e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2005 |
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OR |
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 0-25871
INFORMATICA CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware |
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77-0333710 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
100 Cardinal Way
Redwood City, California 94063
(Address of principal executive offices)
(650) 385-5000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days: Yes þ No o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act): Yes þ No o
As of August 1, 2005, there were approximately
87,833,000 shares of the registrants common stock
outstanding.
INFORMATICA CORPORATION
Table of Contents
1
PART I: FINANCIAL INFORMATION
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ITEM 1. |
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
INFORMATICA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, | |
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December 31, | |
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2005 | |
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2004 | |
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(Unaudited) | |
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(In thousands) | |
ASSETS |
Current assets:
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Cash and cash equivalents
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$ |
74,167 |
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$ |
88,941 |
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Short-term investments
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176,347 |
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152,160 |
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Accounts receivable, net
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30,670 |
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42,535 |
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Prepaid expenses and other current assets
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10,109 |
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7,837 |
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Total current assets
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291,293 |
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291,473 |
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Restricted cash
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12,166 |
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12,166 |
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Property and equipment, net
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22,258 |
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20,063 |
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Goodwill
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81,897 |
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82,245 |
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Intangible assets, net
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4,766 |
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2,880 |
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Other assets
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846 |
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941 |
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Total assets
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$ |
413,226 |
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$ |
409,768 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
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Accounts payable
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$ |
3,872 |
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$ |
7,476 |
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Accrued liabilities
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13,956 |
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15,581 |
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Accrued compensation and related expenses
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14,682 |
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15,681 |
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Income taxes payable
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4,954 |
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3,142 |
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Accrued facilities restructuring charges
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18,984 |
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20,080 |
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Accrued merger costs
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67 |
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209 |
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Deferred revenues
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68,260 |
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62,443 |
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Total current liabilities
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124,775 |
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124,612 |
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Accrued facilities restructuring charges, less current portion
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82,635 |
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89,171 |
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Accrued merger costs, less current portion
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131 |
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263 |
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Total liabilities
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207,541 |
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214,046 |
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Commitments and contingencies
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Stockholders equity:
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Common stock
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389,338 |
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390,035 |
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Deferred stock-based compensation
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(504 |
) |
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(1,000 |
) |
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Accumulated deficit
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(183,138 |
) |
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(195,088 |
) |
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Accumulated other comprehensive income (loss)
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(11 |
) |
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1,775 |
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Total stockholders equity
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205,685 |
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195,722 |
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Total liabilities and stockholders equity
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$ |
413,226 |
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$ |
409,768 |
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See accompanying notes to condensed consolidated financial
statements.
2
INFORMATICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended | |
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Six Months Ended | |
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June 30, | |
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June 30, | |
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2005 | |
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2004 | |
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2005 | |
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2004 | |
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(Unaudited) | |
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(In thousands, except per share data) | |
Revenues:
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License
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$ |
28,103 |
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$ |
23,292 |
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$ |
53,059 |
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$ |
48,210 |
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Service
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36,102 |
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29,742 |
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69,537 |
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58,997 |
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Total revenues
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64,205 |
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53,034 |
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122,596 |
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107,207 |
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Cost of revenues:
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License
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1,135 |
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624 |
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1,845 |
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1,725 |
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Service
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11,387 |
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9,663 |
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21,868 |
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19,746 |
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Amortization of acquired technology
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233 |
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581 |
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469 |
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1,155 |
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Total cost of revenues
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12,755 |
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10,868 |
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24,182 |
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22,626 |
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Gross profit
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51,450 |
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42,166 |
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98,414 |
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84,581 |
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Operating expenses:
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Research and development
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10,460 |
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13,924 |
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20,707 |
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27,226 |
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Sales and marketing
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29,028 |
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22,590 |
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54,386 |
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45,142 |
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General and administrative
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4,994 |
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4,709 |
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10,100 |
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9,666 |
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Amortization of intangible assets
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47 |
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48 |
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|
94 |
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103 |
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Facilities restructuring charges
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70 |
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1,628 |
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Total operating expenses
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44,599 |
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41,271 |
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86,915 |
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82,137 |
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Income from operations
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6,851 |
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|
895 |
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11,499 |
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2,444 |
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Interest income and other, net
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1,571 |
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426 |
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2,604 |
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1,115 |
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Income before provision for income taxes
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8,422 |
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1,321 |
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14,103 |
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3,559 |
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Provision for income taxes
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|
781 |
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|
342 |
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2,153 |
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|
689 |
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Net income
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$ |
7,641 |
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$ |
979 |
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$ |
11,950 |
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$ |
2,870 |
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Basic net income per common share
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$ |
0.09 |
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$ |
0.01 |
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$ |
0.14 |
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$ |
0.03 |
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Diluted net income per common share
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$ |
0.09 |
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$ |
0.01 |
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$ |
0.13 |
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$ |
0.03 |
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Shares used in computing basic net income per common share
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86,876 |
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85,557 |
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86,881 |
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85,184 |
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Shares used in computing diluted net income per common share
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89,760 |
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88,394 |
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89,502 |
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89,320 |
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See accompanying notes to condensed consolidated financial
statements.
3
INFORMATICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Six Months Ended | |
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June 30, | |
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2005 | |
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2004 | |
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(Unaudited) | |
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(In thousands) | |
Operating activities
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Net income
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$ |
11,950 |
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$ |
2,870 |
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Depreciation and amortization
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4,464 |
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|
5,257 |
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Provision for doubtful accounts and sales and returns allowances
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(203 |
) |
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(254 |
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Amortization and compensation expense related to stock options
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462 |
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2,700 |
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Amortization of intangible assets and acquired technology
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|
563 |
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1,258 |
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Non-cash facilities restructuring charges
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1,628 |
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Loss on sale of property and equipment
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3 |
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19 |
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Changes in operating assets and liabilities:
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Accounts receivable
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|
12,068 |
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|
3,211 |
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Prepaid expenses and other assets
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(4,677 |
) |
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(2,612 |
) |
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Accounts payable and accrued liabilities
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(5,229 |
) |
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|
(3,209 |
) |
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|
Accrued compensation and related expenses
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|
(999 |
) |
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|
(2,457 |
) |
|
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|
Income taxes payable
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|
1,715 |
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|
(468 |
) |
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Accrued facilities restructuring charges
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|
(9,239 |
) |
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|
(2,161 |
) |
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|
Accrued merger charges
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(37 |
) |
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(203 |
) |
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Deferred revenues
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|
5,817 |
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|
2,454 |
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Net cash provided by operating activities
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|
18,286 |
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|
6,405 |
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Investing activities
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Purchases of property and equipment
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(6,892 |
) |
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|
(1,434 |
) |
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Purchases of investments
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|
(117,842 |
) |
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|
(90,281 |
) |
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Maturities and sales of investments
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|
93,635 |
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|
80,582 |
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Net cash used in investing activities
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(31,099 |
) |
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|
(11,133 |
) |
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Financing activities
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Net proceeds from issuance of common stock
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|
11,762 |
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|
8,408 |
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Repurchases and retirements of common stock
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|
(12,217 |
) |
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Net cash provided by (used in) financing activities
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|
(455 |
) |
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|
8,408 |
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Effect of foreign exchange rate changes on cash and cash
equivalents
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|
(1,506 |
) |
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|
21 |
|
Net increase (decrease) in cash and cash equivalents
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|
|
(14,774 |
) |
|
|
3,701 |
|
Cash and cash equivalents at beginning of period
|
|
|
88,941 |
|
|
|
82,903 |
|
|
|
|
|
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|
Cash and cash equivalents at end of period
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|
$ |
74,167 |
|
|
$ |
86,604 |
|
|
|
|
|
|
|
|
Supplemental disclosures:
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Income taxes paid
|
|
$ |
649 |
|
|
$ |
1,180 |
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and financing
activities:
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|
|
|
|
|
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|
Unrealized gain (loss) on short-term investments
|
|
$ |
(20 |
) |
|
$ |
79 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements.
4
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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|
Note 1. |
Summary of Significant Accounting Policies |
The accompanying condensed consolidated financial statements of
Informatica Corporation (the Company) have been
prepared in conformity with accounting principles generally
accepted in the United States. However, certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed, or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission
(SEC). In the opinion of management, the financial
statements include all adjustments necessary (which are of a
normal and recurring nature, except see Note 4.
Restructuring Charges for a description of other than normal
recurring adjustments) for the fair presentation of the results
of the interim periods presented. All of the amounts included in
this report related to the condensed consolidated financial
statements and notes thereto as of and for the three and six
months ended June 30, 2005 and 2004 are unaudited. The
interim results presented are not necessarily indicative of
results for any subsequent interim period, the year ended
December 31, 2005 or any future period.
These unaudited condensed consolidated financial statements
should be read in conjunction with the Companys audited
consolidated financial statements and notes thereto for the year
ended December 31, 2004 included in the Companys
Annual Report on Form 10-K filed with the SEC. The
condensed consolidated balance sheet as of December 31,
2004 has been derived from the audited consolidated financial
statements of the Company.
The Company follows detailed revenue recognition guidelines,
which are discussed below. The Company recognizes revenue in
accordance with accounting principles generally accepted in the
United States of America that have been prescribed for the
software industry. The accounting rules related to revenue
recognition are complex and are affected by interpretations of
the rules and an understanding of industry practices, both of
which are subject to change. Consequently, the revenue
recognition accounting rules require management to make
significant judgments, such as determining if collectibility is
probable and if a customer is credit-worthy.
The Company recognizes revenue in accordance with American
Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) 97-2, Software
Revenue Recognition, as amended and modified by
SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions.
The Company recognizes license revenues when a noncancelable
license agreement has been signed, the product has been shipped
or the Company has provided the customer with the access codes
that allow for immediate possession of the software
(collectively delivered), the fees are fixed or
determinable, collectibility is probable and vendor-specific
objective evidence (VSOE) of fair value exists to
allocate the fee to the undelivered elements of the arrangement.
VSOE is based on the price charged when an element is sold
separately. In the case of an element not yet sold separately,
the price, which does not change before the element is made
generally available, is established by authorized management. If
an acceptance period is required, the Company recognizes revenue
upon customer acceptance or the expiration of the acceptance
period after all other revenue recognition criteria under
SOP 97-2 have been met. The Companys standard
agreements do not contain product return rights.
Credit-worthiness and collectibility are first assessed on a
country level basis. Then, for those customers, including direct
end users and the Companys indirect channel partners
(resellers, distributors and original equipment manufacturers
(OEMs)) in countries deemed to have sufficient timely payment
history, customers are assessed based on their payment history
and credit profile.
5
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The country level assessment of credit-worthiness and
collectibility has generally been performed annually with any
changes in assessment effective on January 1st of the
next fiscal year. The Company recently performed a country level
assessment of credit-worthiness and determined 10 additional
countries to be credit-worthy based on geopolitical and economic
stability. These countries include France, where the Company has
a direct sales channel, and Japan, where the Company has both
direct and indirect sales channels, as well as Spain, Italy,
Norway, Sweden, Denmark, Finland, Australia and New Zealand,
where the sales channel consists of distributors. In each of the
nine countries excluding France, the Company assessed the
credit-worthiness and collectibility of its existing
distributors and will continue to recognize revenue through
these distributors upon cash receipt. However, effective
January 1, 2005, in France, where the country level
criteria have been met and individual customers are deemed
credit-worthy, the Company has begun recognizing revenue upon
shipment, rather than on cash receipt, after all other revenue
recognition criteria under SOP 97-2 have been met,
including, for resellers and distributors, evidence of
sell-through to an identified end user. In the other nine
countries where the individual distributors have not met the
credit-worthiness and collectibility requirements, the Company
will continue to reassess their status quarterly.
The Companys reseller and distributor arrangements
typically provide for sublicense or end user license fees based
on a percentage of list prices. Revenue arrangements with
resellers and distributors require evidence of sell-through,
that is, persuasive evidence that the products have been sold to
an identified end user. For products sold indirectly through the
Companys resellers and distributors, the Company
recognizes revenue upon shipment and receipt of evidence of
sell-through if the reseller or distributor has been deemed
credit-worthy.
The Company also enters into OEM arrangements that provide for
license fees based on inclusion of the Companys products
in the OEMs products. These arrangements provide for
fixed, irrevocable royalty payments. For credit-worthy OEMs,
royalty payments are recognized based on the activity in the
royalty report the Company receives from the OEM, or in the case
of OEMs with fixed royalty payments, revenue is recognized when
the related payment is due. When OEMs are not deemed
credit-worthy, revenue is recognized upon cash receipt. In both
cases, revenue is recognized after all other revenue recognition
criteria under SOP 97-2 have been met.
The assessment of credit-worthiness for resellers, distributors
and OEMs within countries that have been deemed to be
credit-worthy generally takes place quarterly, with any changes
effective at the beginning of the next fiscal quarter.
Credit-worthiness for these partners is assessed based on
established credit history consisting of sales of at least one
million dollars and with timely payment history, generally for
the last 12 months. In the third quarter of 2004, the
Companys assessment of three resellers and OEMs determined
that these customers were credit-worthy and effective October
2004, the Company began recognizing revenue from these customers
upon shipment, after all other revenue recognition criteria
under SOP 97-2 have been met.
For transactions to all customers, including direct end users,
resellers, distributors and OEMs, where the customer is deemed
credit-worthy, but where the stated payment terms of the
transaction are greater than 45 days from the invoice date,
the Company recognizes revenue when the payments become due. In
assessing this policy in light of the Companys continuing
international expansion where stated payment terms can be
slightly longer, the Company determined, effective
January 1, 2005, that extending the threshold to
60 days on a world-wide basis is more reflective of the
Companys standard payment terms with its customers.
Therefore, effective January 1, 2005, the Company began to
recognize revenue upon shipment for transactions with
credit-worthy customers in credit-worthy countries with stated
payment terms up to and including 60 days, after all other
revenue recognition criteria under SOP 97-2 have been met.
The Company has analyzed the impact of this change as though it
had been implemented during 2004 and determined that this change
would not have been material to its quarterly or annual revenue
or
6
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
results of operations in 2004. Those transactions with stated
terms of more than 60 days will continue to be recognized
when payments become due.
When a customer, including direct end users, resellers,
distributors and OEMs, is not deemed credit-worthy, revenue is
recognized when cash is received, after all other revenue
recognition criteria under SOP 97-2 have been met.
The Company recognizes maintenance revenues, which consist of
fees for ongoing support and product updates, ratably over the
term of the contract, typically one year. Consulting revenues
are primarily related to implementation services and product
enhancements performed on a time-and-materials basis or, on a
very infrequent basis, a fixed fee arrangement under separate
service arrangements related to the installation and
implementation of its software products. Education services
revenues are generated from classes offered at the
Companys headquarters, sales offices and customer
locations. Revenues from consulting and education services are
recognized as the services are performed. When a contract
includes both license and service elements, the license fee is
recognized on delivery of the software or cash collections,
provided services do not include significant customization or
modification of the base product, and are not otherwise
essential to the functionality of the software, and the payment
terms for licenses are not dependent on additional acceptance
criteria.
Deferred revenues include deferred license, maintenance,
consulting and education services revenue. The Companys
practice is to net unpaid deferred items against the related
receivables balances from those OEMs, specific resellers,
distributors and specific international customers for which the
Company defers revenue until payment is received.
|
|
|
Net Income Per Common Share |
Under the provisions of SFAS No. 128,
Earnings per Share, basic net income per
share is computed using the weighted-average number of common
shares outstanding during the period. Diluted net income per
share reflects the potential dilution of securities by adding
other common stock equivalents, primarily stock options, to the
weighted-average number of common shares outstanding during the
period, if dilutive. Potentially dilutive securities have been
excluded from the computation of diluted net income per share if
their inclusion is antidilutive.
The calculation of basic and diluted net income per common share
is as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net income
|
|
$ |
7,641 |
|
|
$ |
979 |
|
|
$ |
11,950 |
|
|
$ |
2,870 |
|
Weighted average shares outstanding
|
|
|
86,900 |
|
|
|
85,823 |
|
|
|
86,913 |
|
|
|
85,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average unvested shares of common stock subject to
repurchase
|
|
|
(24 |
) |
|
|
(266 |
) |
|
|
(32 |
) |
|
|
(301 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net income per common share
|
|
|
86,876 |
|
|
|
85,557 |
|
|
|
86,881 |
|
|
|
85,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
2,884 |
|
|
|
2,837 |
|
|
|
2,621 |
|
|
|
4,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing dilutive net income per common share
|
|
|
89,760 |
|
|
|
88,394 |
|
|
|
89,502 |
|
|
|
89,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$ |
0.09 |
|
|
$ |
0.01 |
|
|
$ |
0.14 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
|
$ |
0.09 |
|
|
$ |
0.01 |
|
|
$ |
0.13 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company accounts for stock issued to employees using the
intrinsic value method in accordance with Accounting Principles
Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees, and complies with the disclosure
provisions of Statement of Financial Accounting Standard
(SFAS) No. 123, Accounting for
Stock-Based Compensation and SFAS No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure. Under APB No. 25,
compensation expense of fixed stock options is based on the
difference, if any, on the date of the grant between the fair
value of the Companys stock and the exercise price of the
option. The Company amortizes its stock-based compensation under
APB 25 using a straight-line basis over the remaining
vesting term of the related options. The Company accounts for
stock issued to non-employees in accordance with the provisions
of SFAS No. 123 and Emerging Issues Task Force
(EITF) No. 96-18, Accounting for Equity
Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services.
Pro forma information regarding net income and net income per
share is required by SFAS No. 148 as if the Company
had accounted for its employee stock options and shares issued
under the Employee Stock Purchase Plan (ESPP) under
the fair value method of SFAS No. 123. The fair value
of the Companys stock-based awards to employees was
estimated using the multiple option approach of the
Black-Scholes option-pricing model. The related expense is
amortized using an accelerated method over the vesting terms of
the option as required by Financial Accounting Standards Board
Interpretation (FIN) No. 28, Accounting for
Stock Appreciation Rights and Other Variable Stock Option or
Awards Plans (an interpretation of APB Opinions No. 15 and
25).
The fair value of the Companys stock-based awards was
estimated assuming no expected dividends with the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Option Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life of options (years)
|
|
|
3.0 year |
|
|
|
3.0 year |
|
|
|
3.0 year |
|
|
|
3.0 year |
|
|
Risk-free interest rate
|
|
|
3.7% |
|
|
|
3.3% |
|
|
|
3.8% |
|
|
|
3.0% |
|
|
Volatility
|
|
|
61% |
|
|
|
85% |
|
|
|
63% |
|
|
|
87% |
|
ESPP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life of options (years)
|
|
|
1.25 year |
|
|
|
1.25 year |
|
|
|
1.25 year |
|
|
|
1.25 year |
|
|
Risk-free interest rate
|
|
|
3.1% |
|
|
|
1.4% |
|
|
|
3.1% |
|
|
|
1.4% |
|
|
Volatility
|
|
|
45% |
|
|
|
64% |
|
|
|
45% |
|
|
|
64% |
|
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. The
Black-Scholes model requires the input of highly subjective
assumptions. Because the Companys stock-based awards have
characteristics significantly different from those in traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in
managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its stock-based awards. During the first quarter of 2005, the
Company modified its approach and updated certain assumptions
with respect to determining the estimated fair value of shares
granted under its employee stock purchase plan, and made other
corrections to its 2004 pro forma charges. The previous amounts
for the three and six months ended June 30, 2004 have been
revised to reflect these corrections. The pro forma stock-based
compensation expense reported under the fair value method was
previously reported as $4.1 million and $7.5 million
for the three and six months ended June 30, 2004,
respectively.
8
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Had compensation cost for the Companys stock-based
compensation plans been determined using the fair value at the
grant dates for awards under those plans calculated using the
Black-Scholes method of SFAS No. 123, the
Companys net income (loss) and basic and diluted net
income (loss) per share would have been changed to the pro forma
amounts indicated below (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net income, as reported
|
|
$ |
7,641 |
|
|
$ |
979 |
|
|
$ |
11,950 |
|
|
$ |
2,870 |
|
|
Stock-based employee compensation included in net income as
reported, net of related tax effects*
|
|
|
224 |
|
|
|
1,693 |
|
|
|
462 |
|
|
|
2,331 |
|
|
Stock-based employee compensation using the fair value method,
net of related tax effects*
|
|
|
(4,254 |
) |
|
|
(5,817 |
) |
|
|
(8,956 |
) |
|
|
(9,593 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), pro forma
|
|
$ |
3,611 |
|
|
$ |
(3,145 |
) |
|
$ |
3,456 |
|
|
$ |
(4,392 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.09 |
|
|
$ |
0.01 |
|
|
$ |
0.14 |
|
|
$ |
0.03 |
|
|
Pro forma
|
|
$ |
0.04 |
|
|
$ |
(0.04 |
) |
|
$ |
0.04 |
|
|
$ |
(0.05 |
) |
Diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.09 |
|
|
$ |
0.01 |
|
|
$ |
0.13 |
|
|
$ |
0.03 |
|
|
Pro forma
|
|
$ |
0.04 |
|
|
$ |
(0.04 |
) |
|
$ |
0.04 |
|
|
$ |
(0.05 |
) |
|
|
* |
The tax effects on stock-based compensation have been fully
reserved by way of a valuation allowance. |
These pro forma amounts may not be representative of the effects
on reported income (loss) for future years as options vest over
several years and additional awards are generally made each year.
|
|
Note 2. |
Comprehensive Income (Loss) |
Other comprehensive income refers to gains and losses that,
under the accounting principles generally accepted in the United
States of America, are recorded as an element of
stockholders equity and are excluded from net income.
Comprehensive income (loss) consisted of the following items (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net income, as reported
|
|
$ |
7,641 |
|
|
$ |
979 |
|
|
$ |
11,950 |
|
|
$ |
2,870 |
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on investments*
|
|
|
244 |
|
|
|
(786 |
) |
|
|
(20 |
) |
|
|
(741 |
) |
|
Foreign currency translation adjustment*
|
|
|
(1,138 |
) |
|
|
79 |
|
|
|
(1,766 |
) |
|
|
(145 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
6,747 |
|
|
$ |
272 |
|
|
$ |
10,164 |
|
|
$ |
1,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accumulated other comprehensive income (loss) as of
June 30, 2005 and December 31, 2004 consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Unrealized loss on investments
|
|
$ |
(665 |
) |
|
$ |
(645 |
) |
Cumulative foreign currency translation adjustment
|
|
|
654 |
|
|
|
2,420 |
|
|
|
|
|
|
|
|
|
|
$ |
(11 |
) |
|
$ |
1,775 |
|
|
|
|
|
|
|
|
|
|
* |
The tax effect on unrealized gain (loss) on investment and
foreign currency translation adjustment has not been significant. |
|
|
Note 3. |
Goodwill and Intangible Assets |
The carrying amount of the goodwill and intangible assets as of
June 30, 2005 and December 31, 2004 is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Gross | |
|
|
|
Gross | |
|
|
|
|
Carrying | |
|
Accumulated | |
|
Net | |
|
Carrying | |
|
Accumulated | |
|
Net | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
Amount | |
|
Amortization | |
|
Amount | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Core technology
|
|
$ |
6,378 |
|
|
$ |
(4,726 |
) |
|
$ |
1,652 |
|
|
$ |
6,429 |
|
|
$ |
(4,257 |
) |
|
$ |
2,172 |
|
Purchased technology
|
|
|
2,500 |
|
|
|
|
|
|
|
2,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
|
|
1,775 |
|
|
|
(1,775 |
) |
|
|
|
|
|
|
1,775 |
|
|
|
(1,775 |
) |
|
|
|
|
Customer relationships
|
|
|
945 |
|
|
|
(331 |
) |
|
|
614 |
|
|
|
945 |
|
|
|
(237 |
) |
|
|
708 |
|
Patents
|
|
|
297 |
|
|
|
(297 |
) |
|
|
|
|
|
|
297 |
|
|
|
(297 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$ |
11,895 |
|
|
$ |
(7,129 |
) |
|
$ |
4,766 |
|
|
$ |
9,446 |
|
|
$ |
(6,566 |
) |
|
$ |
2,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
$ |
81,897 |
|
|
|
|
|
|
|
|
|
|
$ |
82,245 |
|
Amortization expense of intangible assets was approximately
$0.3 million and $0.6 million for three months ended
June 30, 2005 and 2004, respectively, and $0.6 million
and $1.3 million for six months ended June 30, 2005
and 2004, respectively. The weighted-average amortization
periods of the Companys core technology, developed
technology, customer relationships and patents are
3.5 years, 1.25 years, 5 years and 3 years,
respectively. In the first quarter of 2005, the Company
purchased a source code license with a value of
$2.5 million. The amortization expense related to
identifiable intangible assets as of June 30, 2005 is
expected to be $0.6 million for the remainder of 2005, and
$1.1 million, $0.5 million and $0.1 million in
2006, 2007 and 2008, respectively.
Core technology at June 30, 2005 and December 31, 2004
totaling $0.7 million and $1.0 million, net, related
to the Companys acquisition of Striva Corporation in
September 2003, was recorded in a European local currency;
therefore the gross carrying amount and accumulated amortization
are subject to periodic currency translation adjustments.
In the first quarter of 2005, the Company recorded a
$0.1 million decrease in goodwill related to closing out an
escrow account. In the second quarter of 2005, the Company
recorded a $0.2 million decrease in goodwill related to a
reduction of accrued merger costs.
10
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 4. |
Facilities Restructuring Charges |
In October 2004, the Company announced a restructuring plan
(2004 Restructuring Plan) related to the December
2004 relocation of the Companys corporate headquarters
within Redwood City, California. In February 2005, the Company
subleased approximately 187,000 square feet of its previous
corporate headquarters at Pacific Shore Center through July 2013
with a right of termination by the tenant which is exercisable
in July 2009. As a result, the Company recorded facilities
restructuring charges (restructuring charges) of
approximately $103.6 million, consisting of
$21.6 million in leasehold improvement and asset write-offs
and $82.0 million related to estimated facility lease
losses, which is comprised of the present value of lease payment
obligations for the remaining nine year lease term of the
previous corporate headquarters, net of actual and estimated
sublease income. In June 2005, the Company entered into a
sublease agreement to sublease approximately 51,000 square
feet of its excess space at Pacific Shore Center through August
2008 with an option to renew through July 2013. The Company has
actual and estimated sublease income, including the
reimbursement of certain property costs such as common area
maintenance, insurance and property tax, net of estimated broker
commissions of $1.1 million for the remainder of 2005,
$4.3 million in 2006, $4.5 million in 2007,
$4.4 million in 2008, $2.3 million in 2009,
$0.8 million in 2010, $3.1 million in 2011,
$3.7 million in 2012 and $3.0 million in 2013. If the
Company is unable to sublease the Pacific Shore Center
facilities during the remaining optional lease term through
2013, restructuring charges could increase by approximately
$10.8 million.
The Company will recognize approximately $22.5 million of
accretion as a restructuring charge over the remaining term of
the lease, or approximately eight years, as follows:
$2.3 million for the remainder of 2005; $4.3 million
in 2006; $4.0 million in 2007; $3.6 million in 2008;
$3.1 million in 2009; $2.4 million in 2010;
$1.7 million in 2011; $0.9 million in 2012; and
$0.2 million in 2013. Accretion represents imputed interest
and is the difference between the Companys non-discounted
future cash obligations and the discounted present value of
these cash obligations.
During 2001, the Company announced a restructuring plan
(2001 Restructuring Plan) and recorded restructuring
charges of approximately $12.1 million, consisting of
$1.5 million in leasehold improvement and asset write-offs
and $10.6 million related to the consolidation of excess
leased facilities in the San Francisco Bay Area and Texas.
During 2002, the Company recorded additional restructuring
charges of approximately $17.0 million, consisting of
$15.1 million related to estimated facility lease losses
and $1.9 million in leasehold improvement and asset
write-offs. The timing of the restructuring accrual adjustment
was a result of negotiated and executed subleases for the
Companys excess facilities in Dallas, Texas and Palo Alto,
California during the third quarter of 2002. These subleases
included terms that provided a lower level of sublease rates
than the initial assumptions. The terms of these new subleases
were consistent with the continued deterioration of the
commercial real estate market in these areas. In addition, cost
containment measures initiated in the same quarter, such as
delayed hiring and salary reductions, resulted in an adjustment
to managements estimate of occupancy of available vacant
facilities. These charges represent adjustments to the original
assumptions, including the time period that the buildings will
be vacant, expected sublease rates, expected sublease terms and
the estimated time to sublease. The Company calculated the
estimated costs for the additional restructuring charges based
on current market information and trend analysis of the real
estate market in the respective area.
In December 2004, the Company recorded additional restructuring
charges of $9.0 million related to estimated facility lease
losses. The restructuring accrual adjustments recorded in the
third and fourth
11
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
quarters of 2004 were the result of the relocation of its
corporate headquarters within Redwood City, California in
December 2004, an executed sublease for the Companys
excess facilities in Palo Alto, California during the third
quarter of 2004 and an adjustment to managements estimate
of occupancy of available vacant facilities. These charges
represent adjustments to the original assumptions in the 2001
Restructuring Plan charges, including the time period that the
buildings will be vacant; expected sublease rates; expected
sublease terms; and the estimated time to sublease. The Company
calculated the estimated costs for the additional restructuring
charges based on current market information and trend analysis
of the real estate market in the respective area. If the Company
is unable to sublease any of the available vacant Pacific Shores
facilities included in its 2001 Restructuring Plan during the
remaining lease term through 2013, restructuring charges could
increase by approximately $3.3 million.
Inherent in the estimation of the costs related to the
restructuring efforts are assessments of the Companys
ability to generate sublease income. The estimates of sublease
income may vary significantly depending, in part, on factors
which may be beyond the Companys control, such as the time
periods required to locate and contract suitable subleases and
the market rates at the time of such subleases.
A summary of the activity of the accrued restructuring charges
for the six months ended June 30, 2005 and 2004 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued | |
|
|
|
|
|
|
|
|
|
Accrued | |
|
|
Restructuring | |
|
|
|
|
|
|
|
Restructuring | |
|
|
Charges at | |
|
Restructuring | |
|
|
|
|
|
Charges at | |
|
|
December 31, | |
|
| |
|
Net Cash | |
|
Non-Cash | |
|
June 30, | |
|
|
2004 | |
|
Charges | |
|
Adjustments | |
|
Payment | |
|
Reclass | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
2004 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess lease facilities
|
|
$ |
88,521 |
|
|
$ |
2,465 |
|
|
$ |
(823 |
) |
|
$ |
(7,082 |
) |
|
$ |
(21 |
) |
|
$ |
83,060 |
|
2001 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess lease facilities
|
|
|
20,730 |
|
|
|
|
|
|
|
(14 |
) |
|
|
(2,157 |
) |
|
|
|
|
|
|
18,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
109,251 |
|
|
$ |
2,465 |
|
|
$ |
(837 |
) |
|
$ |
(9,239 |
) |
|
$ |
(21 |
) |
|
$ |
101,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued | |
|
|
|
|
|
|
|
Accrued | |
|
|
Restructuring | |
|
|
|
|
|
|
|
Restructuring | |
|
|
Charges at | |
|
|
|
Net | |
|
|
|
Charges at | |
|
|
December 31, | |
|
Restructuring | |
|
Cash | |
|
Non-Cash | |
|
June 30, | |
|
|
2003 | |
|
Charges | |
|
Payment | |
|
Reclass | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
2001 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess lease facilities
|
|
$ |
15,167 |
|
|
|
|
|
|
$ |
(2,161 |
) |
|
|
|
|
|
$ |
13,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the three months ended June 30, 2005, the Company
recorded $70,000 of restructuring charges. This charge included
$1.2 million of accretion charges, and a $0.3 million
adjustment related to the 2004 Restructuring Plan due to an
increase in lease operating expense assumptions, offset by an
adjustment to reflect a $1.4 million increase in the
Companys assumed sublease income, as a result of
subleasing excess space under the 2004 Restructuring Plan. In
the six months ended June 30, 2005, the Company recorded
$1.6 million of restructuring charges. This charge included
$2.5 million of accretion charges, and a $0.6 million
adjustment related to the 2004 Restructuring Plan due to an
increase in lease operating expense assumptions, offset by an
adjustment to reflect a $1.4 million increase in the
Companys assumed sublease income. As of June 30,
2005, $19.0 million of the $101.6 million accrued
restructuring charges was classified as current liabilities and
the remaining $82.6 million was classified as noncurrent
liabilities.
The accrued merger costs include transaction costs and an
accrual for excess leased facilities formerly occupied by
Striva. In accordance with EITF No. 95-3, Recognition of
Liabilities in Connection with a Business Combination, the
liability associated with this restructuring is considered a
liability assumed in
12
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the purchase price allocation. The $2.1 million merger
accrual was adjusted by $0.2 million in both 2004 and 2003
to $1.7 million. Of the $1.7 million accrued merger
costs included in the purchase price, $0.2 million and
$1.0 million were paid in 2004 and 2003, respectively, and
$18,000 and $36,000 was paid during the three and six months
ended June 30, 2005, respectively. During the second
quarter of 2005, the Company reduced accrued merger costs by
approximately $0.2 million, resulting in a decrease in the
goodwill balance due to an adjustment in facility restructuring
assumptions. As of June 30, 2005, $67,000 of these costs
was classified as current liabilities and $0.1 million was
classified as noncurrent liabilities.
|
|
Note 5. |
Commitments and Contingencies |
In December 2004, the Company relocated its corporate
headquarters within Redwood City, California and entered into a
new lease agreement. The lease term is from December 15,
2004 to December 31, 2007 (with a three-year renewal
option). Minimum contractual lease payments are
$1.5 million, $1.9 million and $2.1 million for
the years ended December 31, 2005, 2006 and 2007,
respectively.
The Company entered into two lease agreements in February 2000
for two office buildings in Redwood City, California, which it
occupied in August 2001. The lease expires in July 2013. As part
of these agreements, the Company purchased certificates of
deposit totaling $12.2 million as a security deposit for
lease payments until certain financial milestones are met. The
letter of credit may be reduced to an amount not less than three
months of the base rent at the then current rate if the
Companys annual revenues reach $750 million, and the
Company has quarterly operating profits of at least
$100 million for no less than four consecutive calendar
quarters. These certificates of deposit are classified as
long-term restricted cash on the Companys consolidated
balance sheet.
The Company leases certain office facilities under various
noncancelable operating leases, including those described above,
which expire at various dates through 2013 and require the
Company to pay operating costs, including property taxes,
insurance and maintenance. Operating lease payments in the table
below include approximately $133.0 million, net of actual
sublease income, for operating lease commitments for facilities
that are included in restructuring charges. See Note 4,
Restructuring Charges, above for a further discussion.
Future minimum lease payments as of June 30, 2005 under
noncancelable operating leases with original terms in excess of
one year are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating | |
|
Sublease | |
|
|
|
|
Leases | |
|
Income | |
|
Net | |
|
|
| |
|
| |
|
| |
Remaining 2005
|
|
$ |
10,555 |
|
|
$ |
(1,058 |
) |
|
$ |
9,497 |
|
2006
|
|
|
21,308 |
|
|
|
(3,163 |
) |
|
|
18,145 |
|
2007
|
|
|
20,174 |
|
|
|
(2,397 |
) |
|
|
17,777 |
|
2008
|
|
|
16,717 |
|
|
|
(2,392 |
) |
|
|
14,325 |
|
2009
|
|
|
17,169 |
|
|
|
(1,242 |
) |
|
|
15,927 |
|
Thereafter
|
|
|
61,370 |
|
|
|
|
|
|
|
61,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
147,293 |
|
|
$ |
(10,252 |
) |
|
$ |
137,041 |
|
|
|
|
|
|
|
|
|
|
|
In June 2005, the Company subleased 51,000 square feet of
office space at Pacific Shores Center, its previous corporate
headquarters, in Redwood City, California through August 2008
with an option to renew through July 2013. In February 2005, the
Company subleased 187,000 square feet of office space at
Pacific Shores Center for the remainder of the lease term
through July 2013 with a right of termination by
13
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the subtenant which is exercisable in July 2009. In 2004, the
Company signed sublease agreements for leased office space in
Palo Alto and Scotts Valley, California. In 2003, the Company
signed sublease agreements for leased office space in
San Francisco, Palo Alto and Redwood City, California.
During 2002, the Company signed sublease agreements for leased
office space in Palo Alto, California and Carrollton, Texas.
The Company generally provides a warranty for its software
products and services to its customers for a period of three to
six months and accounts for its warranties under the Financial
Accounting Standards Board (FASB)
SFAS No. 5, Accounting for Contingencies. The
Companys software products media are generally
warranted to be free of defects in materials and workmanship
under normal use, and the products are also generally warranted
to substantially perform as described in certain Company
documentation. The Companys services are generally
warranted to be performed in a professional manner and to
materially conform to the specifications set forth in a
customers signed contract. In the event there is a failure
of such warranties, the Company generally will correct or
provide a reasonable work around or replacement product. The
Company has provided a warranty accrual of $0.2 million as
of June 30, 2005 and December 31, 2004. To date, the
Companys product warranty expense has not been significant.
The Company sells software licenses and services to its
customers under contracts, which the Company refers to as the
License to Use Informatica Software (License
Agreement). Each License Agreement contains the relevant
terms of the contractual arrangement with the customer, and
generally includes certain provisions for indemnifying the
customer against losses, expenses, and liabilities from damages
that may be awarded against the customer in the event the
Companys software is found to infringe upon a patent,
copyright, trademark, or other proprietary right of a third
party. The License Agreement generally limits the scope of and
remedies for such indemnification obligations in a variety of
industry-standard respects, including but not limited to certain
time and scope limitations and a right to replace an infringing
product.
The Company believes its internal development processes and
other policies and practices limit its exposure related to the
indemnification provisions of the License Agreement. In
addition, the Company requires its employees to sign a
proprietary information and inventions agreement, which assigns
the rights to its employees development work to the
Company. To date, the Company has not had to reimburse any of
its customers for any losses related to these indemnification
provisions, and no material claims against the Company are
outstanding as of June 30, 2005. For several reasons,
including the lack of prior indemnification claims and the lack
of a monetary liability limit for certain infringement cases
under the License Agreement, the Company cannot determine the
maximum amount of potential future payments, if any, related to
such indemnification provisions.
On November 8, 2001, a purported securities class action
complaint was filed in the United States District Court for the
Southern District of New York. The case is entitled In re
Informatica Corporation Initial Public Offering Securities
Litigation, Civ. No. 01-9922 (SAS) (S.D.N.Y.), related to
In re Initial Public Offering Securities Litigation, 21 MC 92
(SAS) (S.D.N.Y.). Plaintiffs amended complaint was brought
purportedly on behalf of all persons who purchased the
Companys common stock from April 29, 1999 through
December 6, 2000. It names as defendants Informatica
Corporation, two of the Companys former officers (the
Informatica defendants), and several investment
banking firms that served as underwriters of the Companys
April 29, 1999 initial public offering and
September 28, 2000 follow-on
14
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
public offering. The complaint alleges liability as to all
defendants under Sections 11 and/or 15 of the Securities
Act of 1933 and Sections 10(b) and/or 20(a) of the
Securities Exchange Act of 1934, on the grounds that the
registration statements for the offerings did not disclose that:
(1) the underwriters had agreed to allow certain customers
to purchase shares in the offerings in exchange for excess
commissions paid to the underwriters; and (2) the
underwriters had arranged for certain customers to purchase
additional shares in the aftermarket at predetermined prices.
The complaint also alleges that false analyst reports were
issued. No specific damages are claimed.
Similar allegations were made in other lawsuits challenging over
300 other initial public offerings and follow-on offerings
conducted in 1999 and 2000. The cases were consolidated for
pretrial purposes. On February 19, 2003, the Court ruled on
all defendants motions to dismiss. The Court denied the
motions to dismiss the claims under the Securities Act of 1933.
The Court denied the motion to dismiss the Section 10(b)
claim against Informatica and 184 other issuer defendants. The
Court denied the motion to dismiss the Section 10(b) and
20(a) claims against the Informatica defendants and 62 other
individual defendants.
The Company accepted a settlement proposal presented to all
issuer defendants. In this settlement, plaintiffs will dismiss
and release all claims against the Informatica defendants, in
exchange for a contingent payment by the insurance companies
collectively responsible for insuring the issuers in all of the
IPO cases, and for the assignment or surrender of control of
certain claims the Company may have against the underwriters.
The Informatica defendants will not be required to make any cash
payments in the settlement, unless the pro rata amount paid by
the insurers in the settlement exceeds the amount of the
insurance coverage, a circumstance which the Company does not
believe will occur. The settlement will require approval of the
Court, which cannot be assured, after class members are given
the opportunity to object to the settlement or opt out of the
settlement. The Court has set a hearing date of January 9,
2006 to consider final approval of the settlement.
On July 15, 2002, the Company filed a patent infringement
action in U.S. District Court in Northern California
against Acta Technology, Inc. (Acta), now known as
Business Objects Data Integration, Inc. (BODI),
asserting that certain Acta products infringe on three of our
patents: U.S. Patent No. 6,014,670, entitled
Apparatus and Method for Performing Data Transformations
in Data Warehousing; U.S. Patent No. 6,339,775,
entitled Apparatus and Method for Performing Data
Transformations in Data Warehousing (this patent is a
continuation-in-part of and claims the benefit of
U.S. Patent No. 6,014,670); and U.S. Patent
No. 6,208,990, entitled Method and Architecture for
Automated Optimization of ETL Throughput in Data Warehousing
Applications. On July 17, 2002, the Company filed an
amended complaint alleging that Acta products also infringe on
one additional patent: U.S. Patent No. 6,044,374,
entitled Object References for Sharing Metadata in Data
Marts. In the suit, the Company is seeking an injunction
against future sales of the infringing Acta/ BODI products, as
well as damages for past sales of the infringing products. The
Company has asserted that BODIs infringement of the
Informatica patents was willful and deliberate. On
September 5, 2002, BODI answered the complaint and filed
counterclaims against us seeking a declaration that each patent
asserted is not infringed and is invalid and unenforceable. BODI
did not make any claims for monetary relief against us. The
parties presented their respective claim constructions to the
Court on September 24, 2003, and on August 1, 2005,
the Court issued its claims construction order. The Company
believes that the issued claims construction order is favorable
to the Companys position on the infringement action. The
matter is currently in the discovery phase.
The Company is also a party to various legal proceedings and
claims arising from the normal course of business activities.
15
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Based on current available information, the Company does not
expect that the ultimate outcome of these unresolved matters,
individually or in the aggregate, will have a material adverse
effect on its results of operations, cash flows or financial
position.
The Company recorded an income tax provision of
$0.8 million and $2.2 million for the three and six
months ended June 30, 2005, respectively, which primarily
represents federal alternative minimum taxes, income taxes
currently payable on income generated in
non-U.S. jurisdictions, and foreign withholding taxes. The
Company recorded a provision for income tax of $0.3 million
and $0.7 million for the three and six months ended
June 30, 2004, which primarily represents federal
alternative minimum taxes, and income and withholding taxes
attributable to foreign operations. The expected tax provision
derived from applying the federal statutory rate to the
Companys income before income taxes for the six months
period ending June 30, 2005 differed from the recorded
income tax provision primarily due to the reversal of a portion
of the Companys valuation allowance to reflect the
utilization of approximately $3.7 million of tax attributes
partially offset by foreign income and withholding taxes of
$0.5 million and state taxes of $0.4 million.
|
|
Note 7. |
Stock Repurchases |
On July 2, 2004, the Company announced a share repurchase
program for up to five million shares of the Companys
common stock. Purchases may be made from time to time in the
open market and will be funded from available working capital.
The number of shares to be purchased and the timing of purchases
will be based on the level of the Companys cash balances
and general business and market conditions. For the three and
six months ended June 30, 2005, the Company purchased
882,500 shares at a cost of $6.9 million and
1,537,500 shares at a cost of $12.2 million,
respectively. These shares were retired and reclassified as
authorized and unissued shares of common stock.
|
|
Note 8. |
Recent Accounting Pronouncements |
In June 2005, the FASB issued SFAS Statement No. 154,
Accounting Changes and Error Corrections,
(SFAS No. 154), which replaces APB
No. 20, Accounting Changes, and FAS No. 3,
Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting
for and reporting of a change in accounting principle. APB
Opinion No. 20 previously required that most voluntary
changes in accounting principle be recognized by including in
net income of the period of change a cumulative effect of
changing to the new accounting principle whereas where as
SFAS No. 154 requires retrospective application to
prior periods financial statements of a voluntary change
in accounting principle, unless it is impracticable.
SFAS No. 154 enhances the consistency of financial
information between periods. SFAS No. 154 will be
effective beginning with the Companys first quarter of
fiscal year 2006. The Company does not expect that the adoption
of SFAS No. 154 to have a material impact on its
results of operations or financial position.
In December 2004, the FASB issued FASB Statement No. 123
(revised 2004) (SFAS No. 123(R)),
Share-Based Payment, which is a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123(R) supersedes APB
Opinion No. 25, Accounting for Stock Issued to
Employees, and amends SFAS No. 95, Statement of
Cash Flows. Generally, the approach in
SFAS No. 123(R) is similar to the approach described
in SFAS No. 123. However, SFAS No. 123(R)
requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no
longer an alternative to financial statement recognition.
SFAS No. 123(R) also requires the benefits of tax
deductions in excess of recognized compensation expense to be
reported as a financing cash flow, rather than as an operating
cash flow as prescribed under current accounting rules. This
requirement will reduce net operating cash flows and increase
net financing cash flows in
16
INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
periods after adoption, but will result in no change to total
cash flow. As permitted by SFAS No. 123, the Company
currently accounts for share-based payments to employees using
Opinion 25s intrinsic value method. As a consequence, the
Company generally recognizes no compensation cost for employee
stock options and purchases under the Companys ESPP. The
Company is required to adopt SFAS No. 123(R) in the
first quarter of 2006. Although the Company has not completed
its evaluation of the impact of this accounting pronouncement,
the adoption of SFAS No. 123(R)s fair value
method will have no adverse impact on the Companys total
cash flows, but is expected to reduce the Companys net
income and diluted earnings per share. The actual effects of
adopting SFAS No. 123(R) will depend on numerous
factors including the amounts of share-based payments granted in
the future, the valuation model the Company uses to value future
share-based payments to employees and estimated forfeiture
rates. See Note 1. Summary of Significant Accounting
Policies Stock-Based Compensation, above, for the effect
on reported net income (loss) and earnings per share if the
Company had accounted for its stock option and stock purchase
plans using the fair value recognition provisions of
SFAS No. 123.
|
|
Note 9. |
Significant Customer Information and Segment Reporting |
The Company has adopted the provisions of
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes
standards for the manner in which public companies report
information about operating segments in annual and interim
financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and
major customers. The method for determining the information to
report is based on the way management organizes the operating
segments within the Company for making operating decisions and
assessing financial performance.
The Companys chief operating decision-maker is considered
to be the Chief Executive Officer. The Chief Executive Officer
reviews financial information presented on a consolidated basis,
accompanied by disaggregated information about revenues by
geographic region for purposes of making operating decisions and
assessing financial performance. On this basis, the Company is
organized and operates in a single segment: the design,
development and marketing of software solutions.
The following table presents geographic information (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
45,737 |
|
|
$ |
38,963 |
|
|
$ |
83,905 |
|
|
$ |
76,204 |
|
|
Europe
|
|
|
15,913 |
|
|
|
11,814 |
|
|
|
34,601 |
|
|
|
26,341 |
|
|
Other
|
|
|
2,555 |
|
|
|
2,257 |
|
|
|
4,090 |
|
|
|
4,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
64,205 |
|
|
$ |
53,034 |
|
|
$ |
122,596 |
|
|
$ |
107,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Long-lived assets (excluding goodwill):
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
23,383 |
|
|
$ |
18,982 |
|
|
Europe
|
|
|
3,065 |
|
|
|
3,476 |
|
|
Other
|
|
|
576 |
|
|
|
485 |
|
|
|
|
|
|
|
|
|
|
$ |
27,024 |
|
|
$ |
22,943 |
|
|
|
|
|
|
|
|
No customer accounted for more than 10% of the Companys
total revenues in the three and six months ended June 30,
2005 and 2004. At June 30, 2005 and 2004, no single
customer accounted for more than 10% of the accounts receivable
balance.
17
|
|
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
This quarterly report on Form 10-Q includes
forward-looking statements within the meaning of the
federal securities laws, particularly statements referencing our
expectations relating to license revenues, service revenues,
cost of license revenues as a percentage of license revenues,
cost of service revenues as a percentage of service revenues and
operating expenses as a percentage of total revenues; the
recording of amortization of acquired technology and stock-based
compensation; provision for income taxes; deferred taxes;
international expansion beyond North America and Europe; the
ability of our products to meet customer demand; expected
savings from our 2004 Restructuring Plan; the extent to which we
may generate revenues from the use or sale of elements of our
analytic applications; the sufficiency of our cash balances and
cash flows for the next 12 months; our stock repurchase
program; potential investments of cash or stock to acquire or
invest in complementary businesses, products or technologies;
the impact of recent changes in accounting standards; and
assumptions underlying any of the foregoing. In some cases,
forward-looking statements can be identified by the use of
terminology such as may, will,
expects, intends, plans,
anticipates, estimates,
potential, or continue, or the negative
thereof or other comparable terminology. Although we believe
that the expectations reflected in the forward-looking
statements contained herein are reasonable, these expectations
or any of the forward-looking statements could prove to be
incorrect, and actual results could differ materially from those
projected or assumed in the forward-looking statements. Our
future financial condition and results of operations, as well as
any forward-looking statements, are subject to risks and
uncertainties, including but not limited to the factors set
forth under the heading Risk Factors. All
forward-looking statements and reasons why results may differ
included in this report are made as of the date hereof, and we
assume no obligation to update any such forward-looking
statements or reasons why actual results may differ.
The following discussion should be read in conjunction with our
condensed consolidated financial statements and notes thereto
appearing elsewhere in this report.
Overview
We are a leading provider of enterprise data integration
software. We generate revenues from sales of software licenses
and services, which consist of maintenance, consulting and
education services. Our license revenues are derived from our
data integration software products. We receive software license
revenues from licensing our products directly to end users and
indirectly through resellers, distributors and OEMs. We receive
service revenues from maintenance contracts, consulting services
and education services that we perform for customers that
license our products either directly or indirectly.
We license our software and provide services to many industry
sectors, including, but not limited to, financial services,
communications, pharmaceuticals, insurance, manufacturing,
utilities, government and retail. We market and sell our
software and services through our global direct sales force in
the United States, Canada, France, Germany, the Netherlands,
Switzerland, the United Kingdom and Japan. We also maintain
relationships with a variety of strategic partners to jointly
develop, market, sell, recommend and/or implement our solutions.
In addition, we also have relationships with distributors in
various regions, including Europe, Asia-Pacific, Australia,
Japan and Latin America, who sublicense our products and provide
service and support within their territories. Most of our
international sales have been in Europe. Revenues outside of
Europe and North America, which includes the United States and
Canada, were 4% or less of total consolidated revenues in 2005,
2004 and 2003, but we anticipate further expansion outside of
these two regions in the future.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States of America (GAAP). These accounting
principles require us to make certain estimates, judgments and
assumptions. We believe that the estimates, judgments and
assumptions upon which we rely are reasonable based upon
information available to us at the time that these estimates,
18
judgments and assumptions are made. These estimates, judgments
and assumptions can affect the reported amounts of assets and
liabilities as of the date of the financial statements, as well
as the reported amounts of revenues and expenses during the
periods presented. To the extent there are material differences
between these estimates, judgments or assumptions and actual
results, our financial statements will be affected. For further
information on our critical accounting policies, see the
discussion in Note 1, Summary of Significant Accounting
Policies of notes to condensed consolidated financial statements
and Note 8, Recent Accounting Pronouncements.
Our senior management has reviewed these critical accounting
policies and related disclosures with our Audit Committee. See
Note 1 of notes to consolidated financial statements filed
in our 2004 Annual Report on Form 10-K, which contains
additional information regarding our significant accounting
policies and other disclosures required by GAAP. We believe the
following critical accounting policies involve our more
significant judgments and estimates used in the preparation of
our condensed consolidated financial statements:
We follow detailed revenue recognition guidelines, which are
discussed below. We recognize revenue in accordance with GAAP
guidance that has been prescribed for the software industry. The
accounting rules related to revenue recognition are complex and
are affected by interpretations of the rules and an
understanding of industry practices, both of which are subject
to change. Consequently, the revenue recognition accounting
rules require management to make significant judgments, such as
determining if collectibility is probable and if a customer is
credit-worthy.
We recognize revenue in accordance with American Institute of
Certified Public Accountants (AICPA) Statement of
Position (SOP) 97-2, Software Revenue
Recognition, as amended and modified by SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition,
With Respect to Certain Transactions. We recognize license
revenues when a noncancelable license agreement has been signed,
the product has been shipped or we have provided the customer
with the access codes that allow for immediate possession of the
software (collectively delivered), the fees are
fixed or determinable, collectibility is probable and
vendor-specific objective evidence (VSOE) of fair
value exists to allocate the fee to the undelivered elements of
the arrangement. VSOE is based on the price charged when an
element is sold separately. In the case of an element not yet
sold separately, the price, which does not change before the
element is made generally available, is established by
authorized management. If an acceptance period is required, we
recognize revenue upon customer acceptance or the expiration of
the acceptance period after all other revenue recognition
criteria under SOP 97-2 have been met. Our standard
agreements do not contain product return rights.
Credit-worthiness and collectibility are first assessed on a
country level basis. Then, for those customers, including direct
end users and our indirect channel partners (resellers,
distributors and original equipment manufacturers (OEMs)) in
countries deemed to have sufficient timely payment history,
customers are assessed based on their payment history and credit
profile.
The country level assessment of credit-worthiness and
collectibility has generally been performed annually with any
changes in assessment effective on January 1st of the
next fiscal year. We recently performed a country level
assessment of credit-worthiness and determined 10 additional
countries to be credit-worthy based on geopolitical and economic
stability. These countries include France, where we have a
direct sales channel and Japan, where we have both direct and
indirect sales channels, as well as Spain, Italy, Norway,
Sweden, Denmark, Finland, Australia and New Zealand, where our
sales channel consists of distributors. In each of the nine
countries, excluding France, we assessed the credit-worthiness
and collectibility of our existing distributors and will
continue to recognize revenue through these distributors upon
cash receipt. However, effective January 1, 2005, in
France, where the country level criteria have been met and
individual customers are deemed credit-worthy, we have begun
recognizing revenue upon shipment, rather than on cash receipt,
after all other revenue recognition criteria under SOP 97-2
have been met, including, for resellers and distributors,
evidence of sell-through to an identified end user. In the
19
other nine countries where the individual distributors have not
met the credit-worthiness and collectibility requirements, we
will continue to reassess their status quarterly.
Our reseller and distributor arrangements typically provide for
sublicense or end user license fees based on a percentage of
list prices. Revenue arrangements with resellers and
distributors require evidence of sell-through, that is,
persuasive evidence that the products have been sold to an
identified end user. For products sold indirectly through our
resellers and distributors, we recognize revenue upon shipment
and receipt of evidence of sell-through if the reseller or
distributor has been deemed credit-worthy.
We also enter into OEM arrangements that provide for license
fees based on inclusion of our products in the OEMs
products. These arrangements provide for fixed, irrevocable
royalty payments. For credit-worthy OEMs, royalty payments are
recognized based on the activity in the royalty report we
receive from the OEM, or in the case of OEMs with fixed royalty
payments, revenue is recognized when the related payment is due.
When OEMs are not deemed credit-worthy, revenue is recognized
upon cash receipt. In both cases, revenue is recognized after
all other revenue recognition criteria under SOP 97-2 have
been met.
The assessment of credit-worthiness for resellers, distributors
and OEMs within countries that have been deemed to be
credit-worthy generally takes place quarterly, with any changes
effective at the beginning of the next fiscal quarter.
Credit-worthiness for these partners is assessed based on
established credit history consisting of sales of at least one
million dollars and with timely payment history, generally for
the last 12 months. In the third quarter of 2004, our
assessment of three resellers and OEMs determined that these
customers were credit-worthy and effective October 2004, we
began recognizing revenue from these customers upon shipment,
after all other revenue recognition criteria under SOP 97-2
have been met.
For transactions to all customers, including direct end users,
resellers, distributors and OEMs, where the customer is deemed
credit-worthy, but where the stated payment terms of the
transaction are greater than 45 days from the invoice date,
we recognize revenue when the payments become due. In assessing
this policy in light of our continuing international expansion
where stated payment terms can be slightly longer, we
determined, effective January 1, 2005, that extending the
threshold to 60 days on a world-wide basis would be more
reflective of the Companys standard payment terms with its
customers. Therefore, effective January 1, 2005, we began
to recognize revenue upon shipment for transactions with
credit-worthy customers in credit-worthy countries with stated
payment terms up to and including 60 days, after all other
revenue recognition criteria under SOP 97-2 have been met.
We have analyzed the impact of this change as though it had been
implemented during 2004 and determined that this change would
not have been material to our quarterly or annual revenue or
results of operations in 2004. Those transactions with stated
terms of more than 60 days will continue to be recognized
when payments become due.
When a customer, including direct end-users, resellers,
distributors and OEMs, is not deemed credit-worthy, revenue is
recognized when cash is received, after all other revenue
recognition criteria under SOP 97-2 have been met.
We recognize maintenance revenues, which consist of fees for
ongoing support and product updates and upgrades, ratably over
the term of the contract, typically one year. Consulting
revenues are primarily related to implementation services and
product enhancements performed on a time-and-materials basis or,
on a very infrequent basis, a fixed fee arrangement under
separate service arrangements related to the installation and
implementation of our software products. Education services
revenues are generated from classes offered at our headquarters,
sales offices and customer locations. Revenues from consulting
and education services are recognized as the services are
performed. When a contract includes both license and service
elements, the license fee is recognized on delivery of the
software or cash collections, provided services do not include
significant customization or modification of the base product
and are not otherwise essential to the functionality of the
software, and the payment terms for licenses are not dependent
on additional acceptance criteria.
20
Deferred revenues include deferred license, maintenance,
consulting and education services revenues. Our practice is to
net unpaid deferred items against the related receivables
balances from those OEMs, specific resellers, distributors and
specific international customers for which we defer revenue
until payment is received.
|
|
|
Allowance for Sales Returns and Doubtful Accounts |
We maintain allowances for sales returns on revenues in the same
period as the related revenues are recorded. We make an estimate
of our expected returns and provide an allowance for sales
returns in accordance with Statement of Financial Accounting
Standard (SFAS) No. 48, Revenue Recognition
When Right of Return Exists. These estimates require
management judgment and are based on historical sales returns
and other known factors. To date, sales returns have been
infrequent and not significant in relation to our total
revenues. However, if these estimates do not adequately reflect
future sales returns, revenues could be overstated.
We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments. In cases where we are aware of circumstances
that may impair a specific customers ability to meet its
financial obligations to us, we record a specific allowance
against amounts due to us. For all other customers, we recognize
allowances for doubtful accounts based on the length of time the
receivables are past due, industry and geographic
concentrations, the current business environment and our
historical experience. If the financial condition of our
customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be
required. At June 30, 2005 and December 31, 2004, our
allowance for doubtful accounts balance, which related to our
historical experience applied to accounts receivable not
specifically reserved and to a lesser extent specific accounts
where we believe collection is not probable, was
$0.6 million and $0.8 million, respectively. These
amounts represent 2% of total accounts receivable at
June 30, 2005 and December 31, 2004.
We assess goodwill for impairment in accordance with
SFAS No. 142, Goodwill and other Intangible
Assets, which requires that goodwill be tested for
impairment at the reporting unit level
(Reporting Unit) at least annually and more
frequently upon the occurrence of certain events, as defined by
SFAS No. 142. Consistent with our determination that
we have only one reporting segment, we have determined that
there is only one Reporting Unit, specifically the license,
implementation and support of our software products. Goodwill
was tested for impairment in our annual impairment tests on
October 31 using the two-step process required by
SFAS No. 142. First, we reviewed the carrying amount
of the Reporting Unit compared to the fair value of
the Reporting Unit based on quoted market prices of our common
stock and the discounted cash flows based on analyses prepared
by management. Our cash flow forecasts are based on assumptions
that are consistent with the plans and estimates being used to
manage the business. An excess carrying value compared to fair
value would indicate that goodwill may be impaired. Second, if
we determine that goodwill may be impaired, then we compare the
implied fair value of the goodwill, as defined by
SFAS No. 142, to its carrying amount to determine the
impairment loss, if any.
Based on these estimates, we determined in our annual impairment
tests as of October 31 of each year that the fair value of
the Reporting Unit exceeded the carrying amount and accordingly,
goodwill was not impaired. Assumptions and estimates about
future values and remaining useful lives are complex and often
subjective. They can be affected by a variety of factors,
including external factors such as industry and economic trends,
and internal factors such as changes in our business strategy
and our internal forecasts. Although we believe the assumptions
and estimates we have made in the past have been reasonable and
appropriate, different assumptions and estimates could
materially impact our reported financial results. Accordingly,
future changes in market capitalization or estimates used in
discounted cash flows analyses could result in significantly
different fair values of the Reporting Unit, which may result in
impairment of goodwill.
21
During the fourth quarter of 2004, we recorded significant
charges (2004 Restructuring Plan) related to the
relocation of our corporate headquarters to take advantage of
more favorable lease terms and reduced operating expenses. In
addition, we significantly increased the 2001 restructuring
charges (2001 Restructuring Plan) in the third and
fourth quarters of 2004 due to changes in our assumptions used
to calculate the original charge as a result of our decision to
relocate our corporate headquarters. The accrued restructuring
charges represent gross lease obligations and estimated
commissions and other costs (principally leasehold improvements
and asset write-offs), offset by actual and estimated gross
sublease income, which is net of estimated broker commissions
and tenant improvement allowances, expected to be received over
the remaining lease terms.
These liabilities include managements estimates pertaining
to sublease activities. Inherent in the estimation of the costs
related to the restructuring efforts are assessments of our
ability to generate sublease income. We will continue to
evaluate the commercial real estate market conditions
periodically to determine if our estimates of the amount and
timing of future sublease income are reasonable based on current
and expected commercial real estate market conditions. Our
estimates of sublease income may vary significantly depending,
in part, on factors which may be beyond our control, such as the
time periods required to locate and contract suitable subleases
and the market rates at the time of such subleases.
If we determine that there is further deterioration in the
estimated sublease rates or in the expected time it will take us
to sublease our vacant space, we may incur additional
restructuring charges in the future and our cash position could
be adversely affected. For example, we increased our 2001
Restructuring Plan charges in 2002 and 2004 based on the
continued deterioration in the San Francisco Bay Area and
Dallas, Texas real estate markets. Future adjustments to the
charges could result from a change in the time period that the
buildings will be vacant, expected sublease rate, expected
sublease terms and the expected time it will take to sublease.
We will periodically assess the need to update the original
restructuring charges based on current real estate market
information and trend analysis and executed sublease agreements.
We recorded a full valuation allowance to reduce all of our
deferred tax assets to the amount that is likely to be realized.
We have considered future taxable income and ongoing tax
planning strategies in assessing the need for a valuation
allowance; however, if it were determined that we would be able
to realize all or part of our deferred tax assets in the future,
an adjustment to the deferred tax asset would decrease our tax
rate and increase income in the period in which such
determination was made. Likewise, if we determined that we would
not be able to realize all or part of our net deferred tax asset
in the future, an adjustment to the deferred tax asset would be
charged to income in the period in which such determination was
made.
Recent Accounting Pronouncements
For recent accounting pronouncements see Note 8. Recent
Accounting Pronouncements to the Condensed Consolidated
Financial Statements under Part I, Item. 1.
22
Results of Operations
The following table presents certain financial data for the
three and six months ended June 30, 2005 and 2004 as a
percentage of total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Six Months | |
|
|
Ended | |
|
Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
|
44 |
% |
|
|
44 |
% |
|
|
43 |
% |
|
|
45 |
% |
|
Support and service
|
|
|
56 |
|
|
|
56 |
|
|
|
57 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
Support and service
|
|
|
18 |
|
|
|
18 |
|
|
|
18 |
|
|
|
18 |
|
|
Amortization of acquired technology
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
80 |
|
|
|
80 |
|
|
|
80 |
|
|
|
79 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
16 |
|
|
|
26 |
|
|
|
17 |
|
|
|
25 |
|
|
Sales and marketing
|
|
|
45 |
|
|
|
43 |
|
|
|
44 |
|
|
|
42 |
|
|
General and administrative
|
|
|
8 |
|
|
|
9 |
|
|
|
8 |
|
|
|
9 |
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
69 |
|
|
|
78 |
|
|
|
70 |
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
11 |
|
|
|
2 |
|
|
|
10 |
|
|
|
3 |
|
Interest income and other, net
|
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
13 |
|
|
|
3 |
|
|
|
12 |
|
|
|
4 |
|
Provision for income taxes
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
12 |
% |
|
|
2 |
% |
|
|
10 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
The following sets forth, for the periods indicated, our
revenues (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
License revenues
|
|
$ |
28,103 |
|
|
$ |
23,292 |
|
|
|
21 |
% |
|
$ |
53,059 |
|
|
$ |
48,210 |
|
|
|
10 |
% |
Service revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance revenues
|
|
|
25,385 |
|
|
|
21,403 |
|
|
|
19 |
% |
|
|
49,122 |
|
|
|
42,832 |
|
|
|
15 |
% |
|
Consulting and education revenues
|
|
|
10,717 |
|
|
|
8,339 |
|
|
|
29 |
% |
|
|
20,415 |
|
|
|
16,165 |
|
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total service revenues
|
|
|
36,102 |
|
|
|
29,742 |
|
|
|
21 |
% |
|
|
69,537 |
|
|
|
58,997 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
64,205 |
|
|
$ |
53,034 |
|
|
|
21 |
% |
|
$ |
122,596 |
|
|
$ |
107,207 |
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Our total revenues increased to $64.2 million for the three
months ended June 30, 2005 from $53.0 million for the
three months ended June 30, 2004 representing an increase
of $11.2 million or 21%. Total revenues increased to
$122.6 million for the six months ended June 30, 2005
from $107.2 million for the six months ended June 30,
2004 representing an increase of $15.4 million or 14%.
Our license revenues increased to $28.1 million and
$53.1 million for the three and six months ended
June 30, 2005, respectively, and from $23.3 million
and $48.2 million for the three and six months ended
June 30, 2004, respectively. The $4.8 million or 21%
increase for the three months ended June 30, 2005 and the
$4.8 million or 10% increase for the six months ended
June 30, 2005 compared to the same periods in 2004 were
primarily due to an increase in both the volume and the average
transaction amount of our orders in the second quarter of 2005
and an increase in international license revenues in the first
half of 2005. The average transaction amount for orders greater
than $100,000 in the second quarter of 2005 increased to
$307,000 from $274,000 in the second quarter of 2004. The
increase in average transaction amount of orders and strong
international license revenue are the result of higher
productivity from our larger sales and marketing team and growth
in the broader data integration market.
Maintenance revenues increased to $25.4 million for the
three months ended June 30, 2005 from $21.4 million
for the three months ended June 30, 2004 and increased to
$49.1 million for the six months ended June 30, 2005
from $42.8 million for the six months ended June 30,
2004. The $4.0 million or 19% increase and
$6.3 million or 15% increase for the three and six months
ended June 30, 2005, respectively, compared to the same
periods in 2004, were primarily due to consistently strong
renewals of maintenance contracts in 2005 coupled with the
increasing size of our customer base. For the remainder of 2005,
we expect maintenance revenues to increase from the second
quarter of 2005 as we continue to increase our customer base.
|
|
|
Consulting and Education Services Revenues |
Consulting and education services revenues increased to
$10.7 million for the three months ended June 30, 2005
from $8.3 million for the three months ended June 30,
2004 and increased to $20.4 million for the six months
ended June 30, 2005 from $16.2 million for the six
months ended June 30, 2004. The $2.4 million or 29%
increase and $4.2 million or 26% increase for the three and
six months ended June 30, 2005, respectively, compared to
the same periods in 2004 were primarily due to an increase in
demand in consulting and education services in North America.
For the remainder of 2005, we expect revenues from consulting
and education services to remain relatively consistent with, or
increase modestly from the second quarter of 2005.
Our international revenues increased to $18.5 million for
the three months ended June 30, 2005 from
$14.1 million for the three months ended June 30, 2004
and increased to $38.7 million for the six months ended
June 30, 2005 from $31.0 million for the six months
ended June 30, 2004. The $4.4 million or 31% increase
and $7.7 million or 25% increase for the three and six
months ended June 30, 2005, respectively, compared to the
same periods in 2004 were primarily due to 33% and 31% increases
in international license revenue for the three and six months
ended June 30, 2005, respectively, as a result of our
continued expansion in Europe and Asia-Pacific. International
revenues as a percentage of total revenues were 29% and 32% for
the three and six months ended June 30, 2005 and 27% and
29% for the three and six months ended June 30, 2004,
respectively.
24
|
|
|
Key Factors Affecting Revenues |
Certain key factors will affect our ability to meet our
forecasted revenue in the remaining periods of 2005, including
the following:
|
|
|
|
|
Conversion of our Sales Pipeline. As a result of the
continued uncertainty in IT spending by our customers and
prospects, our ability to meet our forecasted revenues for the
remaining periods of 2005 will continue to be highly dependent
on our success in converting our sales pipeline into license
revenues from orders received and shipped within the quarter.
See Risk Factors We have experienced and
could continue to experience fluctuations in our quarterly
operating results, especially the amount of license revenue we
recognize each quarter, and such fluctuations have caused and
could continue to cause our stock price to decline. |
|
|
|
General Economic Uncertainty. The general economic
uncertainty caused customer purchases to be reduced in amount,
deferred or cancelled, and therefore reduced the overall license
pipeline conversion rates in much of 2003 and 2004. Although we
believe that the broader software market is steadily recovering
from this period of uncertainty, any interruption or delay in
the current recovery could cause a reduction in the rate of
conversion of our sales pipeline into license revenue for the
remaining periods of 2005 and beyond. See Risk
Factors If we are unable to accurately forecast
revenues, we may fail to meet stock analysts and investors
expectations of our quarterly operating results, which could
cause our stock price to decline and Risk
Factors We have experienced reduced sales pipeline
and pipeline conversion rates in the past, which has adversely
affected the growth of our company and the price of our common
stock. |
|
|
|
New Edition of PowerCenter. On February 22, 2005, we
announced the release of PowerCenter Advanced Edition. This
edition of PowerCenter includes two previously at-cost options,
team-based development and server grid, as well as two
previously separate products, PowerAnalyzer and SuperGlue. We
also announced on this date that we were removing these two
options and these two separate products from our price list.
PowerCenter Advanced Edition is priced higher than the standard
edition of PowerCenter but less than the aggregate price of all
components previously sold separately. Because this edition of
PowerCenter and its pricing are new, we cannot predict its
impact on overall PowerCenter sales and revenues. |
|
|
|
Sales Force Turnover. We experienced increased sales
force turnover in the first half of 2004 and we continued to add
new sales personnel in late 2004 and the first half of 2005.
Because we typically experience lower productivity from newly
hired sales personnel for a period of six to 12 months,
these new sales personnel may not be able to generate
significant license revenues in 2005. See Risk
Factors An increase in turnover rates of our sales
force personnel may negatively impact our ability to generate
license revenues. |
|
|
|
Competition. While we believe that IBMs recently
announced acquisition of Ascential Software presents us with an
opportunity to be the most open data integration platform for
our customers, the acquisition could lead to customer confusion
or uncertainty, and may cause customers to defer or delay their
purchasing decisions for data integration software. See Risk
Factors If we do not compete effectively with
companies selling data integration products, our revenues may
not grow and could decline. |
|
|
|
Quarterly Fluctuations. Our quarterly operating results
have fluctuated in the past and are likely to do so in the
future. In particular, our license revenues are not predictable
with any significant degree of certainty. Furthermore, we have
historically recognized a substantial portion of our license
revenues in the last month of each quarter. In addition, we
typically receive a substantial portion of new license orders in
the last few weeks of each quarter. |
|
|
|
Future Revenues (New Orders, Backlog and Deferred
Revenues) |
Our future revenues are dependent upon (i) new orders
received, shipped and recognized in a given quarter and
(ii) our backlog and deferred revenues entering a given
quarter. Our backlog is comprised of
25
product license orders that have not shipped as of the end of a
given quarter and orders to distributors, resellers and OEMs
where revenue is recognized upon cash receipt. Our deferred
revenues are primarily comprised of (i) maintenance
revenues that we recognize over the term of the contract,
typically one year, (ii) license product orders that have
shipped but where the terms of the license agreement contain
acceptance language or other terms that require that the license
revenues be deferred until all revenue recognition criteria are
met or recognized ratably over an extended period, and
(iii) consulting and education services revenues that have
been prepaid and services have not yet been performed. We
typically ship products shortly after the receipt of an order,
which is common in the software industry, and we historically
have not had a substantial backlog of license orders awaiting
shipment at the end of any given quarter. Aggregate backlog and
deferred revenues at June 30, 2005 was approximately
$83.6 million compared to $57.4 million at
June 30, 2004 and $76.0 million at March 31,
2005. This increase at June 30, 2005 compared to
June 30, 2004 was primarily due to an increase in deferred
maintenance revenues and to a lesser extent license orders
awaiting shipment and orders shipped which will be recognized as
revenue upon cash receipt. We do not believe that backlog and
deferred revenues as of any particular date is indicative of
future results.
Cost of Revenues
The following sets forth, for the periods indicated, our cost of
revenues (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Cost of license revenues
|
|
$ |
1,135 |
|
|
$ |
624 |
|
|
|
82 |
% |
|
$ |
1,845 |
|
|
$ |
1,725 |
|
|
|
7 |
% |
Cost of service revenues
|
|
|
11,387 |
|
|
|
9,663 |
|
|
|
18 |
% |
|
|
21,868 |
|
|
|
19,746 |
|
|
|
11 |
% |
Amortization of acquired technology
|
|
|
233 |
|
|
|
581 |
|
|
|
(60 |
)% |
|
|
469 |
|
|
|
1,155 |
|
|
|
(59 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,755 |
|
|
$ |
10,868 |
|
|
|
17 |
% |
|
$ |
24,182 |
|
|
$ |
22,626 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of license revenues, as a percentage of license revenues
|
|
|
4 |
% |
|
|
3 |
% |
|
|
|
|
|
|
3 |
% |
|
|
4 |
% |
|
|
|
|
Cost of service revenues, as a percentage of service revenues
|
|
|
32 |
% |
|
|
32 |
% |
|
|
|
|
|
|
31 |
% |
|
|
33 |
% |
|
|
|
|
Our cost of license revenues consists primarily of software
royalties, product packaging, documentation, production costs
and personnel costs for packaging and shipping. Cost of license
revenues increased to $1.1 million for the three months
ended June 30, 2005 from $0.6 million for the three
months ended June 30, 2004, representing 4% and 3% of
license revenues for those periods, respectively. Cost of
license revenues increased to $1.8 million for the six
months ended June 30, 2005 from $1.7 million for the
six months ended June 30, 2004, representing 3% and 4% of
license revenues for those periods, respectively. The
$0.5 million or 82% increase and $0.1 million or 7%
increase for the three and six months ended June 30, 2005,
respectively, compared to the same periods in 2004 were
primarily due to a shift in product mix to more royalty bearing
products which was offset by a favorably negotiated arrangement
in the first quarter of 2005 with one of the vendors from which
we license royalty-bearing software. For the remainder of 2005,
we expect the cost of license revenues as a percentage of
license revenues to be relatively consistent with, or increase
slightly from the second quarter of 2005.
Our cost of service revenues is a combination of costs of
maintenance, consulting and education services revenues. Our
cost of maintenance revenues consists primarily of costs
associated with customer service personnel expenses and royalty
fees for maintenance related to third-party software providers.
Cost
26
of consulting revenues consists primarily of personnel costs and
expenses incurred in providing consulting services at
customers facilities. Cost of education services revenues
consists primarily of the costs of providing training classes
and materials at our headquarters, sales and training offices
and customer locations. Cost of service revenues increased to
$11.4 million for the three months ended June 30, 2005
from $9.7 million for the three months ended June 30,
2004, representing 32% of service revenues for those periods,
respectively, and increased to $21.9 million for the six
months ended June 30, 2005 from $19.7 million for the
six months ended June 30, 2004, representing 31% and 33% of
service revenues for those periods, respectively. The
$1.7 million or 18% increase and $2.1 million or 11%
increase for the three and six months ended June 30, 2005
compared to the same periods in 2004, respectively, were
primarily due to headcount growth in the customer support,
professional service and education service groups. For the
remainder of 2005, we expect our cost of service revenues as a
percentage of service revenues to be relatively consistent with
the second quarter of 2005, or increase slightly from the
current levels if the growth in our consulting services
business, if any, is greater than that experienced by our
maintenance and education services business.
|
|
|
Amortization of Acquired Technology |
Amortization of acquired technology is the amortization of
technologies acquired through business combinations.
Amortization of acquired technology decreased to
$0.2 million for the three months ended June 30, 2005
from $0.5 million for the three months ended June 30,
2004 and decreased to $0.6 million for the six months ended
June 30, 2005 from $1.2 million for the six months
ended June 30, 2004. The $0.4 million or 60% decrease
and $0.7 million or 59% decrease for the three and six
months ended June 30, 2005, respectively, compared to the
same periods in 2004 were primarily due to certain developed
technology acquired in our 2003 acquisition of Striva being
fully amortized as of December 31, 2004. We expect
amortization of other acquired technology to be approximately
$0.4 million for the remainder of 2005.
Operating Expenses
The following sets forth, for the periods indicated, our
research and development expenses (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Research and development
|
|
$ |
10,460 |
|
|
$ |
13,924 |
|
|
|
(25 |
)% |
|
$ |
20,707 |
|
|
$ |
27,226 |
|
|
|
(24 |
)% |
Our research and development expenses consist primarily of
salaries and other personnel-related expenses, consulting
services, facilities and related overhead costs associated with
the development of new products, the enhancement and
localization of existing products, quality assurance and
development of documentation for our products. Research and
development expenses decreased to $10.5 million for the
three months ended June 30, 2005 from $13.9 million
for the three months ended June 30, 2004, representing
approximately 16% and 26%, respectively, of total revenues for
those periods. The $3.5 million or 25% decrease for the
three months ended June 30, 2005 compared to the same
period in 2004 was primarily due to a $2.2 million decrease
in facilities and related overhead costs in connection with the
2004 Restructuring Plan, a $1.2 million decrease in
stock-based compensation and a $0.2 million decrease in
third-party consulting costs, as a result of shifting consulting
projects to our India office. Research and development expenses
decreased to $20.7 million for the six months ended
June 30, 2005 from $27.2 million for the six months
ended June 30, 2004, representing approximately 17% and
25%, respectively, of total revenues for those periods. The
$6.5 million or 24% decrease for the six months ended
June 30, 2005 compared to the same period in 2004, was
primarily due to a $4.1 million decrease in facilities and
related overhead costs in connection with the 2004 Restructuring
Plan, a $1.5 million decrease in stock-based compensation
and a $0.9 million decrease in third-party consulting
costs, as a
27
result of shifting consulting projects to our India office. To
date, all software and development costs have been expensed in
the period incurred because costs incurred subsequent to the
establishment of technological feasibility have not been
significant. For the remainder of 2005, we expect the research
and development expenses as a percentage of total revenues to
remain relatively consistent with the second quarter of 2005.
The following sets forth, for the periods indicated, our sales
and marketing expenses (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Sales and marketing
|
|
$ |
29,028 |
|
|
$ |
22,590 |
|
|
|
28% |
|
|
$ |
54,386 |
|
|
$ |
45,142 |
|
|
|
20% |
|
Our sales and marketing expenses consist primarily of personnel
costs, including commissions and bonus, as well as costs of
public relations, seminars, marketing programs, lead generation,
travel and trade shows. Sales and marketing expenses increased
to $29.0 million for the three months ended June 30,
2005 from $22.6 million for the three months ended
June 30, 2004, representing approximately 45% and 43%,
respectively, of total revenues for those periods. The
$6.4 million or 28% increase for the three months ended
June 30, 2005 compared to the same period in 2004 was
primarily due to a $5.6 million increase in
personnel-related costs including sales commissions, and
travel-related expenses, as a result of headcount increasing
from 281 in June 2004 to 360 in June 2005 and costs associated
with opening new offices in Asia-Pacific, and a
$0.8 million increase in marketing programs, as a result of
the record customer attendance at Informatica World, our annual
user conference, and lead generation costs. Sales and marketing
expenses increased to $54.4 million for the six months
ended June 30, 2005 from $45.1 million for the six
months ended June 30, 2004, representing approximately 44%
and 42%, respectively, of total revenues for those periods. The
$9.3 million or 20% increase for the six months ended
June 30, 2005 compared to the same period in 2004 was
primarily due to an $8.8 million increase in
personnel-related costs including travel-related and office
equipment expenses, as a result of headcount increase from the
same period in 2004 and a $0.4 million increase in lead
generation costs. For the remainder of 2005, we expect sales and
marketing expenses as a percentage of total revenues to remain
relatively consistent with, or decrease from, the second quarter
of 2005.
|
|
|
General and Administrative |
The following sets forth, for the periods indicated, our general
and administrative expenses (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
General and administrative
|
|
$ |
4,994 |
|
|
$ |
4,709 |
|
|
|
6% |
|
|
$ |
10,100 |
|
|
$ |
9,666 |
|
|
|
4% |
|
Our general and administrative expenses consist primarily of
personnel costs for finance, human resources, legal and general
management, as well as professional service expenses associated
with recruiting, legal and accounting services. General and
administrative expenses increased slightly to $5.0 million
for the three months ended June 30, 2005 from
$4.7 million for the three months ended June 30, 2004,
representing approximately 8% and 9%, respectively, of total
revenues for those periods. The $0.3 million or 6% increase
for the three months ended June 30, 2005 compared to the
same period in 2004 was primarily due to a $0.9 million
increase in personnel related costs and third-party consulting
service costs which was partially offset by a $0.4 million
decrease in facilities and related overhead costs in connection
with the 2004 Restructuring Plan. General and administrative
expenses increased slightly to $10.1 million for the six
months ended June 30, 2005 from $9.7 million for the
six months ended June 30, 2004, representing approximately
8% and 9%, respectively, of total revenues for those periods. The
28
$0.4 million or 4% increase for the six months ended
June 30, 2005 compared to the same period in 2004 was
primarily due to a $1.6 million increase in personnel
related costs and third-party consulting service costs which was
partially offset by a $0.8 million decrease in facilities
and related overhead costs in connection with the 2004
Restructuring Plan, a $0.3 million decrease in bad debt
expenses and a $0.1 million decrease in travel-related
expenses. The increase of personnel related costs and consulting
services expense were primarily due to the costs associated with
compliance with the Sarbanes-Oxley Act of 2002
(Sarbanes-Oxley). For the remainder of 2005, we
expect general and administrative expenses as a percentage of
total revenues to remain relatively consistent with, or decrease
slightly from, the second quarter of 2005.
|
|
|
Amortization of Intangible Assets |
The following sets forth, for the periods indicated, our
amortization of intangible assets (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Amortization of Intangible assets
|
|
$ |
47 |
|
|
$ |
48 |
|
|
|
(2 |
)% |
|
$ |
94 |
|
|
$ |
103 |
|
|
|
(9 |
)% |
Amortization of intangible assets is the amortization of
customer relationships acquired through business combinations.
Amortization of intangible assets decreased to $47,000 and
$94,000 for the three and six months ended June 30, 2005,
respectively, from $48,000 and $103,000 for the three and six
months ended June 30, 2004, respectively. Amortization of
intangible assets was relatively flat during these periods. We
expect amortization of the remaining intangible assets to be
approximately $0.1 million for the remainder of 2005.
|
|
|
Facilities Restructuring Charges |
The following sets forth, for the periods indicated, our
restructuring and excess facilities charges (in thousands,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 |
|
Change | |
|
2005 | |
|
2004 |
|
Change | |
|
|
| |
|
|
|
| |
|
| |
|
|
|
| |
Facilities restructuring charges
|
|
$ |
70 |
|
|
$ |
|
|
|
|
n/a |
|
|
$ |
1,628 |
|
|
$ |
|
|
|
|
n/a |
|
In the three months ended June 30, 2005, we recorded
$70,000 of restructuring charges. This charge included
$1.2 million of accretion charges, and a $0.3 million
adjustment related to the 2004 Restructuring Plan due to an
increase in lease operating expense assumptions, offset by an
adjustment to reflect a $1.4 million increase in our
assumed sublease income, as a result of subleasing excess space
under the 2004 Restructuring Plan to a subtenant. In the six
months ended June 30, 2005, we recorded $1.6 million
of restructuring charges. This charge included $2.4 million
of accretion charges, and a $0.6 million adjustment related
to the 2004 Restructuring Plan due to an increase in lease
operating expense assumptions, offset by an adjustment to
reflect a $1.4 million increase in our assumed sublease
income. (See Note 4, Restructuring Charges, above)
As of June 30, 2005, $101.6 million of total lease
termination costs, net of actual and expected sublease income,
less broker commissions and tenant improvement costs related to
facilities to be subleased, was included in accrued
restructuring charges and is expected to be paid by 2013.
Net cash payments for facilities included in the 2004
Restructuring Plan amounted to $3.0 million and
$7.1 million for three and six months ended June 30,
2005, respectively. Actual future cash requirements may differ
from the restructuring liability balances as of June 30,
2005 if we continue to be
29
unable to sublease the excess leased facilities, there are
changes to the time period that facilities are vacant, or the
actual sublease income is different from current estimates.
Net cash payments for facilities included in the 2001
Restructuring Plan amounted to $1.0 million and
$1.1 million for three months ended June 30, 2005 and
2004, respectively, and $2.2 million for six months ended
June 30, 2005 and 2004, respectively. Actual future cash
requirements may differ from the restructuring liability
balances as of June 30, 2005 if we continue to be unable to
sublease the excess leased facilities, there are changes to the
time period that facilities are vacant, or the actual sublease
income is different from current estimates.
Our results of operations were positively affected by the
decrease in rent expense, which approximates the cash payments,
and decreases to non-cash depreciation and amortization expense
for the property and equipment written-off, totaling
$0.1 million in each of the three months ended
June 30, 2005 and 2004, and, $0.2 million in each of
the six months ended June 30, 2005 and 2004.
In addition, we will continue to evaluate our current facilities
requirements to identify facilities that are in excess of our
current and estimated future needs, as well as evaluate the
assumptions related to estimated future sublease income for
excess facilities. Accordingly, any changes to these estimates
of excess facilities costs could result in additional charges
that could materially affect our consolidated financial position
and results of operations.
Interest Income and Other, Net
The following sets forth, for the periods indicated, our
interest income and other (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest income and other, net
|
|
$ |
1,571 |
|
|
$ |
426 |
|
|
|
269% |
|
|
$ |
2,604 |
|
|
$ |
1,115 |
|
|
|
134% |
|
Interest income and other, net is primarily interest income
earned on our cash, cash equivalents, investments and restricted
cash. Interest income and other, net increased to
$1.6 million for the three months ended June 30, 2005
from $0.4 million for the three months ended June 30,
2004. The $1.2 million increase for the three months ended
June 30, 2005 compared to the same period in 2004 was
primarily due to a $0.7 million increase in interest
income, as a result of higher average cash and investment
balances and higher interest rates compared to the same period
in 2004 and a $0.5 million decrease in foreign exchange
loss, as a result of the weakening of the U.S. dollar against
the Euro and British pound compared to the same period in 2004.
Interest income and other, net increased to $2.6 million
for the six months ended June 30, 2005 from
$1.1 million for the six months ended June 30, 2004.
The $1.5 million increase for the six months ended
June 30, 2005 compared to the same period in 2004 was
primarily due to a $1.0 million increase in interest
income, as a result of higher average cash and investment
balances and higher interest rates compared to the same period
in 2004 and a $0.4 million decrease in foreign exchange
loss, as a result of the weakening of the U.S. dollar against
the Euro and British pound compared to the same period in 2004.
We currently do not engage in any foreign currency hedging
activities and, therefore, are susceptible to fluctuations in
foreign exchange gains or losses in our results of operations in
future reporting periods.
30
Provision for Income Taxes
The following sets forth, for the periods indicated, our
provision for income taxes (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Provision for income taxes
|
|
$ |
781 |
|
|
$ |
342 |
|
|
|
128% |
|
|
$ |
2,153 |
|
|
$ |
689 |
|
|
|
212% |
|
We recorded an income tax provision of $0.8 million and
$2.2 million for the three and six months ended
June 30, 2005, respectively, which primarily represents
federal alternative minimum taxes, income taxes currently
payable on income generated in non-U.S. jurisdictions, and
foreign withholding taxes. We recorded a provision for income
tax of $0.3 million and $0.7 million for the three and
six months ended June 30, 2004, which primarily represents
federal alternative minimum taxes, and income and withholding
taxes attributable to foreign operations. The expected tax
provision derived from applying the federal statutory rate to
our income before income taxes for the six months period ending
June 30, 2005 differed from the recorded income tax
provision primarily due to the reversal of a portion of our
valuation allowance to reflect the utilization of approximately
$3.7 million of tax attributes partially offset by foreign
income and withholding taxes of $0.5 million and state
taxes of $0.4 million. Our tax provision for the remainder
of 2005 remains heavily dependent upon the jurisdictional mix in
which we generate pretax income, the level of earnings subject
to foreign incomes taxes, and the amount of foreign withholding
taxes paid.
Liquidity and Capital Resources
We have funded our operations primarily through cash flows from
operations and public offerings of our common stock. As of
June 30, 2005, we had $250.5 million in available cash
and cash equivalents and short-term investments and
$12.2 million of restricted cash under the terms of our
Pacific Shores property leases.
Our primary sources of cash are the collection of accounts
receivable from our customers and proceeds from the exercise of
stock options and stock purchased under our employee stock
purchase plan. Our uses of cash include payroll and
payroll-related expenses and operating expenses such as
marketing programs, travel, professional services and facilities
and related costs. We have also used cash to purchase property
and equipment, repurchase common stock from the open market to
reduce the dilutive impact of stock option issuances and acquire
businesses and technologies to expand our product offerings.
A number of non-cash items were charged to expenses and
decreased our net income in the six months ended June 30,
2005 and 2004. These items include depreciation and amortization
of property and equipment and intangible assets and acquired
technology, non-cash facilities restructuring charges and
amortization of deferred stock-based compensation. The extent to
which these non-cash items increase or decrease in amount and
increase or decrease our future operating income will have no
corresponding impact on our operating cash flows.
Operating activities: Cash provided by operating
activities for the six months ended June 30, 2005 was
$18.3 million, representing an improvement of
$11.9 million from the six months ended June 30, 2004.
This improvement primarily resulted from a $9.1 million
increase in net income, after adjusting for non-cash expenses,
an increase in cash collections against accounts receivable, an
increase in deferred revenues and income taxes payable offset by
payments to reduce our accrual for excess facilities, accounts
payable and accrued liabilities and increases in prepaid
expenses and other assets primarily for insurance and
third-party software maintenance. Our days sales outstanding in
accounts receivable (days outstanding) decreased
from 54 days at June 30, 2004 to 43 days at
June 30, 2005. Days outstanding at June 30, 2005 were
primarily impacted by improvements to our collection program.
Deferred revenues increased primarily due to increased
maintenance renewals. Cash provided by operating activities for
the six months ended June 30, 2004 was $6.4 million
and primarily resulted from our net income, after adjusting for
non-cash
31
depreciation and amortization expenses, and payments against
accounts payable and accrued liabilities. Our operating cash
flows will also be impacted in the future based on the timing of
payments to our vendors by the nature of vendor arrangements and
managements assessment of our cash inflows.
Investing Activities: We anticipate that we will continue
to purchase necessary property and equipment in the normal
course of our business. The amount and timing of these purchases
and the related cash outflows in future periods is difficult to
predict and is dependent on a number of factors including the
hiring of employees, the rate of change of computer hardware and
software used in our business, and our business outlook. We have
classified our investment portfolio as available for
sale, and our investment objectives are to preserve
principal and provide liquidity while at the same time
maximizing yields without significantly increasing risk. We may
sell an investment at any time if the quality rating of the
investment declines, the yield on the investment is no longer
attractive or we are in need of cash. Because we invest only in
investment securities that are highly liquid with a ready
market, we believe that the purchase, maturity or sale of our
investments has no material impact on our overall liquidity.
Financing Activities: We receive cash from the exercise
of common stock options and the sale of common stock under our
employee stock purchase plan. While we expect to continue to
receive these proceeds in future periods, the timing and amount
of such proceeds is difficult to predict and is contingent on a
number of factors including the price of our common stock, the
number of employees participating in our stock option plans and
our employee stock purchase plan and general market conditions.
From time to time, our Board of Directors has approved common
stock repurchase programs to repurchase shares of our common
stock in the open market.
We believe that our cash balances and the cash flows generated
by operations will be sufficient to satisfy our anticipated cash
needs for working capital and capital expenditures for at least
the next 12 months. However, because our operating results
may fluctuate significantly as a result of a decrease in
customer demand or the acceptance of our products, we may not in
the future be able to generate positive cash flows from
operations. If this occurred, we would require additional funds
to support our working capital requirements, or for other
purposes, and may seek to raise such additional funds through
public or private equity financings or from other sources. We
may not be able to obtain adequate or favorable financing at
that time. Any financing we obtain may dilute our
stockholders ownership interests.
In July 2004, our Board of Directors authorized a stock
repurchase program for up to five million shares of our common
stock. Purchases may be made from time to time in the open
market through the end of 2005 and will be funded from available
working capital. The number of shares to be purchased and the
timing of purchases will be based on the level of our cash
balances and general business and market conditions. In 2004, we
purchased 1,055,000 shares at a cost of $6.1 million
under this program. In the six months ended June 30, 2005,
we purchased 1,537,500 shares at a cost of
$12.2 million under this program. These shares were retired
and reclassified as authorized and unissued shares of common
stock.
We may continue to repurchase shares from time to time in order
to take advantage of attractive share price levels, as
determined by management and approved by the Board of Directors.
The timing and terms of the transactions will depend on market
conditions, our liquidity and other considerations.
A portion of our cash may be used to acquire or invest in
complementary businesses or products or to obtain the right to
use complementary technologies. From time to time, in the
ordinary course of business, we may evaluate potential
acquisitions of such businesses, products or technologies. We
are not currently a party to any contracts or letters of intent
with respect to any acquisitions. The nature of these
transactions makes it difficult to predict the amount and timing
of such cash requirements. We may also be required to raise
additional financing to complete future acquisitions.
32
We lease certain office facilities and equipment under
noncancelable operating leases. During 2004, 2002 and 2001, we
recorded restructuring charges related to the consolidation of
excess leased facilities in the San Francisco Bay Area and
Texas. Operating lease payments in the table below include
approximately $133.0 million, net of actual sublease
income, for operating lease commitments for those facilities
that are included in restructuring charges. See Note 4.
Restructuring Charges and Note 5. Commitments and
Contingencies, in notes to the condensed consolidated financial
statements in Part I, Item 1.
Our future minimum lease payments as of June 30, 2005 under
noncancelable operating leases with original terms in excess of
one year are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating | |
|
Sublease | |
|
|
|
|
Leases | |
|
Income | |
|
Net | |
|
|
| |
|
| |
|
| |
Remaining 2005
|
|
$ |
10,555 |
|
|
$ |
(1,058 |
) |
|
$ |
9,497 |
|
2006
|
|
|
21,308 |
|
|
|
(3,163 |
) |
|
|
18,145 |
|
2007
|
|
|
20,174 |
|
|
|
(2,397 |
) |
|
|
17,777 |
|
2008
|
|
|
16,717 |
|
|
|
(2,392 |
) |
|
|
14,325 |
|
2009
|
|
|
17,169 |
|
|
|
(1,242 |
) |
|
|
15,927 |
|
Thereafter
|
|
|
61,370 |
|
|
|
|
|
|
|
61,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
147,293 |
|
|
$ |
(10,252 |
) |
|
$ |
137,041 |
|
|
|
|
|
|
|
|
|
|
|
The expected timing of payment of the obligations discussed
above is estimated based on current information. Timing of
payments and actual amounts paid may be different depending on
the time of receipt of goods or services or changes to
agreed-upon amounts for some obligations.
We have sublease agreements for leased office space in Palo
Alto, San Francisco, Scotts Valley and Redwood City,
California and Carrollton, Texas. In the event the sublessees
are unable to fulfill their obligations, we would be responsible
for rent due under the leases. However, we expect the sublessees
will fulfill their obligations under these leases.
In February 2000, we entered into two lease agreements for two
buildings in Redwood City, California (our former corporate
headquarters), which we occupied from August 2001 through
December 2004. The lease expires in July 2013. As part of these
agreements, we have purchased certificates of deposit totaling
$12.2 million as a security deposit for lease payments
until certain financial milestones are met. The letter of credit
may be reduced to an amount not less than three months of the
base rent at the then current rate if our annual revenues reach
$750 million and we have quarterly operating profits of at
least $100 million for no less than four consecutive
calendar quarters. These certificates of deposit are classified
as long-term restricted cash on the consolidated balance sheet.
|
|
|
Off-Balance Sheet Arrangements |
We do not have any off-balance sheet financing arrangements or
transactions, arrangements or relationships with special
purpose entities.
Risk Factors
In addition to the other information contained in this
Form 10-Q, we have identified the following risks and
uncertainties that may have a material adverse effect on our
business, financial condition or results of operation. Investors
should carefully consider the risks described below before
making an investment decision. Our business could be harmed by
any of these risks. The trading price of our common stock could
decline due to any of these risks, and investors may lose all or
part of their investment. In assessing these risks, investors
should also refer to the other information contained in our
other SEC filings, including our Form 10-K for the year
ended December 31, 2004.
33
|
|
|
We have experienced and could continue to experience
fluctuations in our quarterly operating results, especially the
amount of license revenue we recognize each quarter, and such
fluctuations have caused and could continue to cause our stock
price to decline. |
Our quarterly operating results have fluctuated in the past and
are likely to do so in the future. These fluctuations have
caused our stock price to experience declines in the past and
could cause our stock price to significantly fluctuate or
experience declines in the future. One of the reasons why our
operating results have fluctuated is that our license revenues
are not predictable with any significant degree of certainty and
are vulnerable to short-term shifts in customer demand. For
example, we have experienced customer order deferrals in
anticipation of future new product introductions or product
enhancements, as well as the particular budgeting and purchase
cycles of our customers. By comparison, our short-term expenses
are relatively fixed and based in part on our expectations of
future revenues.
Moreover, we historically have not had a substantial backlog of
license orders at the end of a fiscal period. This has
particularly been the case at the end of the first and third
fiscal quarters. For example, in the three months ended
March 31, 2004, we experienced greater seasonal reduction
in license orders than we expected. When we experience quarters
where our license revenues generally reflect orders received and
shipped in that same quarter and where we have not had a
substantial backlog of orders, we do not have significant
visibility of expected results for future quarters.
Furthermore, we generally recognize a substantial portion of our
license revenues in the last month of each quarter, and more
recently, in the last few weeks of each quarter. As a result, we
cannot predict the adverse impact caused by cancellations or
delays in orders until the end of each quarter. Moreover, the
likelihood of an adverse impact may be greater if we continue to
experience increased average transaction sizes due to a mix of
relatively larger deals in our sales pipeline.
Due to the difficulty we experience in predicting our quarterly
license revenues, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future
performance. Furthermore, our future operating results could
fail to meet the expectations of stock analysts and investors.
If this happens, the price of our common stock could fall.
|
|
|
If we do not compete effectively with companies selling
data integration products, our revenues may not grow and could
decline. |
The market for our products is highly competitive, quickly
evolving and subject to rapidly changing technology. Our
competition consists of hand-coded, custom-built data
integration solutions developed in-house by various companies in
the industry segments that we target, as well as other vendors
of integration software products, including, Ab Initio, Business
Objects, Embarcadero Technologies, IBM, which recently acquired
Ascential Software, SAS Institute and certain other
privately-held companies. In the past, we have competed with
business intelligence vendors that currently offer, or may
develop, products with functionalities that compete with our
products, such as Cognos, Hyperion Solutions, MicroStrategy and
certain privately-held companies. We also compete against
certain database and enterprise application vendors, which offer
products that typically operate specifically with these
competitors proprietary databases. Such potential
competitors include IBM, Microsoft, Oracle, SAP and Siebel
Systems. Many of these competitors have longer operating
histories, substantially greater financial, technical, marketing
or other resources, or greater name recognition than we do. Our
competitors may be able to respond more quickly than we can to
new or emerging technologies and changes in customer
requirements. Competition could seriously impede our ability to
sell additional products and services on terms favorable to us.
Our current and potential competitors may develop and market new
technologies that render our existing or future products
obsolete, unmarketable or less competitive. We believe we
currently compete more on the basis of our products
functionality than on the basis of price. We may have difficulty
competing on the basis of price in circumstances where our
competitors develop and market products with similar or superior
functionality and pursue an aggressive pricing strategy or
bundle data integration technology at no cost to the customer or
at deeply discounted prices.
34
Our current and potential competitors may make strategic
acquisitions, consolidate their operations or establish
cooperative relationships among themselves or with other
solution providers, thereby increasing their ability to provide
a broader suite of software products or solutions and more
effectively address the needs of our prospective customers, such
as IBMs recent acquisition of Ascential Software. Such
acquisitions could cause customers to defer their purchasing
decisions. Our current and potential competitors may establish
or strengthen cooperative relationships with our current or
future strategic partners, thereby limiting our ability to sell
products through these channels. If any of this were to occur,
our ability to market and sell our software products would be
impaired. In addition, competitive pressures could reduce our
market share or require us to reduce our prices, either of which
could harm our business, results of operations and financial
condition.
|
|
|
We rely on our relationships with our strategic partners.
If we do not maintain and strengthen these relationships, our
ability to generate revenue and control expenses could be
adversely affected, which could cause a decline in the price of
our common stock. |
We believe that our ability to increase the sales of our
products depends in part upon maintaining and strengthening
relationships with our strategic partners and any future
strategic partners. In addition to our direct sales force, we
rely on established relationships with a variety of strategic
partners, such as systems integrators, resellers and
distributors, for marketing, licensing, implementing and
supporting our products in the United States and
internationally. We also rely on relationships with strategic
technology partners, such as enterprise application providers,
database vendors, data quality vendors and enterprise integrator
vendors, for the promotion and implementation of our products.
Our strategic partners offer products from several different
companies, including, in some cases, products that compete with
our products. We have limited control, if any, as to whether
these strategic partners devote adequate resources to promoting,
selling and implementing our products as compared to our
competitors products.
While our strategic partnership with IBMs BCS group has
been successful in the past, IBMs recent acquisition of
Ascential Software may make it more critical that we strengthen
our relationships with our other strategic partners. We cannot
guarantee that we will be able to strengthen our relationships
with our strategic partners or that such relationships will be
successful in generating additional revenue.
We may not be able to maintain our strategic partnerships or
attract sufficient additional strategic partners who have the
ability to market our products effectively, are qualified to
provide timely and cost-effective customer support and service
or have the technical expertise and personnel resources
necessary to implement our products for our customers. In
particular, if our strategic partners do not devote sufficient
resources to implement our products, we may incur substantial
additional costs associated with hiring and training additional
qualified technical personnel to implement solutions for our
customers in a timely manner. Furthermore, our relationships
with our strategic partners may not generate enough revenue to
offset the significant resources used to develop these
relationships. If we are unable to leverage the strength of our
strategic partnerships to generate additional revenue, our
revenues and the price of our common stock could decline.
|
|
|
If we are unable to accurately forecast revenues, we may
fail to meet stock analysts and investors expectations of
our quarterly operating results, which could cause our stock
price to decline. |
We use a pipeline system, a common industry
practice, to forecast sales and trends in our business. Our
sales personnel monitor the status of all proposals, including
the date when they estimate that a customer will make a purchase
decision and the potential dollar amount of the sale. We
aggregate these estimates periodically in order to generate a
sales pipeline. We compare the pipeline at various points in
time to look for trends in our business. While this pipeline
analysis may provide us with some guidance in business planning
and budgeting, these pipeline estimates are necessarily
speculative and may not consistently correlate to revenues in a
particular quarter or over a longer period of time.
Additionally, because we have historically recognized a
substantial portion of our license revenues in the last month of
35
each quarter, and more recently, in the last few weeks of each
quarter, we may not be able to adjust our cost structure in a
timely manner in response to variations in the conversion of the
sales pipeline into license revenues. Any change in the
conversion of the pipeline into customer sales or in the
pipeline itself could cause us to improperly budget for future
expenses that are in line with our expected future revenues,
which would adversely affect our operating margins and results
of operations and could cause the price of our common stock to
decline.
|
|
|
We have experienced reduced sales pipeline and pipeline
conversion rates in prior years, which have adversely affected
the growth of our company and the price of our common
stock. |
In 2002, we experienced a reduced conversion rate of our overall
license pipeline, primarily as a result of the general economic
slowdown which caused the amount of customer purchases to be
reduced, deferred or cancelled. In the first half of 2003, we
continued to experience a decrease in our sales pipeline as well
as our pipeline conversion rate, primarily as a result of the
negative impact of the war in Iraq on the capital spending
budgets of our customers, as well as the continued general
economic slowdown. While the U.S. economy improved in the
second half of 2003 and in 2004, we experienced, and continue to
experience, uncertainty regarding our sales pipeline and our
ability to convert potential sales of our products into revenue.
Although we have experienced an increase in sales pipeline and
pipeline conversation rates in the first half of 2005, as a
result of increased investment in sales personnel and an
gradually improving IT spending environment, if we are unable to
continue to increase the size of our sales pipeline and our
pipeline conversion rate, our results of operations could fail
to meet the expectations of stock analysts and investors, which
could cause the price of our common stock to decline.
|
|
|
As a result of our products lengthy sales cycles,
our expected revenues are susceptible to fluctuations, which
could cause us to fail to meet stock analysts and
investors expectations, resulting in a decline in the
price of our common stock. |
Due to the expense, broad functionality and company-wide
deployment of our products, our customers decisions to
purchase our products typically require the approval of their
executive decision-makers. In addition, we frequently must
educate our potential customers about the full benefits of our
products, which also can require significant time. This trend
towards greater customer executive level involvement and
customer education is likely to increase as we expand our market
focus to broader data integration initiatives which may result
in larger average transaction sizes. Further, our sales cycle
may lengthen as we continue to focus our sales efforts on large
corporations. As a result of these factors, the length of time
from our initial contact with a customer to the customers
decision to purchase our products typically ranges from three to
nine months. We are subject to a number of significant risks as
a result of our lengthy sales cycle, including:
|
|
|
|
|
our customers budgetary constraints and internal
acceptance review procedures; |
|
|
|
the timing of our customers budget cycles; |
|
|
|
the seasonality of technology purchases, which historically has
resulted in stronger sales of our products in the fourth quarter
of the year, especially when compared to lighter sales in the
first quarter of the year; |
|
|
|
our customers concerns about the introduction of our
products or new products from our competitors; or |
|
|
|
potential downturns in general economic or political conditions
that could occur during the sales cycle. |
If our sales cycle lengthens unexpectedly, it could adversely
affect the timing of our revenues or increase costs, which may
independently cause fluctuations in our revenue and results of
operations. Finally, if we are unsuccessful in closing sales of
our products after spending significant funds and management
resources, our operating margins and results of operations could
be adversely impacted, and the price of our common stock could
decline.
36
|
|
|
Our international operations expose us to greater
intellectual property, collections, exchange rate fluctuations,
regulatory and other risks, which could limit our future
growth. |
We have significant operations outside the United States,
including software development centers in India, the Netherlands
and the United Kingdom, sales offices in Belgium, Canada,
France, Germany, the Netherlands, Switzerland and the United
Kingdom, and customer support centers in the Netherlands, India
and the United Kingdom. Additionally, we have recently opened
offices in Japan, Korea, China, Taiwan, Hong Kong and we plan to
continue to expand our internal operation, and we plan to expand
our international operations in the Asia-Pacific market. Our
international operations face numerous risks. For example, in
order to sell our products in certain foreign countries, our
products must be localized, that is, customized to meet local
user needs. Developing local versions of our products for
foreign markets is difficult, requires us to incur additional
expenses and can take longer than we anticipate. We currently
have limited experience in localizing products and in testing
whether these localized products will be accepted in the
targeted countries. We cannot assure you that our localization
efforts will be successful.
In addition, we have only a limited history of marketing,
selling and supporting our products and services
internationally. As a result, we must hire and train experienced
personnel to staff and manage our foreign operations. However,
we have experienced difficulties in recruiting, training and
managing an international staff, and we may continue to
experience such difficulties in the future.
We must also be able to enter into strategic distributor
relationships with companies in certain international markets
where we do not have a local presence. If we are not able to
maintain successful strategic distributor relationships
internationally or recruit additional companies to enter into
strategic distributor relationships, our future success in these
international markets could be limited.
Business practices with European and other foreign governments
and entities may differ from those in North America and may
require us to include terms in our software license agreements,
such as extended warranty terms, that will require us to defer
license revenue and recognize it ratably over the warranty term
or other performance obligation included within the agreement.
For example, license revenue for 2004 did not include the full
amount related to two large software license agreements signed
in Europe in the third quarter of 2004. We deferred the license
revenues related to these software license agreements in
September 2004 due to extended warranties that contained
provisions for additional unspecified deliverables and began
amortizing the deferred revenues balances to license revenues in
September 2004 for a two- to five-year period. While
historically we have infrequently entered into software license
agreements that require ratable recognition of license revenue,
we may enter into software license agreements like these in the
future.
Our software development centers in India, the Netherlands and
the United Kingdom also subject our business to certain risks,
including:
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greater difficulty in protecting our ownership rights to
intellectual property developed in foreign countries, which may
have laws that materially differ from those in the United States; |
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communication delays between our main development center in
Redwood Shores, California and our development centers in India,
the Netherlands and the United Kingdom as a result of time zone
differences, which may delay the development, testing or release
of new products; |
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greater difficulty in relocating existing trained development
personnel and recruiting local experienced personnel, and the
costs and expenses associated with such activities; and |
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increased expenses incurred in establishing and maintaining
office space and equipment for the development centers. |
Additionally, our international operations as a whole are
subject to a number of risks, including the following:
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greater risk of uncollectible accounts and longer collection
cycles; |
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greater risk of unexpected changes in regulatory practices,
tariffs, and tax laws and treaties; |
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greater risk of a failure of our foreign employees to comply
with both U.S. and foreign laws, including antitrust
regulations, the Foreign Corrupt Practices Act, and unfair trade
regulations; |
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potential conflicts with our established distributors in
countries in which we elect to establish a direct sales presence; |
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our limited experience in establishing a sales and marketing
presence and the appropriate internal systems, processes and
controls in Asia, especially China, Hong Kong, Taiwan and Korea; |
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fluctuations in exchange rates between the U.S. dollar and
foreign currencies in markets where we do business because we do
not engage in any hedging activities; and |
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general economic and political conditions in these foreign
markets. |
These factors and other factors could harm our ability to gain
future international revenues and, consequently, materially
impact our business, results of operations and financial
condition. Our failure to manage our international operations
and the associated risks effectively could limit the future
growth of our business. The expansion of our existing
international operations and entry into additional international
markets will require significant management attention and
financial resources.
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While we believe we currently have adequate internal
control over financial reporting, we are required to assess our
internal control over financial reporting on an annual basis and
any future adverse results from such assessment could result in
a loss of investor confidence in our financial reports and have
an adverse effect on our stock price. |
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
(Section 404) and the rules and regulations
promulgated by the SEC to implement Section 404, we are
required to furnish a report to include in our Form 10-K an
annual report by our management regarding the effectiveness of
our internal control over financial reporting. The report
includes, among other things, an assessment of the effectiveness
of our internal control over financial reporting as of the end
of our fiscal year, including a statement as to whether or not
our internal control over financial reporting is effective. This
assessment must include disclosure of any material weaknesses in
our internal control over financial reporting identified by
management.
Managements assessment of internal control over financial
reporting requires management to make subjective judgments and,
because this requirement to provide a management report is newly
effective, some of our judgments will be in areas that may be
open to interpretation. Therefore our management report may be
uniquely difficult to prepare, and our auditors, who are
required to issue an attestation report along with our
management report, may not agree with managements
assessments. While we currently believe our internal control
over financial reporting is effective, the effectiveness of our
internal controls in future periods is subject to the risk that
our controls may become inadequate because of changes in
conditions.
If we are unable to assert that our internal control over
financial reporting is effective in any future period (or if our
auditors are unable to express an opinion on the effectiveness
of our internal controls), we could lose investor confidence in
the accuracy and completeness of our financial reports, which
would have an adverse effect on our stock price.
Additionally, in 2004, we experienced turnover in our finance
and accounting personnel and shifts in responsibilities at the
management level. These personnel and responsibility changes
adversely affected our ability to effectively follow our
internal controls and contributed to a significant deficiency
regarding our controls over license revenue recognition in the
third quarter of 2004. We corrected this deficiency in the
fourth quarter of 2004 by establishing additional controls to
review revenue transactions. We will continue to enhance our
internal control over financial reporting by adding resources
and procedures, as necessary.
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If our products are unable to interoperate with hardware
and software technologies that are developed and maintained by
third parties that are not within our control, our ability to
develop and sell our products to our customers could be
adversely affected which would result in harm to our business
and operating results. |
Our products are designed to interoperate with and provide
access to a wide range of third-party developed and maintained
hardware and software technologies, which are used by our
customers. The future design and development plans of the third
parties that maintain these technologies are not within our
control and may not be in line with our future product
development plans. We may also rely on such third parties,
particularly certain third party developers of database and
application software products, to provide us with access to
these technologies so that we can properly test and develop our
products to interoperate with the third-party technologies.
These third parties may in the future refuse or otherwise be
unable to provide us with the necessary access to their
technologies. In addition, these third parties may decide to
design or develop their technologies in a manner that would not
be interoperable with our own. If either of these situations
occur, we would not be able to continue to market our products
as interoperable with such third party hardware and software,
which could adversely affect our ability to successfully sell
our products to our customers.
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Changes in our product packaging and pricing may impact
market acceptance of our products and affect our results of
operations. |
We recently announced the release of PowerCenter Advanced
Edition. This edition of PowerCenter includes two previously
at-cost options, team-based development and server grid
functionality, as well as two previously separate products,
PowerAnalyzer and SuperGlue. We also simultaneously announced
that we are removing these two options and these two separate
products from our price list. PowerCenter Advanced Edition is
priced higher than the standard edition of PowerCenter but less
than the aggregate price of all components previously sold
separately. The success of this product transition is subject to
significant risks, including:
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we may receive less revenue from PowerCenter Advanced Edition
than we would have received from the sale of each of the
components previously sold separately; |
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customers may be confused by the change in the product offerings
and may delay or defer purchases; and |
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existing customers of PowerAnalyzer and SuperGlue may not renew
their support services agreements, which may reduce our overall
maintenance revenues and maintenance renewal rates. |
To the extent that we encounter or are unable to successfully
manage any of the risks outlined above, our results of
operations may be adversely affected.
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If the market in which we sell our products and services
does not grow as we anticipate, we may not be able to increase
our revenues at an acceptable rate of growth, and the price of
our common stock could decline. |
The market for software products that enable more effective
business decision-making by helping companies aggregate and
utilize data stored throughout an organization, continues to
change. Substantially all of our historical revenues have been
attributable to the sales of products and services in the data
warehousing market. While we believe that this market is still
growing, we expect most of our growth to come from the emerging
market for broader data integration, which includes migration,
data consolidation, data synchronization and single view
projects. The use of package software solutions to address the
needs of the broader data integration market is relatively new
and is still emerging. Our potential customers may:
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not fully value the benefits of using our products; |
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not achieve favorable results using our products; |
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experience technical difficulties in implementing our
products; or |
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use alternative methods to solve the problems addressed by our
products. |
If this market does not grow as we anticipate, we would not be
able to sell as much of our software products and services as we
currently expect, which could result in a decline in the price
of our common stock.
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An increase in the turnover rate of our sales force
personnel may negatively impact our ability to generate license
revenues. |
We experienced an increased level of turnover in our direct
sales force in the fourth quarter of 2003 and the first quarter
of 2004. This increase in the turnover rate impacted our ability
to generate license revenues in the first nine months of 2004.
Although we have hired replacements in our sales force and have
seen the pace of the turnover decrease in recent quarters, we
typically experience lower productivity from newly hired sales
personnel for a period of six to 12 months. If we are
unable to effectively train such new personnel, or if we
continue to experience a heightened level of sales force
turnover, our ability to generate license revenues may be
negatively impacted.
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The loss of our key personnel or the inability to attract
and retain additional personnel could adversely affect our
ability to grow our company successfully and may negatively
impact our results of operations. |
We believe our success depends upon our ability to attract and
retain highly skilled personnel and key members of our
management team. We continue to experience changes in members of
our senior management team. For example, we recently hired John
Entenmann as our Executive Vice President, Corporate Strategy
and Marketing and Paul Hoffman as our Executive Vice President,
Worldwide Sales. Accordingly, until such new senior personnel
become familiar with our business strategy and systems, their
integration could result in some disruption to our ongoing
operations.
We also experienced an increased level of turnover in our direct
sales force in the fourth quarter of 2003 and the first quarter
of 2004. We have, at times, also recently experienced an
increased level of turnover in other areas of the business. If
we are unable to effectively attract and train new personnel, or
if we continue to experience a heightened level of turnover, our
results of operations may be negatively impacted.
We currently do not have any key-man life insurance relating to
our key personnel, and their employment is at-will and not
subject to employment contracts. We have relied on our ability
to grant stock options as one mechanism for recruiting and
retaining highly skilled talent. Potential accounting
regulations requiring the expensing of stock options may impair
our future ability to provide these incentives without incurring
significant compensation costs. There can be no assurance that
we will continue to successfully attract and retain key
personnel.
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If the current improvement in the U.S. and global economy
does not result in increased sales of our products and services,
our operating results would be harmed, and the price of our
common stock could decline. |
As our business has grown, we have become increasingly subject
to the risks arising from adverse changes in the domestic and
global economy. We experienced the adverse effect of the
economic slowdown in 2002 and the first six months of 2003,
which resulted in a significant reduction in capital spending by
our customers, as well as longer sales cycles, and the deferral
or delay of purchases of our products. In addition, terrorist
actions and the military actions in Afghanistan and Iraq
magnified and prolonged the adverse effects of the economic
slowdown. Although the U.S. economy improved beginning in
the third quarter of 2003, and we have experienced some
improvement in our pipeline conversion rate, we may not
experience any significant improvement in our pipeline
conversion rate in the future. In particular, our ability to
forecast and rely on U.S. federal government orders,
especially potential orders from the U.S. Department of
Defense, is uncertain due to congressional budget constraints
and changes in spending priorities.
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If the current improvement in the U.S. economy does not
result in increased sales of our products and services, our
results of operations could fail to meet the expectations of
stock analysts and investors, which could cause the price of our
common stock to decline. Moreover, if the current economic
conditions in Europe and Asia do not improve or if there is an
escalation in regional or global conflicts, we may fall short of
our revenue expectations for 2005. Although we have seen
improvement in our European revenues, we may experience
difficulties in our pipeline conversion rate or be negatively
impacted by the effects of an economic slowdown in Europe in the
future, which may impact our ability to meet our revenue
expectations for 2005. Although we are investing in Asia, there
are significant risks with overseas investments and our growth
prospects in Asia are uncertain. In addition, we could
experience delays in the payment obligations of our world-wide
reseller customers if they experience weakness in the end-user
market, which would increase our credit risk exposure and harm
our financial condition.
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We rely on the sale of a limited number of products, and
if these products do not achieve broad market acceptance, our
revenues would be adversely affected. |
To date, substantially all of our revenues have been derived
from our data integration products such as PowerCenter,
PowerMart, PowerConnect and related services. We expect sales of
our data integration software and related services to comprise
substantially all of our revenues for the foreseeable future. If
any of our products do not achieve market acceptance, our
revenues and stock price could decrease. In particular, with the
completion of our Striva acquisition, we began selling and
marketing PowerExchange as part of our complete product
offering. Market acceptance for PowerExchange, as well as our
current products, could be affected if, among other things,
competition substantially increases in the enterprise data
integration market or transactional applications suppliers
integrate their products to such a degree that the utility of
the data integration functionality that our products provide is
minimized or rendered unnecessary.
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We may not be able to successfully manage the growth of
our business if we are unable to improve our internal systems,
processes and controls. |
We need to continue to improve our internal systems, processes
and controls to effectively manage our operations and growth,
including our international growth into new geographies,
particularly the Asia-Pacific market. We may not be able to
successfully implement improvements to these systems, processes
and controls in an efficient or timely manner, and we may
discover deficiencies in existing systems, processes and
controls. We have licensed technology from third parties to help
us accomplish this objective. The support services available for
such third-party technology may be negatively affected by
mergers and consolidation in the software industry, and support
services for such technology may not be available to us in the
future. We may experience difficulties in managing improvements
to our systems, processes and controls or in connection with
third-party software, which could disrupt existing customer
relationships, causing us to lose customers, limit us to smaller
deployments of our products or increase our technical support
costs.
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The price of our common stock fluctuates as a result of
factors other than our operating results, such as the actions of
our competitors and securities analysts, as well as developments
in our industry and changes in accounting rules. |
The market price for our common stock has experienced
significant fluctuations and may continue to fluctuate
significantly. The market price for our common stock may be
affected by a number of factors other than our operating
results, including:
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the announcement of new products or product enhancements by our
competitors; |
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quarterly variations in our competitors results of
operations; |
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changes in earnings estimates and recommendations by securities
analysts; |
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developments in our industry; and |
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changes in accounting rules. |
After periods of volatility in the market price of a particular
companys securities, securities class action litigation
has often been brought against that company. We and certain of
our former officers and our directors have been named as
defendants in a purported class action complaint, which was
filed on behalf of certain persons who purchased our common
stock between April 29, 1999 and December 6, 2000.
Such actions could cause the price of our common stock to
decline.
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The price of our common stock may fluctuate when we
account for employee stock option and employee stock purchase
plans using the fair value method, which could significantly
reduce our net income and earnings per share. |
In December 2004, the FASB issued SFAS No. 123(R),
Share-Based Payment, which will require us to
measure compensation cost for all share-based payments
(including employee stock options) at fair value at the date of
grant and record such expense in our consolidated financial
statements. SFAS No. 123(R) is effective for first
interim periods beginning after June 15, 2005. Pro forma
disclosure is no longer an alternative to financial statement
recognition. In April 2005, the Securities and Exchange
Commission announced the adoption of a new rule that amends the
compliance dates for SFAS No. 123(R). The new rules
allow companies to implement SFAS No. 123(R) at the
beginning of their next fiscal year, starting after
June 15, 2005 instead of the next reporting period, that
begins after June 15, 2005, or December 15, 2005 for
certain issuers. We are therefore required to adopt
SFAS No. 123(R) in the first quarter of 2006. Although
we have not completed our evaluation of the impact of this
accounting pronouncement, the adoption of
SFAS No. 123(R) is expected to have a material adverse
impact on our consolidated financial position and results of
operations, as we expect the adoption of
SFAS No. 123(R) will result in an increase in our
operating expenses and a reduction in our net income and
earnings per share, all of which could result in a decline in
the price of our common stock.
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We rely on a number of different distribution channels to
sell and market our products. Any conflicts that we may
experience within these various distribution channels could
result in confusion for our customers and a decrease in revenue
and operating margins. |
We have a number of relationships with resellers, systems
integrators and distributors that assist us in obtaining broad
market coverage for our products and services. Although our
discount policies, sales commission structure and reseller
licensing programs are intended to support each distribution
channel with a minimum level of channel conflicts, we may not be
able to minimize these channel conflicts in the future. Any
channel conflicts that we may experience could result in
confusion for our customers and a decrease in revenue and
operating margins.
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Any significant defect in our products could cause us to
lose revenue and expose us to product liability claims. |
The software products we offer are inherently complex and,
despite extensive testing and quality control, have in the past
and may in the future contain errors or defects, especially when
first introduced. These defects and errors could cause damage to
our reputation, loss of revenue, product returns, order
cancellations or lack of market acceptance of our products. We
have in the past and may in the future need to issue corrective
releases of our software products to fix these defects or
errors. For example, we issued corrective releases to fix
problems with the version of our PowerMart released in the first
quarter of 1998. As a result, we had to allocate significant
customer support resources to address these problems.
Our license agreements with our customers typically contain
provisions designed to limit our exposure to potential product
liability claims. However, the limitation of liability
provisions contained in our license agreements may not be
effective as a result of existing or future national, federal,
state or local laws or ordinances or unfavorable judicial
decisions. Although we have not experienced any product
liability claims to date, the sale and support of our products
entails the risk of such claims, which could be substantial in
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light of the use of our products in enterprise-wide
environments. In addition, our insurance against product
liability may not be adequate to cover a potential claim.
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If we are unable to successfully respond to technological
advances and evolving industry standards, we could experience a
reduction in our future product sales, which would cause our
revenues to decline. |
The market for our products is characterized by continuing
technological development, evolving industry standards, changing
customer needs and frequent new product introductions and
enhancements. The introduction of products by our direct
competitors or others embodying new technologies, the emergence
of new industry standards or changes in customer requirements
could render our existing products obsolete, unmarketable or
less competitive. In particular, an industry-wide adoption of
uniform open standards across heterogeneous applications could
minimize the importance of the integration functionality of our
products and materially adversely affect the competitiveness and
market acceptance of our products. Our success depends upon our
ability to enhance existing products, to respond to changing
customer requirements and to develop and introduce in a timely
manner new products that keep pace with technological and
competitive developments and emerging industry standards. We
have in the past experienced delays in releasing new products
and product enhancements and may experience similar delays in
the future. As a result, in the past, some of our customers
deferred purchasing our products until the next upgrade was
released. Future delays or problems in the installation or
implementation of our new releases may cause customers to forego
purchases of our products and purchase those of our competitors
instead. Additionally, even if we are able to develop new
products and product enhancements, we cannot ensure that they
will achieve market acceptance.
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We recognize revenue from specific customers at the time
we receive payment for our products, and if these customers do
not make timely payment, our revenues could decrease. |
Based on limited credit history, we recognize revenue from
direct end users, resellers, distributors and OEMs that have not
been deemed credit-worthy at the time we receive payment for our
products, rather than at the time of sale. If these customers do
not make timely payment for our products, our revenues could
decrease. If our revenues decrease, the price of our common
stock may fall.
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We have a limited operating history and a cumulative net
loss, which makes it difficult to evaluate our operations,
products and prospects for the future. |
We were incorporated in 1993 and began selling our products in
1996; therefore, we have a limited operating history upon which
investors can evaluate our operations, products and prospects.
With the exception of 2003, when we had net income of
$7.3 million, since our inception we have incurred
significant annual net losses, resulting in an accumulated
deficit of $183.1 million as of June 30, 2005. We
cannot ensure that we will be able to sustain profitability in
the future. If we are unable to sustain profitability, we may
fail to meet the expectations of stock analysts and investors,
and the price of our common stock may fall.
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If we are not able to adequately protect our proprietary
rights, third parties could develop and market products that are
equivalent to our own, which would harm our sales
efforts. |
Our success depends upon our proprietary technology. We believe
that our product developments, product enhancements, name
recognition and the technological and innovative skills of our
personnel are essential to establishing and maintaining a
technology leadership position. We rely on a combination of
patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to
establish and protect our proprietary rights.
However, these legal rights and contractual agreements may
provide only limited protection. Our pending patent applications
may not be allowed or our competitors may successfully challenge
the validity or scope of any of our nine issued patents or any
future issued patents. Our patents alone may not provide us with
any significant competitive advantage, and third parties may
develop technologies that are similar
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or superior to our technology or design around our patents.
Third parties could copy or otherwise obtain and use our
products or technology without authorization, or develop similar
technology independently. We cannot easily monitor any
unauthorized use of our products, and, although we are unable to
determine the extent to which piracy of our software products
exists, software piracy is a prevalent problem in our industry
in general.
The risk of not adequately protecting our proprietary technology
and our exposure to competitive pressures may be increased if a
competitor should resort to unlawful means in competing against
us. For example, in July 2003 we settled a complaint against
Ascential Software Corporation in which a number of former
Informatica employees recruited and hired by Ascential,
misappropriated our trade secrets, including sensitive product
and marketing information and detailed sales information
regarding existing and potential customers and unlawfully used
that information to benefit Ascential in gaining a competitive
advantage against us. Although we were ultimately successful in
this lawsuit, there are no assurances that we will be successful
in protecting our proprietary technology from competitors in the
future.
We have entered into agreements with many of our customers and
partners that require us to place the source code of our
products into escrow. Such agreements generally provide that
such parties will have a limited, non-exclusive right to use
such code if: (1) there is a bankruptcy proceeding by or
against us; (2) we cease to do business; or (3) we
fail to meet our support obligations. Although our agreements
with these third parties limit the scope of rights to use of the
source code, we may be unable to effectively control such
third-partys actions.
Furthermore, effective protection of intellectual property
rights is unavailable or limited in various foreign countries.
The protection of our proprietary rights may be inadequate and
our competitors could independently develop similar technology,
duplicate our products or design around any patents or other
intellectual property rights we hold.
We may be forced to initiate litigation in order to protect our
proprietary rights. For example, on July 15, 2002, we filed
a patent infringement lawsuit against Acta Technology, Inc.
Although this lawsuit is in the discovery stage, litigating
claims related to the enforcement of proprietary rights can be
very expensive and can be burdensome in terms of management time
and resources, which could adversely affect our business and
operating results.
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We have substantial real estate lease commitments that are
currently subleased to third parties, and if subleases for this
space are terminated or cancelled, our operating results and
financial condition could be adversely affected. |
We have substantial real estate lease commitments in the United
States, a significant portion of which is subleased to third
parties. The terms of most of these sublease agreements account
for only a portion of the period our master leases and contain
rights of the subtenant to extend the term of the sublease. To
the extent that (1) our subtenants do not renew their
subleases at the end of the initial term and we are unable to
enter into new subleases with other parties at comparable rates,
or (2) our subtenants are unable to timely pay the sublease
rent amounts, our cash flow would be negatively impacted and our
operating results and financial condition could be adversely
affected.
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We may face intellectual property infringement claims that
could be costly to defend and result in our loss of significant
rights. |
As is common in the software industry, we have received and may
continue from time to time to receive notices from third parties
claiming infringement by our products of third-party patent and
other proprietary rights. As the number of software products in
our target markets increases and the functionality of these
products further overlaps, we may become increasingly subject to
claims by a third party that our technology infringes such
partys proprietary rights. Any claims, with or without
merit, could be time-consuming, result in costly litigation,
cause product shipment delays or require us to enter into
royalty or licensing agreements, any of which could adversely
affect our business, financial condition and operating results.
Although we do not believe that we are currently infringing any
proprietary rights of others, legal
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action claiming patent infringement could be commenced against
us, and we may not prevail in such litigation given the complex
technical issues and inherent uncertainties in patent
litigation. The potential effects on our business that may
result from a third-party infringement claim include the
following:
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we may be forced to enter into royalty or licensing agreements,
which may not be available on terms favorable to us, or at all; |
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we may be required to indemnify our customers or obtain
replacement products or functionality for our customers; |
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we may be forced to significantly increase our development
efforts and resources to redesign our products as a result of
these claims; and |
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we may be forced to discontinue the sale of some or all of our
products. |
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We may engage in future acquisitions or investments that
could dilute our existing stockholders, or cause us to incur
contingent liabilities, debt or significant expense. |
From time to time, in the ordinary course of business, we may
evaluate potential acquisitions of, or investments in, related
businesses, products or technologies. Future acquisitions and
investments like these could result in the issuance of dilutive
equity securities, the incurrence of debt or contingent
liabilities, or the payment of cash to purchase equity
securities from third parties. There can be no assurance that
any strategic acquisition or investment will succeed.
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Delaware law, as well as our certificate of incorporation
and bylaws, contains provisions that could deter potential
acquisition bids, which may adversely affect the market price of
our common stock, discourage merger offers and prevent changes
in our management or Board of Directors. |
Our basic corporate documents and Delaware law contain
provisions that might discourage, delay or prevent a change in
the control of Informatica or a change in our management. Our
bylaws provide that we have a classified Board of Directors,
with each class of directors subject to re-election every three
years. This classified board has the effect of making it more
difficult for third parties to insert their representatives on
our Board of Directors and gain control of Informatica. These
provisions could also discourage proxy contests and make it more
difficult for our stockholders to elect directors and take other
corporate actions. The existence of these provisions could limit
the price that investors might be willing to pay in the future
for shares of our common stock.
In addition, we have adopted a stockholder rights plan. Under
the plan, we issued a dividend of one right for each outstanding
share of common stock to stockholders of record as of
November 12, 2001, and such rights will become exercisable
only upon the occurrence of certain events. Because the rights
may substantially dilute the stock ownership of a person or
group attempting to take us over without the approval of our
Board of Directors, the plan could make it more difficult for a
third party to acquire us or a significant
percentage of our outstanding capital stock without
first negotiating with our Board of Directors regarding such
acquisition.
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|
We may need to raise additional capital in the future,
which may not be available on reasonable terms to us, if at
all. |
We may not generate sufficient revenue from operations to offset
our operating or other expenses. As a result, in the future, we
may need to raise additional funds through public or private
debt or equity financings. We may not be able to borrow money or
sell more of our equity securities to meet our cash needs. Even
if we are able to do so, it may not be on terms that are
favorable or reasonable to us. If we are not able to raise
additional capital when we need it in the future, our business
could be seriously harmed.
45
|
|
|
Business interruptions could adversely affect our
business. |
Our operations are vulnerable to interruption by fire,
earthquake, power loss, telecommunications or network failure
and other events beyond our control. We do not have a detailed
disaster recovery plan. Our facilities in the State of
California are currently subject to electrical blackouts as a
consequence of a shortage of available electrical power, which
occurred during 2001. In the event these blackouts are
reinstated, they could disrupt the operations of our affected
facilities. In connection with the shortage of available power,
prices for electricity may continue to increase in the
foreseeable future. Such price changes will increase our
operating costs, which could negatively impact our
profitability. In addition, we do not carry sufficient business
interruption insurance to compensate us for losses that may
occur, and any losses or damages incurred by us could have a
material adverse effect on our business.
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ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
All market risk sensitive instruments were entered into for
non-trading purposes. We do not use derivative financial
instruments for speculative trading purposes, nor do we hedge
our foreign currency exposure in a manner that entirely offsets
the effects of changes in foreign exchange rates. As of
June 30, 2005, we did not hold derivative financial
instruments.
Interest Rate Risk
Our exposure to market risk for changes in interest rates
relates primarily to our investment portfolio. We do not use
derivative financial instruments in our investment portfolio.
The primary objective of our investment activities is to
preserve principal while maximizing yields without significantly
increasing risk. Our investment policy specifies credit quality
standards for our investments and limits the amount of credit
exposure to any single issue, issuer or type of investment. Our
investments consist primarily of commercial paper, auction rate
securities, U.S. government notes and bonds, corporate
bonds and municipal securities. All investments are carried at
market value, which approximates cost.
For the six months ended June 30, 2005, the average rate of
return on our investments was 2.6%. If market interest rates
were to increase immediately and uniformly by 100 basis
points from levels as of June 30, 2005, the fair market
value of the portfolio would decline by less than
$1.2 million. Declines in interest rates could, over time,
reduce our interest income.
Foreign Currency Risk
We market and sell our software and services through our direct
sales force and indirect channel partners in the United States
as well as Belgium, Canada, France, Germany, the Netherlands,
Switzerland and the United Kingdom and Japan. We also have
relationships with indirect channel partners in other regions
including Europe, Asia-Pacific and Latin America. As a result,
our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic
conditions in foreign markets. As an example, the strengthening
of the U.S. dollar compared to any of the local currencies
in the markets in which we do business could make our products
less competitive in these markets. Because we translate foreign
currencies into U.S. dollars for reporting purposes,
currency fluctuations, especially between the U.S. dollar
and the Euro and British pound, may have an impact on our
quarterly financial results. To date, we have not engaged in any
foreign currency hedging activities.
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ITEM 4. |
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures. Our
management evaluated, with the participation of our Chief
Executive Officer and our Chief Financial Officer, the
effectiveness of our disclosure controls and procedures as of
the end of the period covered by this Quarterly Report on
Form 10-Q. Based on this evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded that our
disclosure controls and procedures are effective to ensure that
information we are required to disclose in reports that we file
or submit under the Securities Exchange Act of 1934 is recorded,
processed,
46
summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
Changes in Internal Control Over Financial Reporting.
There was no change in our system of internal control over
financial reporting during the three months ended June 30,
2005 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
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ITEM 1. |
LEGAL PROCEEDINGS |
On November 8, 2001, a purported securities class action
complaint was filed in the United States District Court for the
Southern District of New York. The case is entitled In re
Informatica Corporation Initial Public Offering Securities
Litigation, Civ. No. 01-9922 (SAS) (S.D.N.Y.), related to
In re Initial Public Offering Securities Litigation, 21 MC 92
(SAS) (S.D.N.Y.). Plaintiffs amended complaint was brought
purportedly on behalf of all persons who purchased our common
stock from April 29, 1999 through December 6, 2000. It
names as defendants Informatica Corporation, two of our former
officers (the Informatica defendants), and several
investment banking firms that served as underwriters of our
April 29, 1999 initial public offering and
September 28, 2000 follow-on public offering. The complaint
alleges liability as to all defendants under Sections 11
and/or 15 of the Securities Act of 1933 and Sections 10(b)
and/or 20(a) of the Securities Exchange Act of 1934, on the
grounds that the registration statements for the offerings did
not disclose that: (1) the underwriters had agreed to allow
certain customers to purchase shares in the offerings in
exchange for excess commissions paid to the underwriters; and
(2) the underwriters had arranged for certain customers to
purchase additional shares in the aftermarket at predetermined
prices. The complaint also alleges that false analyst reports
were issued. No specific damages are claimed.
Similar allegations were made in other lawsuits challenging over
300 other initial public offerings and follow-on offerings
conducted in 1999 and 2000. The cases were consolidated for
pretrial purposes. On February 19, 2003, the Court ruled on
all defendants motions to dismiss. The Court denied the
motions to dismiss the claims under the Securities Act of 1933.
The Court denied the motion to dismiss the Section 10(b)
claim against Informatica and 184 other issuer defendants. The
Court denied the motion to dismiss the Section 10(b) and
20(a) claims against the Informatica defendants and 62 other
individual defendants.
We accepted a settlement proposal presented to all issuer
defendants. In this settlement, plaintiffs will dismiss and
release all claims against the Informatica defendants, in
exchange for a contingent payment by the insurance companies
collectively responsible for insuring the issuers in all of the
IPO cases, and for the assignment or surrender of control of
certain claims we may have against the underwriters. The
Informatica defendants will not be required to make any cash
payments in the settlement, unless the pro rata amount paid by
the insurers in the settlement exceeds the amount of the
insurance coverage, a circumstance which we do not believe will
occur. The settlement will require approval of the Court, which
cannot be assured, after class members are given the opportunity
to object to the settlement or opt out of the settlement. The
Court has set a hearing date of January 9, 2006 to consider
final approval of the settlement.
On July 15, 2002, we filed a patent infringement action in
U.S. District Court in Northern California against Acta
Technology, Inc. (Acta), now known as Business
Objects Data Integration, Inc. (BODI), asserting
that certain Acta products infringe on three of our patents:
U.S. Patent No. 6,014,670, entitled Apparatus
and Method for Performing Data Transformations in Data
Warehousing; U.S. Patent No. 6,339,775, entitled
Apparatus and Method for Performing Data Transformations
in Data Warehousing (this patent is a continuation-in-part
of and claims the benefit of U.S. Patent
No. 6,014,670); and U.S. Patent No. 6,208,990,
entitled Method and Architecture for Automated
Optimization of ETL Throughput in Data Warehousing
Applications. On July 17, 2002, we filed an amended
complaint alleging that Acta products also infringe on one
additional patent: U.S. Patent No. 6,044,374, entitled
Object References for Sharing Metadata in Data
Marts. In the suit, we are
47
seeking an injunction against future sales of the infringing
Acta/ BODI products, as well as damages for past sales of the
infringing products. We have asserted that BODIs
infringement of our patents was willful and deliberate. On
September 5, 2002, BODI answered the complaint and filed
counterclaims against us seeking a declaration that each patent
asserted is not infringed and is invalid and unenforceable. BODI
did not make any claims for monetary relief against us. The
parties presented their respective claim constructions to the
Court on September 24, 2003, and on August 1, 2005,
the Court issued its claims construction order. The Company
believes that the issued claims construction order is favorable
to the Companys position on the infringement action. The
matter is currently in the discovery phase.
We are also a party to various legal proceedings and claims
arising from the normal course of business activities.
Based on current available information, management does not
expect that the ultimate outcome of these unresolved matters,
individually or in the aggregate, will have a material adverse
effect on our results of operations, cash flows or financial
position. However, litigation is subject to inherent
uncertainties and our view of these matters may change in the
future. Were an unfavorable outcome to occur, there exists the
possibility of a material adverse impact on our results of
operations, cash flows and financial position for the period in
which the unfavorable outcome occurs, and potentially in future
periods.
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ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS |
Repurchases of Equity Securities
On July 2, 2004, we announced a stock repurchase program to
purchase up to 5,000,000 shares of our common stock. The
purpose of our stock repurchase program is, among other things,
to help offset the dilution caused by the issuance of stock
under our employee stock option plans. The number of shares
acquired and the timing of the repurchases are based on several
factors, including general market conditions and the trading
price of our common stock. We repurchased a total of 882,500 and
1,537,500 shares in the three and six months ended
June 30, 2005, respectively, and at June 30, 2005,
2,407,500 shares remained available for repurchase under
the program.
The following table provides information about the repurchase of
our common stock during the three months ended June 30,
2005:
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(2) | |
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Total Number of | |
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Maximum Number of | |
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Shares Purchased | |
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Shares that May yet | |
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(1) | |
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Average Price | |
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as Part of Publicly | |
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be Purchased Under | |
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Total Number of | |
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Paid per | |
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Announced Plans | |
|
the Plans or | |
Period |
|
Shares Purchased | |
|
Share | |
|
or Programs | |
|
Programs | |
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| |
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| |
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| |
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| |
April 1 April 30
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|
310,000 |
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$ |
7.84 |
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310,000 |
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|
2,980,000 |
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May 1 May 31
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|
|
572,500 |
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|
$ |
7.85 |
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|
572,500 |
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|
2,407,500 |
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June 1 June 30
|
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|
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|
|
|
|
|
|
|
|
2,407,500 |
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|
|
|
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|
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Total
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882,500 |
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$ |
7.84 |
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882,500 |
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2,407,500 |
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(1) |
All shares repurchased in open-market transactions under the
repurchase program. |
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(2) |
We announced the repurchase program on July 2, 2004. The
repurchase program authorizes the repurchase of up to five
million shares of our common stock at any time until the end of
2005. |
48
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ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
The following matters were submitted to the stockholders in our
Annual Meeting of Stockholders held on May 26, 2005. Each
of the matters was approved by the requisite vote.
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(a) The following individuals were re-elected to the Board
of Director for three-year terms as Class II directors: |
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Votes | |
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Votes For | |
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Withheld | |
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| |
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| |
A. Brooke Seawell
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77,986,821 |
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4,219,052 |
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Mark A. Bertelsen
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58,415,845 |
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23,790,028 |
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Our Board of Directors is currently comprised of six members who
are divided into three classes with overlapping three-year
terms. The term for our Class I directors, Janice D.
Chaffin and Carl J. Yankowski , will expire at the Annual
Meeting of Stockholders in 2007. The term of our Class III
directors, Sohaib Abbasi and David W. Pidwell, will expire at
the Annual Meeting of Stockholders in 2006. |
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(b) To ratify the appointment of Ernst & Young LLP
as our independent registered public accounting firm for the
year ending December 31, 2005. |
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Affirmative Votes
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80,727,768 |
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Negative Votes
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1,427,826 |
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Votes Abstain
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50,280 |
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Broker Non-Votes
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Exhibit No. |
|
Description |
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31 |
.1 |
|
Certification of the Chief Executive Officer pursuant to
Rule 13a-14(a)/15d-15(a). |
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31 |
.2 |
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Certification of the Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-15(a). |
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32 |
.1 |
|
Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350. |
ITEMS 3 and 5 are not applicable and have been omitted.
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934 the Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
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INFORMATICA CORPORATION |
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/s/ Earl E. Fry
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Earl E. Fry |
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Chief Financial Officer |
|
(Duly Authorized Officer and Principal Financial and
Accounting Officer) |
August 5, 2005
50
INFORMATICA CORPORATION
EXHIBITS TO FORM 10-Q QUARTERLY REPORT
For the Quarter Ended June 30, 2005
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Number |
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Exhibit Title |
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|
|
31 |
.1 |
|
Certification of the Chief Executive Officer pursuant to
Rule 13a-14(a)/15d-15(a). |
|
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31 |
.2 |
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Certification of the Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-15(a). |
|
|
32 |
.1 |
|
Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350. |
51