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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] 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)
<TABLE>
<S> <C>
DELAWARE 77-0333710
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3350 WEST BAYSHORE, PALO ALTO, CALIFORNIA 94303
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 687-6200
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of July 31, 2000, there were 34,553,073 shares of the registrant's
Common Stock outstanding.
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INFORMATICA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements................. 1
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999....................................... 1
Condensed Consolidated Statements of Operations -- Three and
Six Months Ended June 30, 2000 and 1999..................... 2
Condensed Consolidated Statements of Cash Flows -- Three and
Six Months Ended June 30, 2000 and 1999..................... 3
Notes to Condensed Consolidated Financial Statements........ 4
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations................................... 8
Quantitative and Qualitative Disclosures about Market
Item 3. Risk........................................................ 18
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................... 19
Item 4. Submission of Matters to a Vote of Security Holders......... 19
Item 6. Exhibits and Reports on Form 8-K............................ 19
Signature............................................................ 20
</TABLE>
i
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INFORMATICA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 31,831 $57,521
Restricted cash........................................... 20,282 --
Accounts receivable, net of allowances of $2,027 and
$1,977, respectively................................... 18,141 8,119
Prepaid expenses and other current assets................. 2,376 1,272
-------- -------
Total current assets.............................. 72,630 66,912
Property and equipment, net................................. 3,871 1,482
Goodwill and other intangible assets, net................... 34,415 --
Other assets................................................ 1,272 129
-------- -------
Total assets...................................... $112,188 $68,523
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 14,598 $ 7,999
Accrued compensation and related expenses................. 6,089 6,264
Income taxes payable...................................... 1,608 813
Current portion of capital lease obligations.............. 142 150
Current portion of notes payable to stockholders.......... -- 2,075
Deferred revenue.......................................... 15,324 9,660
-------- -------
Total current liabilities......................... 37,761 26,961
Capital lease obligations, less current portion............. 42 66
Notes payable to stockholders, less current portion......... -- 1,372
Stockholders' equity........................................ 74,385 40,124
-------- -------
Total liabilities and stockholders' equity........ $112,188 $68,523
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
1
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INFORMATICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
License........................................... $21,733 $ 9,181 $38,569 $16,528
Service........................................... 12,172 4,851 21,269 8,484
------- ------- ------- -------
Total revenues............................ 33,905 14,032 59,838 25,012
Cost of revenues:
License........................................... 359 111 793 253
Service........................................... 6,586 2,365 11,207 4,241
------- ------- ------- -------
Total cost of revenues.................... 6,945 2,476 12,000 4,494
------- ------- ------- -------
Gross profit........................................ 26,960 11,556 47,838 20,518
Operating expenses:
Research and development.......................... 5,788 2,880 9,876 5,233
Sales and marketing............................... 16,667 7,383 30,101 13,916
General and administrative........................ 2,358 1,099 4,311 2,033
Amortization of stock-based compensation.......... 130 162 529 287
Amortization of goodwill and other intangible
assets......................................... 3,798 -- 4,172 --
Purchased in-process research and development..... 2,199 -- 2,199 --
------- ------- ------- -------
Total operating expenses.................. 30,940 11,524 51,188 21,469
------- ------- ------- -------
Income (loss) from operations....................... (3,980) 32 (3,350) (951)
Interest income, net................................ 421 226 722 184
------- ------- ------- -------
Income (loss) before income taxes................... (3,559) 258 (2,628) (767)
Income tax provision................................ 642 150 875 300
------- ------- ------- -------
Net income (loss)................................... $(4,201) $ 108 $(3,503) $(1,067)
======= ======= ======= =======
Net income (loss) per share:
Basic............................................. $ (0.12) $ 0.00 $ (0.10) $ (0.07)
======= ======= ======= =======
Diluted........................................... $ (0.12) $ 0.00 $ (0.10) $ (0.07)
======= ======= ======= =======
Shares used in calculation of net income (loss) per
share:
Basic............................................. 34,212 23,894 33,517 16,132
======= ======= ======= =======
Diluted........................................... 34,212 29,787 33,517 16,132
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
2
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INFORMATICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (3,503) $(1,067)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 440 199
Other receivable allowances............................... 40 145
Amortization of stock-based compensation.................. 529 287
Amortization of goodwill and other intangible assets...... 4,172 --
Purchased in-process research and development............. 2,199 --
Interest expense related to notes payable................. 125 138
Changes in operating assets and liabilities:
Accounts receivable..................................... (10,072) (1,275)
Prepaid expenses and other current assets............... (1,086) 12
Other assets............................................ (1,143) 30
Accounts payable and accrued liabilities................ 38 1,122
Accrued compensation and related expenses............... (175) 824
Income taxes payable.................................... 616 --
Deferred revenue........................................ 5,545 2,681
-------- -------
Net cash provided by (used in) operating
activities........................................ (2,275) 3,096
-------- -------
INVESTING ACTIVITIES
Purchase of property and equipment, net..................... (2,747) (633)
Acquisition, net of cash acquired........................... (2,309) --
Allocation to restricted cash............................... (20,282) --
-------- -------
Net cash used in investing activities....................... (25,338) (633)
-------- -------
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of payments for
repurchases............................................... 5,724 386
Proceeds from initial public offering, net.................. -- 43,481
Proceeds from notes payable to stockholders................. -- 537
Payments on notes payable to stockholders................... (3,572) (806)
Payments on capital lease obligations....................... (32) (174)
Proceeds from notes receivable from stockholders............ 40 --
-------- -------
Net cash provided by financing activities................... 2,160 43,424
-------- -------
Effect of foreign currency translation on cash and cash
equivalents............................................... (237) (77)
-------- -------
Increase (decrease) in cash and cash equivalents............ (25,690) 45,810
Cash and cash equivalents at beginning of period............ 57,521 7,167
-------- -------
Cash and cash equivalents at end of period.................. $ 31,831 $52,977
======== =======
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest.................................................. $ 217 $ 18
======== =======
Income taxes.............................................. $ 97 $ --
======== =======
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of preferred stock to common stock............. $ -- $17,586
======== =======
Deferred stock-based compensation related to common stock
options granted......................................... $ 1,194 $ 968
======== =======
Common stock issued in connection with asset
acquisition............................................. $ 31,708 $ --
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
3
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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. However, certain information or
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. In the opinion of management, the statements include all adjustments
necessary (which are of a normal and recurring nature) for the fair presentation
of the results of the interim periods presented. These financial statements
should be read in conjunction with our audited consolidated financial statements
for the year ended December 31, 1999.
2. REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
101 provides guidance with respect to the recognition, presentation and
disclosure of revenue in financial statements of all public registrants. The
Company has not fully assessed the impact of the adoption of SAB 101 and has not
determined the effect, if any, that it will have on the Company's reported
revenues or results of operations in future periods.
The Company generates revenues through two sources, software licenses and
services. The Company's license revenues are generated from licensing the
Company's products directly to end users and indirectly through resellers and
original equipment manufacturers. Service revenues are generated from
maintenance contracts and training and consulting services performed for
customers that license the Company's products directly and indirectly through
resellers.
License revenues are recognized when a noncancelable license agreement has
been signed, the product has been shipped, the fees are fixed and determinable,
collectibility is probable and vendor-specific objective evidence exists to
allocate the total fee to elements of the arrangement. Vendor-specific objective
evidence is based on the price charged when an element is sold separately. In
the case of an element not sold separately, the price is established by
authorized management. If an acceptance period is required, revenue is
recognized upon customer acceptance or the expiration of the acceptance period.
The Company also enters into reseller arrangements that typically provide for
sublicense fees based on a percentage of list price. For direct sales, revenue
is recognized upon shipment to the end user and when collectibility is probable.
For sales through resellers, revenue is recognized upon shipment to the end user
and when collectibility is probable or upon cash collections based on credit
history with the reseller. The Company's agreements with its customers and
resellers do not contain product return rights.
Revenues from services, which consist of fees for ongoing support and
product updates, are recognized 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 under separate
service arrangements related to the installation of the Company's software
products. Training revenues are generated from classes offered both on-site and
at customer locations. Revenues from consulting and training 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,
provided services do not include significant customization or modification of
the base product, and the payment terms for licenses are not dependent on
additional acceptance criteria.
Deferred revenue includes deferred license and maintenance revenue and
prepaid training and consulting fees. Deferred license revenue amounts do not
include items which are both deferred and unbilled. The Company's practice is to
net such deferred items against the related receivables balances.
4
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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. STOCK SPLIT
On January 26, 2000, the Board of Directors approved a two-for-one split of
its $.001 par value common stock to be effected in the form of a stock dividend.
The stock split was effected by distribution of one share of the Company's
common stock for each share of common stock held to each stockholder of record
as of February 18, 2000. All references in the financial statements to number of
shares, per share amounts and stock option data of the Company's common stock
have been restated for the effect of the stock split.
4. INITIAL PUBLIC OFFERING
On April 29, 1999, the Company completed an initial public offering and
issued 6,000,000 shares of its common stock, including 500,000 shares in
connection with the exercise of the underwriters' overallotment option, at a
price of $8.00 per share. The Company received $43.5 million in cash, net of
underwriting discounts, commissions and other offering costs. As of the closing
date of the offering, all of the preferred stock outstanding was converted into
an aggregate of 15,880,000 shares of common stock.
5. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted earnings per
share reflects the potential dilution of securities by adding other common stock
equivalents, including stock options, warrants and convertible preferred stock,
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 loss per share for the three months ended June 30,
2000, and for the six months ended June 30, 2000 and 1999, as their inclusion
would be antidilutive.
The calculation of basic and diluted net income (loss) per share is as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss)................................ $(4,201) $ 108 $(3,503) $(1,067)
======= ======= ======= =======
Weighted average shares of common stock
outstanding used in calculation of net income
(loss) per share:
Basic.......................................... 34,212 23,894 33,517 16,132
Effect of dilutive securities:
Common stock equivalents.................... 0 5,893 0 0
------- ------- ------- -------
Diluted..................................... 34,212 29,787 33,517 16,132
======= ======= ======= =======
Net income (loss) per share:
Basic.......................................... $ (0.12) $ 0.00 $ (0.10) $ (0.07)
======= ======= ======= =======
Diluted........................................ $ (0.12) $ 0.00 $ (0.10) $ (0.07)
======= ======= ======= =======
</TABLE>
If the Company had reported net income for the three months ended June 30,
2000, and for the six months ended June 30, 2000 and 1999, the calculation of
diluted earnings per share would have included the shares used in the
computation of basic net loss per share as well as an additional 4,681,000,
5,502,000 and 5,329,000 common equivalent shares related to the outstanding
options and warrants not included in the calculations above, respectively
(determined using the treasury stock method).
5
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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. COMPREHENSIVE INCOME (LOSS)
The following is a calculation of comprehensive income (loss), in
thousands:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss)................................ $(4,201) $108 $(3,503) $(1,067)
Other comprehensive loss:
Foreign currency translation adjustment........ (90) (42) (237) (77)
------- ---- ------- -------
Comprehensive income (loss)...................... $(4,291) $ 66 $(3,740) $(1,144)
======= ==== ======= =======
</TABLE>
7. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires the use of the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are measured using enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. Valuation allowances are established, when necessary, to reduce the
deferred tax assets to the amounts expected to be realized.
8. BUSINESS COMBINATION
In February 2000, the Company acquired Delphi Solutions AG, a distributor
of Informatica products in Switzerland. The agreement was structured as a share
purchase and accounted for as a purchase transaction. The estimated purchase
price includes payments associated with 1999 revenues and projections for 2000
revenues. The first payment of approximately $3.6 million was paid in February
2000, and the estimated second payment of approximately $5.6 million is payable
in January 2001. The purchase price of the transaction was allocated to the
acquired assets and liabilities based on their estimated fair values as of the
date of the acquisition. Amounts allocated to intangible assets are being
amortized on a straight-line basis over a two-year period. Amortization expense
of $1.1 million and $1.5 million was recorded for the three and six months ended
June 30, 2000, respectively. As part of this agreement, the Company is holding a
certificate of deposit for $8.1 million as security for the second payment. This
certificate of deposit has been reclassified to restricted cash on the Company's
balance sheet.
Pro forma results of operations have not been presented since the effects
of the acquisition were not material to the Company's consolidated financial
position, results of operations or cash flows for the periods presented.
9. ASSET ACQUISITION
In April 2000, the Company announced a strategic alliance with
PricewaterhouseCoopers ("PwC") to jointly develop, sell and support end-to-end
analytic solutions for the business-to-business e-commerce market worldwide. In
connection with the agreement, PwC received 409,138 shares of the Company's
common stock in exchange for transferring ownership of certain intellectual
property rights and personnel to the Company.
The total purchase price, including related expenses, was approximately
$31.8 million, of which $5.0 million was allocated to various intangible assets
including acquired workforce and consultants, and $24.6 million was allocated to
core technology and goodwill. Goodwill and other intangible assets are being
amortized on a straight-line basis over two years for the acquired workforce and
consultants and over three years for the core technology and goodwill. At June
30, 2000, accumulated amortization related to goodwill
6
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INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
and other intangible assets and amortization expense for the three months ended
June 30, 2000 totaled $2.7 million.
Purchased in-process research and development of $2.2 million was expensed
in the second quarter of 2000 because the in-process technology had not reached
technological feasibility and had no alternative uses. The value of the
purchased in-process research and development was computed using a discounted
cash flow analysis based on management's estimates of future revenues, cost of
revenues and operating expenses related to the products and technologies
acquired from PwC.
10. COMMITMENTS
In February 2000, the Company entered into two lease agreements for new
corporate headquarters in Redwood City, California. The facility is under
construction and expected to be completed in June 2001. The lease expires twelve
years after occupancy. As part of these agreements, in April 2000, the Company
purchased certificates of deposit totaling $12.2 million as a security deposit
for the first year's lease payments until certain financial covenants are met.
These certificates of deposit have been reclassified as restricted cash on the
Company's balance sheet.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. All statements other than statements of historical fact are
"forward-looking statements" for purposes of these provisions, including any
statements referencing revenues and operating expenses as a percentage of total
revenues; expected hiring of additional sales and marketing personnel; the
sufficiency of our cash balances and cash flows for the next twelve months;
potential investments of cash to acquire or invest in complementary businesses
or products; 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 below and in "Factors That
May Affect Our Operating Results" and elsewhere in this report. 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.
BUSINESS COMBINATION AND STRATEGIC ALLIANCE
In February 2000, we acquired Delphi Solutions AG ("Delphi"), a distributor
of Informatica products in Switzerland. The agreement was structured as a share
purchase and accounted for as a purchase transaction. The estimated purchase
price includes payments associated with 1999 revenues and projections for 2000
revenues. The first payment of approximately $3.6 million was paid in February
2000, and the estimated second payment of approximately $5.6 million is payable
in January 2001. The purchase price of the transaction was allocated to the
acquired assets and liabilities based on their estimated fair values as of the
date of the acquisition. Amounts allocated to intangible assets are being
amortized on a straight-line basis over a two-year period.
In April 2000, we announced a strategic alliance with
PricewaterhouseCoopers ("PwC") to jointly develop, sell and support end-to-end
analytic solutions for the business-to-business e-commerce market worldwide. In
connection with the agreement, PwC received 409,138 shares of our common stock.
The total purchase price, including related expenses, was approximately $31.8
million.
REVENUES
Our total revenues for the three months ended June 30, 2000 increased to
$33.9 million from $14.0 million for the three months ended June 30, 1999,
representing growth of 142%. For the six months ended June 30, 2000, our total
revenues increased to $59.8, representing growth of 139% over the $25.0 million
for the six months ended June 30, 1999. Our license revenues increased to $21.7
million in the three months ended June 30, 2000 from $9.2 million in the three
months ended June 30, 1999, representing growth of 137%. Our license revenues
for the six months ended June 30, 2000 increased to $38.6 million from $16.5
million for the six months ended June 30, 1999, representing growth of 133%.
These increases were due primarily to increases in the number of licenses sold
and the average transaction size, reflecting increased acceptance of
PowerCenter, PowerMart and Informatica Application Products as well as expansion
of our direct sales organization and reseller channels. Service revenues
increased to $12.2 million for the three months ended June 30, 2000 from $4.9
million for the three months ended June 30, 1999, representing growth of 151%.
For the six months ended June 30, 2000, our service revenues increased to $21.3
million from $8.5 million for the six months ended June 30, 1999, representing
growth of 151%. These increases in our service revenues were due primarily to an
increase in consulting, training and maintenance fees associated with both the
increased number of licenses sold and the increased average transaction size,
along with a larger installed license base. Service revenues have increased
modestly as a percentage of total revenues as our installed license base grew
8
<PAGE> 11
and as we continued to provide additional services to our customer base and may
increase modestly in future periods to the extent these trends continue.
COST OF REVENUES
Cost of License Revenues
Our cost of license revenues consists primarily of product packaging,
documentation, production costs and software royalties. Cost of license revenues
was $359,000 and $111,000 in the three months ended June 30, 2000 and 1999,
respectively, representing 2% and 1% of license revenues in each of those
periods. For the six months ended June 30, 2000 and 1999, our cost of license
revenues increased to $793,000 from $253,000, respectively, representing 2% of
license revenues in each of these periods. The increase in our cost of license
revenues in absolute dollars was due primarily to increases in license revenues
and increases in royalty expense.
Cost of Service Revenues
Our cost of service revenues is a combination of costs of maintenance,
training and consulting revenues. Our cost of maintenance revenues consists
primarily of costs associated with software upgrades, telephone support services
and on-site visits. Cost of training revenues consists primarily of the costs of
providing training classes and materials, which are provided both off-site and
at our headquarters. Cost of consulting revenues consists primarily of personnel
costs and expenses incurred in providing consulting services at customers'
facilities. Cost of service revenues was $6.6 million and $2.4 million in the
three months ended June 30, 2000 and 1999, representing 54% and 49% of service
revenues, respectively. Our cost of service revenues was $11.2 million and $4.2
million for the six months ended June 30, 2000 and 1999, respectively,
representing 53% and 50% of service revenues. Cost of service revenues as a
percentage of service revenues increased due to an increase in personnel
associated with our consulting business. Because we believe that providing a
high level of support to customers is a strategic advantage, we have continued
to invest significantly in personnel and infrastructure. For the remainder of
2000, we expect our cost of service revenues as a percentage of total revenues
to remain at or slightly above our June 30, 2000 level as we grow and expand our
consulting business.
OPERATING EXPENSES
Research and Development
Our research and development expenses consist primarily of salaries and
other personnel-related expenses 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 increased to $5.8 million in the three months ended June
30, 2000 from $2.9 million in the three months ended June 30, 1999. The increase
was due primarily to an increase in personnel costs for development of future
products and enhancement of existing products. Research and development expenses
represented 17% and 21% of total revenues in the three months ended June 30,
2000 and 1999, respectively. The decrease as a percentage of total revenues was
due primarily to growth in our total revenues. Research and development expenses
for the six months ended June 30, 2000 and 1999 were $9.9 million and $5.2
million, representing 17% and 21% of total revenues, respectively. The decrease
as a percentage of total revenues was due primarily to growth in our total
revenues. 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. We believe that continued
investment in research and development is critical to attaining our strategic
objectives, and, as a result, we expect research and development expenses to
increase in absolute dollars in future periods. For the remainder of 2000, we
expect research and development expense as a percentage of total revenues to be
at or slightly above our June 30, 2000 level.
Sales and Marketing
Our sales and marketing expenses consist primarily of personnel costs,
including commissions, as well as costs of public relations, seminars, marketing
programs, lead generation, travel and trade shows. Sales and
9
<PAGE> 12
marketing expenses increased to $16.7 million in the three months ended June 30,
2000 from $7.4 million in the three months ended June 30, 1999. For the six
months ended June 30, 2000 and 1999, sales and marketing expenses were $30.1
million and $13.9 million, respectively. The increases were due primarily to the
hiring of additional sales and marketing personnel in connection with the
building of our direct, original equipment manufacturer and reseller channels,
higher sales commissions associated with increased sales volume, and increased
spending associated with trade shows and other marketing programs. Sales and
marketing expenses for the three months ended June 30, 2000 and 1999 represented
49% and 53% of total revenues, respectively. For the six months ended June 30,
2000 and 1999, sales and marketing expenses represented 50% and 56% of total
revenues, respectively. The decline in sales and marketing expenses as a
percentage of total revenues for these periods was due primarily to growth in
total revenues. We expect to continue hiring additional sales and marketing
personnel and to increase promotion and other marketing expenditures in the
future. For the remainder of 2000, we expect sales and marketing expense as a
percentage of total revenue to remain at or slightly below the June 30, 2000
level.
General and Administrative
Our general and administrative expenses consist primarily of personnel
costs for finance, human resources, legal and general management, as well as
professional services associated with recruiting, legal and accounting. General
and administrative expenses increased to $2.4 million in the three months ended
June 30, 2000 from $1.1 million in the three months ended June 30, 1999,
representing 7% and 8% of our total revenues, respectively. For the six months
ended June 30, 2000 and 1999, general and administrative expenses were $4.3
million and $2.0 million, representing 7% and 8% of total revenues,
respectively. Expenses increased due primarily to increased staffing in finance,
human resources, legal, information technology and administration to manage and
support our growth as well as increased costs paid to outside professional
service providers and increased facilities costs. The decrease as a percentage
of our total revenues was due primarily to the growth in our total revenues. We
expect that for the remainder of 2000, our general and administrative expenses
as a percentage of total revenue will remain at or slightly below our June 30,
2000 level.
Bad debt expense charged to operations was $62,000 and $75,000 for the
three months ended June 30, 2000 and 1999, representing less than 1% of total
revenues. For the six months ended June 30, 2000 and 1999, the bad debt expense
charged to operations was $122,000 and $145,000, respectively.
Amortization of Stock-based Compensation
We use the intrinsic value method of accounting for our employee
stock-based compensation plans. Accordingly, no compensation cost is recognized
for any of our stock options when the exercise price of each option equals or
exceeds the fair value of the underlying common stock as of the grant date for
each stock option with respect to the options granted. For non-employees, we
record deferred stock-based compensation of an amount that equals the difference
between the exercise price and deemed fair value of our common stock based on
the Black-Scholes formula for valuing options. This amount will be remeasured at
each measurement date. From inception through June 30, 2000, we recorded
deferred stock-based compensation of $4.9 million. This amount is included as a
component of stockholder's equity and is being amortized on a graded vesting
method by charges to operations over the vesting period of the options. Such
amortization amounted to $130,000 and $162,000 for the three months ended June
30, 2000 and 1999, respectively, and $529,000 and $287,000 for the six months
ended June 30, 2000 and 1999.
Amortization of Goodwill and Other Intangible Assets
Intangible assets consist of goodwill, which represents the excess of the
aggregate purchase price over the fair value of the tangible and identifiable
intangible assets we have acquired. In February 2000, we acquired Delphi
Solutions AG, a distributor of Informatica products in Switzerland. The
agreement was structured as a share purchase and accounted for as a purchase
transaction. Amounts allocated to intangible assets are being amortized on a
straight-line basis over a two-year period. Amortization expense of $1.1 million
and $1.5 million was recorded for the three and six months ended June 30, 2000,
respectively.
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In April 2000, we announced a strategic alliance with PwC to jointly
develop, sell and support end-to-end analytic solutions for the
business-to-business e-commerce market worldwide. In connection with the
agreement, PwC received 409,138 shares of our common stock. We recorded goodwill
and other intangible assets totaling $31.8 million, which is being amortized on
a straight-line basis over two to three years. Amortization of goodwill and
other intangible assets was $2.7 million for the three months ended June 30,
2000.
Purchased In-Process Research and Development
In connection with the strategic alliance with PwC we recorded a charge to
operations of $2.2 million for purchased in-process research and development for
the three months ended June 30, 2000. The in-process technology had not reached
technological feasibility and had no alternative uses. The value of the
purchased in-process research and development was computed using a discounted
cash flow analysis based on management's estimates of future revenues, cost of
revenues and operating expenses related to the products and technologies
acquired from PwC.
NET INTEREST INCOME (EXPENSE)
Interest income (expense) represents interest income earned on our cash,
cash equivalents and restricted cash and interest expense on capital equipment
leases and stockholder loans. Net interest income increased to $421,000 from
$226,000 in the three months ended June 30, 2000 and 1999, respectively. For the
six months ended June 30, 2000 and 1999, net interest income increased to
$722,000 from $184,000, respectively. The increase in the three and six months
ended June 30, 2000 was primarily due to an increased average cash balance as a
result of the completion of our initial public offering of our common stock with
net proceeds of $43.5 million in April 1999.
PROVISION FOR INCOME TAXES
We recorded an income tax provision for state and foreign income taxes of
$642,000 and $150,000 for the three months ended June 30, 2000 and 1999,
respectively. For the six months ended June 30, 2000 and 1999 we recorded an
income tax provision of $875,000 and $300,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through private sales of preferred
equity securities, capital equipment leases and with the completion of our
initial public offering of common stock in April 1999. As of June 30, 2000, we
had $52.1 million in cash, cash equivalents and restricted cash.
Our operating activities resulted in net cash outflows of $2.3 million in
the six months ended June 30, 2000. The net cash provided by operating
activities was primarily due to increases in deferred revenue, amortization of
goodwill and other intangible assets and purchased in-process research and
development. Uses of cash in operating activities were due primarily to net
operating losses and increases in accounts receivable, prepaid expenses and
other current assets and other assets.
For the six months ended June 30, 1999, our operating activities resulted
in a net cash outflows of $3.1 million. The net cash provided by operating
activities was primarily due to increases in deferred revenue, accounts payable
and accrued liabilities and accrued compensation and related expenses. Uses of
cash in operating activities were primarily due to net operating losses and
increases in accounts receivable.
Investing activities used cash of $25.3 million in the six months ended
June 30, 2000 and $633,000 in the six months ended June 30, 1999. Of the $25.3
million used in investing activities in the six months ended June 30, 2000,
$20.3 million was associated with requirements for restricted cash, $2.3 million
was associated with the acquisition of our distributor in Switzerland, Delphi
Solutions, AG. The other $2.7 million was for the purchase of capital equipment.
The use of cash in investing activities in the six months ended June 30, 1999
was due primarily to the purchase of capital equipment.
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Financing activities provided cash of $2.2 million for the six months ended
June 30, 2000. Net cash provided by financing activities was from the exercise
of stock options, partially offset by final payments on notes payable to
stockholders associated with the acquisition of Influence Software, Inc.
("Influence") in December 1999. Financing activities provided $43.5 million for
the six months ended June 30, 1999, primarily through the completion of our
initial public offering of common stock in April 1999.
As of June 30, 2000, our principal commitments consisted of obligations
under operating and capital leases. As of June 30, 2000 and 1999, we had
$184,000 and $285,000, respectively, in outstanding borrowings under capital
lease agreements which are payable through 2001. In addition, the principal and
accrued interest on the notes to stockholders of $3.6 million were fully repaid
in February 2000.
On February 22, 2000, we entered into two lease agreements for new
corporate headquarters in Redwood City, California. The facility is under
construction and is expected to be completed in June 2001. The lease expires
twelve years after occupancy. As part of these leases, we provided certificates
of deposit totaling $12.2 million as a security deposit for one year's lease
payments or until certain financial covenants are met. These certificates of
deposit are classified as restricted cash in the balance sheet.
Deferred revenues consist primarily of the unrecognized portion of revenues
received under maintenance contracts. For international customers, thinly
capitalized resellers and OEMs, revenue is recognized upon cash collections, and
is not recorded on the balance sheet or income statement until collectibility is
no longer determined to be uncertain. As of June 30, 2000, we had $15.0 million
of sales related to shipments to international customers, thinly capitalized
resellers and OEMs for which revenue had not been recognized.
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. Thereafter, we
may 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
your ownership interests.
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.
FACTORS THAT MAY AFFECT OUR OPERATING RESULTS
OUR FUTURE OPERATING RESULTS MAY FLUCTUATE WHICH COULD CAUSE OUR STOCK PRICE TO
FLUCTUATE OR DECLINE
Our future quarterly operating results have fluctuated in the past and are
likely to do so in the future. These fluctuations could cause our stock price to
also significantly fluctuate or experience declines. Some of the factors which
could cause our operating results to fluctuate include:
- the size and timing of customer orders, which can be affected by customer
order deferrals in anticipation of future new product introductions or
product enhancements and customer budgeting and purchasing cycles;
- market acceptance of our products, particularly our new analytics
products;
- the length and variability of our sales cycle for our products;
- introduction or enhancement of our products or our competitors' products
and changes in our or our competitors' pricing policies;
- our ability to develop, introduce and market new products on a timely
basis;
- the mix of our products and services sold and the mix of distribution
channels utilized;
- our success in expanding our sales and marketing programs;
- technological changes in computer systems and environments; and
- general economic conditions, which may affect our customers' capital
investment levels.
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Our product revenues are not predictable with any significant degree of
certainty. Historically, we have recognized a substantial portion of our
revenues in the last month of the quarter. If customers cancel or delay orders,
it can have a material adverse impact on our revenues and results of operations
for the quarter. To the extent any such cancellations or delays are for large
orders, this impact will be greater. To the extent that the average size of our
orders increases, customers' cancellations or delays of orders will more likely
have a material adverse impact on our revenues and results of operations.
Our quarterly product license revenues are difficult to forecast because we
historically have not had a substantial backlog of orders, and therefore
revenues in each quarter are substantially dependent on orders booked and
shipped in that quarter. Our product license revenues are also difficult to
forecast because the market for our products is rapidly evolving, and our sales
cycles, which may last many months, vary substantially from customer to customer
and vary in general due to a number of factors over which we have little or no
control. Nonetheless, our short-term expense levels are relatively fixed and
based, in part, on our expectations of future revenues. The difficulty we have
in predicting our quarterly revenue means revenues shortfalls are likely to
occur at some time, and our inability to adequately reduce short-term expenses
means such shortfalls will affect not only our revenue, but also our overall
business, results of operations and financial conditions.
Due to the uncertainty surrounding our revenues and expenses, we believe
that quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. While we achieved significant
quarter-to-quarter revenue growth in the past, you should not take these recent
quarterly results to be indicative of our future performance. We do not expect
to sustain this same rate of sequential quarterly revenue growth in future
periods. Moreover, it is likely that in some future quarter, our operating
results will fall below the expectations of stock analysts and investors. If
this happens, the price of our common stock may fall.
IF THE MARKET IN WHICH WE SELL OUR PRODUCTS AND SERVICES DOES NOT GROW AS WE
ANTICIPATE, IT WILL ADVERSELY AFFECT OUR REVENUES
The market for software solutions, including business analytics products,
that enable more effective business decision making by helping companies
aggregate and utilize data stored throughout an organization is relatively new
and still emerging. Substantially all of our revenues are attributable to the
sale of products and services in this market. If this market does not grow at
the rate we anticipate, our business, results of operations and financial
condition will be adversely affected. One of the reasons this market might not
grow as we anticipate is that many companies are not yet fully aware of the
benefits of using these software solutions to help make business decisions or
the benefits of our specific product solutions. As a result, we believe large
companies to date have deployed these software solutions to make business
decisions on a relatively limited basis. Although we have devoted and intend to
continue to devote significant resources promoting market awareness of the
benefits of these solutions, our efforts may be unsuccessful or insufficient.
WE EXPECT SEASONAL TRENDS TO CAUSE OUR QUARTERLY REVENUES TO FLUCTUATE
We have experienced, and expect to continue to experience, seasonality with
respect to product license revenues. In recent years, there has been a
relatively greater demand for our products in the fourth quarter than in each of
the first three quarters of the year, particularly the first quarter. As a
result, we have historically experienced relatively higher bookings in the
fourth quarter and relatively lighter bookings in the first quarter. While some
of this effect can be attributed to the rapid growth of revenues in recent
years, we believe that these fluctuations are caused by customer buying patterns
(often influenced by year-end budgetary pressures) and the efforts of our direct
sales force to meet or exceed year-end sales quotas. In addition, European sales
may tend to be relatively lower during the summer months than during other
periods. We expect that seasonal trends will continue for the foreseeable
future. This seasonal impact may increase as we continue to focus our sales
efforts on large corporations.
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BECAUSE WE SELL A FEW MAIN PRODUCTS, IF THEY DO NOT ACHIEVE BROAD MARKET
ACCEPTANCE, OUR REVENUES WILL BE ADVERSELY AFFECTED
To date, substantially all of our revenues were derived from our
PowerCenter, PowerMart, PowerConnect, Analytic Business Components for SAP R/3,
and Informatica Application Products and related services. We expect revenues
derived from these products and related services to comprise substantially all
of our revenues for the foreseeable future. Even if the emerging software market
in which these products are sold grows substantially, if either of these
products does not achieve market acceptance, our revenues will be adversely
affected. Market acceptance of our products could be materially adversely
affected if, among other things, 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.
RISKS ASSOCIATED WITH STRATEGIC ACQUISITIONS AND INVESTMENTS
In December 1999, we acquired Influence, a developer of analytic
applications for e-business, in a transaction accounted for as a
pooling-of-interests. In February 2000, we acquired Delphi, a distributor of
Informatica products in Switzerland, in a transaction accounted for as a
purchase. There can be no assurance that these acquisitions will be effectively
assimilated into our business. The integration of Influence and Delphi will
place a burden on our management and infrastructure. In April 2000, we invested
shares of our common stock with PwC. In connection with the agreement, PwC
transferred intellectual property rights and personnel to us. There can be no
assurance that this strategic investment will be effectively assimilated into
our business. The integration of the PwC intellectual property rights and
personnel will place an additional burden on our management and infrastructure.
Such integrations are subject to risks commonly encountered in making such
acquisitions, including, among others, loss of key personnel of the acquired
company, loss of key customers and business relationships of the acquired
company, the difficulty associated with assimilating and integrating the
personnel, operations and technologies of the acquired company, the potential
disruption of our ongoing business, and the maintenance of uniform standards,
controls, procedures, employees and clients. There can be no assurance that we
will be successful in overcoming these risks or any other problems encountered
in connection with our acquisitions.
From time to time, in the ordinary course of business, we may evaluate
potential acquisitions of, or investments in, such businesses, products or
technologies. In addition, future acquisitions could result in the issuance of
dilutive equity securities, the incurrence of debt or contingent liabilities.
Furthermore, there can be no assurance that any strategic acquisition of
investment will succeed. Any future acquisition or investment could have a
material adverse effect on our business, financial condition and results of
operation.
Recently, the Financial Accounting Standards Board ("FASB") voted to
eliminate pooling of interests accounting for acquisitions and the ability to
write-off in-process research and development has been limited by recent
pronouncements. The effect of these changes would be to increase the portion of
the purchase price for any future acquisitions that must be charged to our cost
of revenues and operating expenses in the periods following any such
acquisitions. As a consequence, our results of operations in periods following
any such acquisitions could be materially adversely affected. Although these
changes would not directly affect the purchase price for any of these
acquisitions, they would have the effect of increasing the reported expenses
associated with any of these acquisitions. To that extent, these changes may
make it more difficult for us to acquire other companies, product lines or
technologies.
THE LOSS OF KEY PERSONNEL OR THE INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS
We believe our future success will depend upon our ability to attract and
retain highly skilled personnel, including Gaurav S. Dhillon, our Chief
Executive Officer, and Diaz H. Nesamoney, our President, and other key members
of management. We currently do not have any key-man life insurance relating to
our key personnel, and these employees are at-will and not subject to employment
contracts. We may not be successful in attracting, assimilating and retaining
key personnel in the future.
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As we seek to expand our operations, the hiring of qualified sales and
technical personnel will be difficult due to the limited number of qualified
professionals. Competition for these types of employees is intense. We have in
the past experienced difficulty in recruiting qualified sales and technical
personnel. Failure to attract, assimilate and retain personnel, particularly
sales and technical personnel, would have a material adverse effect on our
business, results of operations and financial condition.
OUR MARKET IS HIGHLY COMPETITIVE
The market for our products is highly competitive, rapidly evolving and
subject to rapidly changing technology. Many of our 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. If our competitors develop products with similar or
superior functionality, we may have difficulty competing on the basis of price.
Our current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with other solution
providers, thereby increasing the ability of their products to address the needs
of our prospective customers. Our current and potential competitors may
establish or strengthen cooperative relationships with our current or future
channel or strategic partners, thereby limiting our ability to sell products
through these channels. Competitive pressures could reduce our market share or
require us to reduce our prices, either of which could materially and adversely
affect our business, results of operations or financial condition.
We compete principally against providers of decision support, data
warehousing and enterprise and analytic application software. Such competitors
include Acta Technology, Inc., Informix Corporation, Broadbase Information
Systems, Inc., E.piphany, Inc., Information Builders, Inc., and Sagent
Technology, Inc. In addition, we compete or may compete against database vendors
that currently offer, or may develop, products with functionalities that compete
with our solutions. These products typically operate specifically with these
competitors' proprietary databases. Such competitors include IBM Corporation,
Microsoft Corporation and Oracle Corporation.
IF WE DO NOT MAINTAIN AND STRENGTHEN OUR RELATIONSHIPS WITH OUR CHANNEL AND
STRATEGIC PARTNERS, OUR ABILITY TO GENERATE REVENUE WILL BE ADVERSELY AFFECTED
We believe that our ability to increase the sales of our products and our
future success will depend in part upon maintaining and strengthening successful
relationships with our current or future partners. In addition to our direct
sales force, we rely on established relationships with a variety of channel
partners, such as systems integrators, resellers and distributors, for
marketing, licensing and support of our products in the United States and
internationally. We also rely on relationships with strategic technology
partners, such as enterprise resource planning providers, for the promotion of
our solutions. In particular, our ability to market our products depends
substantially on our relationships with such significant partners as Deloitte
Consulting, KPMG, PeopleSoft, PricewaterhouseCoopers and SAP. In addition, our
channel partners may offer products of 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 and selling our products.
We may not be able to maintain our channel or strategic partnerships or
attract sufficient additional channel or strategic partners who are able to
market our products effectively or who are qualified to provide timely and
cost-effective customer support and service. Further, we can give no assurance
that our relationships with our channel and strategic partners will generate
enough revenue to offset the significant resources used to develop these
channels.
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THE LENGTHY SALES CYCLE FOR OUR PRODUCTS MAKES OUR REVENUES SUSCEPTIBLE TO
FLUCTUATIONS
Our sales cycle is generally long because the expense, complexity, broad
functionality and company-wide deployment of our products typically require
executive-level approval for investment in our products. In addition, to
successfully sell our products, we frequently must educate our potential
customers about the full benefits of our products, which can require significant
time. Due to these factors, the sales cycle associated with the purchase of our
products is subject to a number of significant risks over which we have little
or no control, including:
- customers' budgetary constraints and internal acceptance review
procedures;
- the timing of budget cycles;
- concerns about the introduction of our or our competitors' new products;
or
- product enhancements and potential downturns in general economic
conditions.
If our sales cycle lengthens unexpectedly, it could adversely affect the timing
of our revenues. Our sales cycle may lengthen as we continue to focus our sales
efforts on large corporations.
DIFFICULTIES WE MAY ENCOUNTER MANAGING OUR GROWTH COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS
We have experienced a period of rapid and substantial growth that has
placed and, if such growth continues, will continue to place a strain on our
administrative and operational infrastructure. If we are unable to manage this
growth effectively, our business, results of operations or financial condition
may be materially adversely affected. Our ability to manage our operations and
growth effectively requires us to continue to improve our operational, financial
and management controls, reporting systems and procedures and hiring programs.
We may not be able to successfully implement improvements to our management
information and control systems in an efficient or timely manner and may
discover deficiencies in existing systems and controls.
TECHNOLOGICAL ADVANCES AND EVOLVING INDUSTRY STANDARDS COULD ADVERSELY IMPACT
OUR FUTURE PRODUCT SALES
The market for our products is characterized by continuing technological
development, evolving industry standards and changing customer requirements. 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 analytic 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. 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. Failure to develop and introduce new products, or enhance
existing products, in a timely manner in response to changing market conditions
or customer requirements, will materially and adversely affect our business,
results of operations and financial condition.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO GREATER INTELLECTUAL PROPERTY,
COLLECTIONS, REGULATORY AND OTHER RISKS
Our international business is subject to a number of risks, including the
following:
- greater difficulty in protecting intellectual property;
- greater difficulty in staffing and managing foreign operations;
- greater risk of uncollectible accounts;
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- longer collection cycles;
- potential unexpected changes in regulatory practices and tariffs;
- potential unexpected changes in tax laws;
- sales seasonality;
- the impact of fluctuating exchange rates between the U.S. dollar and
foreign currencies in markets where we do business; and
- general economic and political conditions in these foreign markets.
It is difficult to predict the extent of the future impact of these conditions.
These factors and other factors could have a material adverse effect on our
future international revenues and consequently on our business, results of
operations and financial condition.
RISK ASSOCIATED WITH GEOGRAPHIC EXPANSION
A majority of our revenue historically has been derived from clients
located in the United States. Our ability to achieve significant future revenue
growth will in large part depend on our ability to get new customers in the
United States and internationally.
Growth and geographic expansion, such as our recent acquisition of Delphi
in Switzerland, have resulted in new and increased responsibilities for
management personnel and have placed and continue to place a strain on our
management and operating and financial systems. We will be required to continue
to implement and accommodate the increased complexities of international and
multi currency transactions. Any failure to implement and improve our operating
and financial systems or to hire appropriate personnel to manage the operations
would have a material adverse effect on our business, financial condition and
result of operations.
IF OUR PRODUCTS CONTAIN SIGNIFICANT DEFECTS, THESE DEFECTS 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 we first introduce them. 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. Accordingly, these defects and errors could have a material adverse
effect on our business, results of operations or financial condition. 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. Our license agreements with our
customers typically contain provisions designed to limit our exposure to
potential product liability claims. It is possible, however, that 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, sale and support of our products entails
the risk of such claims, which could be substantial in light of the use of our
products in enterprise-wide applications. If a claimant successfully brings a
product liability claim against us, it could have a material adverse effect on
our business, results of operations or financial condition.
ANY INABILITY TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS
Our success depends upon our proprietary technology. 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. It is possible that our pending patent applications will
not be allowed or that competitors will successfully challenge the validity or
scope of our allowed patent or any future allowed patents. Our patents alone may
not provide us with any significant competitive advantage.
Third parties could copy or otherwise obtain and use our products or
technology without authorization, or develop similar technology independently.
It is difficult for us to police unauthorized use of our products, and,
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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. Effective protection of intellectual property rights is unavailable or
limited in certain 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.
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. Third parties
could claim that our current or future products infringe their patent or other
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 have a material
adverse effect upon our business, financial condition and operating results.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to us, or at all. Legal 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.
Moreover, the cost of defending patent litigation could be substantial,
regardless of the outcome. In the event a patent claim against us was successful
and we could not obtain a license on acceptable terms or license a substitute
technology or redesign to avoid infringement, our business, financial condition
and operating results would be materially adversely affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio. We do not plan to use derivative financial instruments in
our investment portfolio. We plan to ensure the safety and preservation of our
invested principal funds by limiting default risks, market risk and reinvestment
risk. We plan to mitigate default risk by investing in high-credit quality
securities.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In April 2000, the Company issued 409,138 shares of common stock to
PricewaterhouseCoopers ("PwC") in connection with its acquisition of certain
intellectual property rights and personnel from PwC. The shares were issued in
reliance on Section 4(2) of the Securities Act of 1933, as amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 25, 2000, the
following individuals were elected to the Board of Directors:
<TABLE>
<CAPTION>
CLASS VOTES FOR VOTES WITHHELD
----- ---------- --------------
<S> <C> <C> <C>
Gaurav S. Dhillon................................. III 28,159,511 36,776
David W. Pidwell.................................. III 28,159,511 36,776
Diaz H. Nesamoney................................. II 28,159,511 36,776
A. Brooke Seawell................................. II 28,159,511 36,776
Vincent R. Worms.................................. I 28,159,511 36,776
</TABLE>
The Company's Board of Directors is currently comprised of five members who are
divided into three classes. A director serves in office until his respective
successor is duly elected and qualified or until his earlier death or
resignation. The term for Class III directors (Gaurav S. Dhillon and David W.
Pidwell) is three years and will expire in 2003, the term for Class II directors
(Diaz H. Nesamoney and A. Brooke Seawell) is two years and will expire in 2002,
and the term for Class I directors (Vincent R. Worms) is one year and will
expire in 2001.
The following proposals were approved at the Company's Annual Meeting:
<TABLE>
<CAPTION>
AFFIRMATIVE NEGATIVE VOTES
VOTES VOTES WITHHELD
----------- --------- --------
<S> <C> <C> <C>
1. Approval of an amendment to the Company's amended and
restated certificate of incorporation to increase the
aggregate number of shares of the Company's common stock
authorized for issuance from 100,000,000 to 200,000,000
shares.................................................... 26,732,820 4,454,596 8,871
2. Ratify the appointment of Ernst & Young, LLP as
independent auditors for the fiscal year ending December
31, 2000.................................................. 28,194,888 880 519
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
3.4 Certificate of amendment to the Company's amended and
restated certificate of incorporation to increase the
aggregate number of shares of the Company's common stock
authorized for issuance from 100,000,000 to 200,000,000
shares.
10.18* Intellectual Property and Consulting Services Transfer
Agreement, executed by the parties on April 1, 2000, by and
among the Company and PricewaterhouseCoopers LLP.
10.19 Assignment and Assumption Agreement, dated April 3, 2000, by
and among the Company and PricewaterhouseCoopers LLP.
10.20 Registration Rights Agreement dated April 3, 2000, by and
among the Company and PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule
</TABLE>
---------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Omitted portions will be filed separately with the Securities
and Exchange Commission.
(b) Reports on Form 8-K
None
19
<PAGE> 22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
Informatica Corporation has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
INFORMATICA CORPORATION
By: /s/ EARL E. FRY
------------------------------------
Earl E. Fry
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial
and Accounting Officer)
Dated: August 11, 2000
20
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.4 Certificate of amendment to the Company's amended and
restated certificate of incorporation to increase the
aggregate number of shares of the Company's common stock
authorized for issuance from 100,000,000 to 200,000,000
shares.
10.18* Intellectual Property and Consulting Services Transfer
Agreement, executed by the parties on April 1, 2000, by and
among the Company and PricewaterhouseCoopers LLP.
10.19 Assignment and Assumption Agreement, dated April 3, 2000, by
and among the Company and PricewaterhouseCoopers LLP.
10.20 Registration Rights Agreement dated April 3, 2000, by and
among the Company and PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
</TABLE>
---------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Omitted portions will be filed separately with the Securities
and Exchange Commission.
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