vote immediately. Vote-by-Internet Vote-by-Telephone 1. Log on to the Internet and go to 1. Call toll-free http://www.eproxyvote.com/file. 1-877-PRX-VOTE (1-877-779-8683) OR 2. Enter your Voter Control Number listed 2. Enter your Voter Control Number listed above and follow the easy steps outlined above and follow the easy recorded on the secured website. instructions. If you vote over the Internet or by telephone, please do not mail your card. DETACH HERE IF YOU ARE RETURNING YOUR PROXY CARD BY MAIL Please mark [ X ] votes as in this example. This Proxy when properly executed will be voted in the manner directed herein by the undersigned stockholder. If no direction is given, this Proxy will be voted FOR the election to the Board of ALL the nominees listed below and FOR proposals 2 and 3. In their discretion, the Proxy holders are authorized to vote upon such other business as may properly come before the meeting or any adjournment or postponement thereof. 1. Election of Directors. Nominees: (01) L. George Klaus, (02) William P. Lyons, (03) Lee D. Roberts, (04) John C. Savage, (05) Roger S. Siboni and (06) Theodore J. Smith FOR WITHHELD ALL FROM ALL NOMINEES [ ] NOMINEES [ ] For all nominees except as noted above FOR AGAINST ABSTAIN 2. To approve an amendment to Company's [ ] [ ] [ ] 2002 Incentive Award Plan to increase the number of shares of Common Stock available for issuance thereunder by an additional 1,400,000 shares. FOR AGAINST ABSTAIN 3. To ratify the appointment of Deloitte and [ ] [ ] [ ] Touche LLP as the independent accountants of the Company for its year ending December 31, 2003. To transact such other business as may properly come before the meeting. MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT Please date this Proxy and sign it exactly as your name or names appear. When shares are held by joint tenants, both should sign. When signing as an attorney, executor, administrator, trustee or guardian, please give full title as such. If shares are held by a corporation, please sign in full corporate name by the president or other authorized officer. If shares are held by a partnership, please sign in full partnership name by an authorized person. Signature: Date: Signature: Date:
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DEF 14A Filing
Filenet (FILE) Inactive DEF 14ADefinitive proxy
Filed: 31 Mar 03, 12:00am