ITEM 1. BUSINESS
INTRODUCTION
We are a leading provider of analytic applications, infrastructure software and related services that help give eBusinesses the ability to evaluate and fine-tune the performance of their key operational areas for more effective decision making. While eBusiness has emerged as the new context for global commerce, one of the most vexing problems facing organizations building their eBusinesses is how to integrate and analyze the wealth of customer, partner and supplier information across both online and offline sales channel. Compounding this problem, businesses have historically suffered from technical complexity and system incompatibility. Our products help streamline and simplify the integration and analysis of information by providing a packaged, integrated solution.
While existing software tools and applications are helping companies access data directly from specific transactional systems, by themselves they have several key limitations:
- they do not address the volume of data generated on behalf of today's eBusinesses;
- they cannot interoperate within an enterprise deployment without specialized programming;
- they cannot access all critical data sources inside and outside an enterprise and
- the analytic applications themselves are not integrated with one another and, thus, are unable to share information across the enterprise value chain linking customers, suppliers, operations and partners.
These challenges point to the need for a software solution that offers the following capabilities:
- Robust data integration -- In addition to integrating current sources, from mainframe, relational and Enterprise Resource Planning (ERP) operational systems, an eBusiness analytic solution must be able to accommodate wide-ranging new sources, from Web transaction servers to integrated supply chain ERP systems;
- Vast scalability -- An eBusiness analytic solution must be able to scale in two dimensions: in sheer volume, to handle ever-greater numbers of transactions; and geographically, to be able to distribute processing close to the users -- many of whom now are more mobile and web-based than ever before -- who need the analytical output;
- Fine granularity -- An eBusiness analytic solution must also be able to aggregate information both horizontally, to identify trends across entire customer populations, and vertically, to drill down for any given customer record, in order to determine important "personalization" details, such as buying habits and key demographic information and
- Real-time refresh -- Perhaps the most daunting need is for real-time processing of source data, which fuels the level of instantaneous decision making that will one day power closed-loop analytic solutions.
With such an analytic solution in place, decision-makers will be able to gain better insight into business trends and will be able to make more accurate and informed business decisions that reflect activity across their entire eBusiness value chain.
INFORMATICA'S SOLUTION
We provide a highly adaptable, functionally rich software solution for deploying, managing and maintaining products that enable more effective business decision making. Our solution consists of an enterprise data integration platform which automates the process of retrieving, organizing and consolidating data from multiple systems, and a suite of analytic applications to evaluate the performance of a corporation's entire value-chain of customer, partner and supplier relationships.
We believe our solution offers the following key benefits:
Complete Analytic Solution
Informatica delivers an integrated solution that automates key processes for system deployment and management, including the steps required for accessing ERP and other transaction systems. Our solution includes a data integration platform as well as a set of analytic applications that cover the following key business areas: Customer Relationship Management (CRM), Business Operations and Procurement. We believe this packaged, complete approach significantly reduces the cost and time associated with deployment and management.
Our packaged solutions help extend our customers' systems investment by protecting them from discontinuous changes in their technology environment related to obsolescence and upgrades in hardware, operating systems, networks and applications. Over the lifetime of a solution deployed using our platform and business analytic products, these benefits are compounded, because ongoing system modifications and project-scope expansions can be addressed with minimal requirements for custom programming and consulting.
Informatica's analytic solution is based on our data-integration infrastructure software. Informatica Applications(TM) provide an analytic solution for gaining real-time business insight across the entire eBusiness value chain. Because our data integration platform provides the foundation for the analytic applications, customers can focus on deploying and enhancing our analytic tools without worrying about data access issues. Our integrated approach and our rules-based software allows our customers with systems to adapt to business changes, such as those resulting from mergers and acquisitions, currency fluctuations and ongoing regulatory change.
Incremental Deployment; Rapid Return on Investment
Unlike traditional, hand-coded decision support systems that are expensive and time-intensive to deploy, and unlike analytic tools targeted to niche transactions systems, we believe our solution allows users to achieve a faster return on investment through incremental, business-unit-size deployments and the ability to build analytic data models on top of proven data integration technology. These successful deployments can then be extended across the enterprise via a data integration hub.
The integrated analytic application suites permit customers to deploy analytic products independently but leverage the functionality in subsequent deployments -- the key business information that would be embedded in one analytic suite could be cross-referenced in any subsequent analytic application deployment. Today's Business to Business (B2B) eBusiness market requires scalable and integrated solutions for helping companies gain insight into key relationships and related activities that can determine profitability across both traditional "brick and mortar" and online sales channels. Our analytic solution permits the Global 2000 companies to perform cross-channel data analysis and establish full value chain "cause-effect" analysis between customer sales, supplier efficiency, and corporate profitability.
Multi-level Scalability
Our analytic solution addresses decision support scalability on many levels. This includes scaling from an early-stage, data mart-based analytic application to an enterprise-wide analytic solution deployment enabling the large data volume, high throughput, and heterogeneous source systems requirements for robust enterprise-wide analytic computing. Taking advantage of distributed, parallel processing technologies, our platform is designed to significantly improve performance by allowing users to bring multiple clusters of servers to bear on large, complex analytic problems.
Architecture Openness and Extensibility
Our open architecture gives users seamless access to data locked in various transactional systems, and enables our customers to address many different types of analytical requirements. Informatica's products permit users to add customized functions to extend our pre-programmed general purpose functions to address
specific business problems. Our analytic applications provide a solution that utilizes data integration capabilities of the platform product set and permits end-user extension of our analytic models.
Deployment Flexibility
Our solution is designed to support a wide range of computing platforms and applications typically found in large organizations, and to collect data from transaction sources employing varying combinations of computer hardware and database software. Our rules-based transformation engine resolves the idiosyncrasies of different operating systems, hardware and database platforms. In addition, our high-performance, customized software drivers are designed to leverage the strengths and mitigate the weaknesses of different vendors' platforms. All of our products run on UNIX (HP-UX, IBM AIX, Sun Solaris) and Microsoft NT servers, use Windows 95, Windows 98, and Windows NT clients, and support all major relational databases, including Oracle, IBM DB2/UDB, Informix, Sybase, and Microsoft SQL Server.
PRODUCTS AND SERVICES
Our products enable large, global organizations to build the necessary infrastructure for deploying and managing business intelligence and analytic applications across the enterprise. Since the acquisition of Influence Software in December 1999, our complete analytic solution enables companies to deploy integration analytic applications that leverage our data integration infrastructure. These products are designed to reduce the complexities of deploying, maintaining, and designing the required analytic solutions and to enhance the quality and performance of information analysis. Informatica is providing a complete solution for our customers to deploy a total solution for business analysis.
Our solution enables enterprises to implement multi-tier decision support architecture that can be as sophisticated -- or as simple -- as necessary. We provide our customers with the capabilities to deploy a complete analytic solution encompassing proven data integration platform along with integrated analytic applications that span CRM, Business Operations, and Procurement. Our customers can deploy our complete suite of analytic applications to examine the impact of suppliers' on time delivery, in the eProcurement suite, on corporate profitability, in the eBusiness Operations, and the correlation to customer satisfaction, within the eCRM solution. Large enterprises can use PowerCenter(TM), for instance, to create a data integration hub that will synchronize and manage wide-ranging decision support resources. Other organizations can start small, through PowerMart,(R) by creating independent line-of-business data warehouses and analytic systems. Then, as business needs grow and change, they can add the synchronization and sophisticated management capabilities of PowerCenter.
The following table summarizes the key features and benefits of our products:
Infrastructure Software
Informatica Applications
PowerCenter
As part of our solution, PowerCenter serves as an enterprise data integration hub for deploying and managing scalable decision support systems. Within PowerCenter, a global repository functions as the central synchronization point, extracting data from diverse operational sources, including mainframe, relational database and popular enterprise resource planning applications. PowerCenter transforms and distributes that data downstream to data warehouses and data marts in preparation for end-user analysis. PowerCenter includes software to design and manage the global repository, to set up data extraction processes from operational databases and to synchronize data sharing among distributed analytic applications.
PowerCenter has a number of innovative and essential features that enable it to function effectively as an enterprise data integration hub. PowerCenter's robust native mainframe file support allows mainframe database files to be imported directly into the PowerCenter hub, eliminating the need for, and the added expense of, additional software. Parallel processing capabilities within this product allow users to roll-out multiple instances of PowerCenter's transformation engine to maximize system performance for the most complex data extractions and transformations. PowerCenter's systems management capabilities are designed to allow administrators to more efficiently manage, monitor and control multiple repositories and servers in the network from a central console.
PowerCenter.e
PowerCenter.e offers a set of unique capabilities that extend the reach of PowerCenter to address eBusiness market requirements. PowerCenter.e has been designed to enable Informatica's customers to leverage their investment in our data integration infrastructure for their emerging eBusiness applications.
In addition to the features and functionality that have established Informatica software as a platform of choice for business insight, Informatica PowerCenter.e offers a set of key features that effectively extend PowerCenter's reach to address the eBusiness market:
- Near real-time eBusiness analytics -- By adding support for IBM's MQSeries, the industry's most widely adopted messaging product, PowerCenter.e provides near real-time support for extraction and loading of data from a company's message queue infrastructure.
- Business-to-business data exchange through support for XML standard -- XML (Extensible Markup Language) is rapidly emerging as the de facto standard for data exchange over the Internet. Because XML data is a hierarchically structured data type, it has been difficult to incorporate into an enterprise decision support system. With PowerCenter.e, eBusinesses can import their XML data into a relational format while importing the metadata about that XML file into the data warehouse repository.
- Ability to read Web log data -- PowerCenter.e eases the process of retrieving data from Web logs by providing tools to import and consolidate Web logs, and transform proprietary Web-log formats into standard, readable structures. PowerCenter.e supports sourcing and parsing of data from today's three leading Web server products from Microsoft, Netscape and Apache.
- Demographic profiling of customers -- Acxiom's Data Network service enables companies to access the most comprehensive collection of data on U.S. consumers, businesses, properties and telephone information available via the Internet. PowerCenter.e provides eBusinesses with a direct connection to this network, helping them achieve a greater amount of insight into their online customers.
- Support for popular Web language -- The most widely used language implemented by Web developers today is Practical Extraction Report Language (PERL). PowerCenter.e lets companies embed PERL within Informatica's transformation logic, allowing the reuse of pre-defined PERL scripts.
PowerMart
PowerMart is an integrated product suite for building and managing line-of-business data marts and analytic applications. PowerMart can be used in conjunction with PowerCenter, or it can be employed to create independent, standalone data marts and data warehouses. PowerMart features integrated warehouse-design, repository-design and management components that share a common, intuitive graphical user interface. Through a variety of software wizards and other productivity-enhancing tools, PowerMart supports the full life-cycle for data mart/data warehouse deployment, development, production and ongoing management.
The PowerMart integrated product suite includes five standard components:
- PowerMart Designer is a powerful, multi-faceted tool for visually defining mappings and transformations;
- PowerMart Repository is an open metadata store for definitions about mappings, transformations and other data mart details;
- PowerMart Repository Manager is a facility for managing user activities and metadata storage in the repository;
- PowerMart Server is a pipelined, multi-threaded server engine that is able to overlap data extraction, transformation and loading and
- PowerMart Server Manager is an administrative interface to the PowerMart Server for configuring data marts and scheduling jobs.
PowerMart includes a number of key features that enable organizations to implement data marts and analytic applications for a fraction of the cost of a large, centralized data warehouse. For example, PowerMart gives users the option of combining disk staging with in-memory server-side caching to fully leverage system resources and achieve peak performance during any stage of data processing. PowerMart also provides a "Deploy Folder" wizard that guides developers through a step-by-step process for moving from test to
development to full production. In addition, advanced session management facilities help data warehouse administrators maintain operational efficiency.
Analytic Business Components for SAP R/3
Our Analytic Business Components are pre-defined templates that provide fully documented building blocks, which include mappings, mapplets, source objects, targets and transformations, that support the rapid and easy development of data marts and analytic applications. These building blocks insulate data warehouse designers from the complexities of the operational system, and greatly simplify the tasks of data mart construction.
Complete Data Integration
We also market and sell two additional software products which extend the capabilities of our data integration platform. PowerConnect for DB2 is a mainframe software bridge that facilitates access to IBM DB2 databases running on IBM MVS and OS/390 systems. PowerConnect for SAP R/3 and PowerConnect for PeopleSoft provide our customers with native access to the two Enterprise Resource Planning (ERP) software products. With PowerConnect, organizations get fast, transparent access to operational data regardless of whether it resides on a mainframe or inside of an enterprise resource planning application.
PowerPlugs(TM) are third-party software programs that add functionality via open application programming interfaces that permit exchange of metadata and data transformation information.
Pricing Model
We have a server-based pricing model in which PowerCenter and PowerMart are priced according to the capabilities of the server upon which they will be running. Informatica's analytic applications are packaged and sold as complete product suites. Our value-based pricing produces higher license fees from a customer who will be using our products on higher capacity servers and higher license fees from those customers who deploy multiple analytic application suites.
Technology Differentiators
The following key technologies differentiate our products from other industry offerings, and we believe they are critical to deploying and managing systems that enable more effective business decision making:
- COMPLETE, INTEGRATED ANALYTICS -- The power of our analytic applications is that all data models are fully integrated and permit extensive "cause-effect" analysis and cross-channel business evaluations. The analytic applications are integrated at the analytic model and presentation layer as well as through our data integration platform and by reliance and utilization of Analytic Business Components.
- METADATA-BASED ARCHITECTURE -- Metadata is "data about data," in that it describes the business rules and cataloging information needed for the decision support applications to function. It also enables users to understand the context and meaning of data that they are analyzing. Through the global repository, PowerCenter permits synchronization and sharing of metadata among distributed repositories that are located in various enterprise departments and are used for different decision support applications. The global repository employs a system of shared folders and hotlinked pointers, available to all registered local repositories, to enable sharing of public metadata and specific data transformations.
For example, the enterprise customer may define certain key values, such as "customer" or "revenue," for use throughout all analytic applications. By keeping these values in shared folders, the system ensures that users throughout the enterprise will be working with consistent data definitions. Through the system of hotlinked pointers, shared information is automatically kept up to date.
Our products also feature open, distributed metadata exchange with other decision support products, such as back-end data modeling tools, front-end query and reporting tools and analytic applications. This contributes greatly to interoperability, quality of analysis and scalability.
- NATIVE CONNECTIVITY TO OPERATIONAL SOURCES -- We are an industry leader in source-database access capabilities. Through PowerCenter and PowerMart, users can access UNIX and Windows NT databases, IBM DB2 databases and leading enterprise resource planning systems. For instance, PowerCenter extends the effectiveness of SAP Business Information Warehouse(TM) by giving users access to all non-SAP data throughout their enterprise. In addition, PowerMart provides a similar capability to users of PeopleSoft's Enterprise Performance Management suite, giving users access to both PeopleSoft and non-PeopleSoft operational data.
- CENTRALIZED MANAGEMENT -- Architectures that enable more effective business decision making require the power of distributed, parallel servers combined with the convenience of centralized management. PowerCenter supports multiple parallel servers and provides a single interface for configuring and monitoring them. Additionally, PowerCenter provides a single interface for viewing and configuring metadata in the PowerCenter repository and any local, registered repositories.
- ENGINE-BASED PERFORMANCE -- The heart of our solution is a high-end performance server, or engine, that automates data movement and transformation. The server employs advanced techniques, such as parallel, overlapped operations, to give users the high-performance data throughput required for enterprise-class implementations. Our platform's engine-based high performance allows users to construct analytic applications and perform analyses according to their real business needs, without having to hand-code transformations or continually modify their objectives because of technology limitations.
Services
We offer comprehensive professional services in implementation consulting, as well as in customer support and training. As of December 31, 1999, we employed 77 people worldwide in services related activities.
Our professional services range from designing and deploying architectures that enable more effective business decision making to data transformation and performance tuning. Our professional services consultants possess expertise in databases and operating systems, enterprise resource systems, business process design and management and major vertical industry issues.
We offer high-quality, timely technical support to customers via phone, e-mail and the Internet. We also publish a comprehensive web-based journal on infrastructure issues, with technical detail that expands on existing documentation and presents implementation options. Additionally, we publish online versions of manuals, release notes and updates to existing documentation.
We provide a number of customer training programs in the United States and Europe. Courses cover topics such as designing target data tables, analyzing operational sources, tuning and troubleshooting and understanding systems used to support business decision making.
STRATEGIC PARTNERS
Our partners include industry leaders in enterprise software, query/analysis applications and systems integration. We pursue a comprehensive partnership program with major vendors in these areas so that they can provide complementary products and services to our joint customers with effective best-of-breed enterprise solutions. Our partnership program is called the PowerPartner Program, and our strategic partners include:
eBusiness Platform Partners
Ariba Broadvision InterWorld Kana Communications
Enterprise Software Partners
BMC Software NEON Systems IBM PeopleSoft Microsoft SAP
Query/Analysis Partners
Brio Technology Business Objects Hyperion Solutions Cognos MicroStrategy
Systems Integration Partners
American Management Systems Application Consulting Group Application Partners Apex Solutions Andersen Consulting Archer Decision Sciences Active Interest Advanced Paradigm Solutions Advisa Group Braun Technology Group BTG Technology Systems C3i Systems Integration Partners (continued)
Cambridge Technology Partners Case Logical Data Cap Gemini Clark Information Systems Client Server Associates Connect Systems Core Integration Partners Cotelligent CSC Ploenzke Daman Consulting Descartes Systems Group DEC Deloitte Touche DMR Consulting DSS Solution EDS Epsilon Encompass Business Solutions Gamut Technologies Geac Computers Grace Technologies Infocrest Solutions IPI GrammTech Knightsbridge Solutions KnowledgeBase Marketing KPMG Lancet Software Development LGS Group Logan/Britton Metamor Migration Software Systems Integration Partners (continued)
NetBase Computing New Technology Management Newport Technology Group NexGen SI Octet Consulting Parallogic Perot Systems PricewaterhouseCoopers Profound Solutions Retail Dynamics Inc. The Revere Group REZsolutions R&Z Software Saphir Saturn Business Systems Siemens Nixdorf Softmaster Software House International Softworks Consulting Solution Builders SQLiason Strategic Technologies Strategic Information Systems Sybertech Sysix Technologies Talent Software Services Tessera Enterprise Systems WebSoft Xenon Yaletown Technology ZYGA
CUSTOMERS
Our customers represent a wide, cross-industry spectrum of large global organizations, plus major governmental and educational institutions. A representative sampling of customers who have purchased at least $100,000 of software license since January 1996 includes:
Communications AirTouch Cellular* AT&T Corp.* Lucent Technologies* Pacific Bell Directory Qualcomm* Sprint Tele-Communications, Inc.* (TCI) Telenor*
Government Bureau of Land Management State of Texas U.S. Navy* US Postal Service*
Financial Services The Capital Group Companies* Charles Schwab SG Cowen* First Union National Bank* GM Acceptance Corp.* Invesco Funds Group Merrill Lynch* Oppenheimer Funds* J.P. Morgan* Providian Financial* Prudential Insurance* Salomon Smith Barney* Stein, Roe & Farnham UBS
High Technology 3Com* Autodesk* Automatic Data Processing* LSI Logic* Gateway* National Semiconductor Silicon Graphics* Internet Software-Service CompuServe e.spire Priceline.com* Netcentives Inktomi* C/NET StoreRunner.com Netscape* UUNET*
Insurance Abbey National* Allstate Insurance* The Equitable Companies* Hartford Insurance* John Hancock* Liberty Mutual Insurance Companies* MassMutual* MetLife Insurance* Mutual of Omaha* Zurich Insurance*
Utilities/Energy Commonwealth Edison Company* Chevron Corporation Entergy Services/Entergy Corporation* KN Energy* Philadelphia Power and Light* Southern Company Manufacturing/Distribution ABB* Avery-Dennison* Boeing* General Electric* Honeywell Lockheed Martin* Motorola* Thomson Publishing Toyota USA*
Media/Entertainment/ Hospitality Carlson Wagonlit Travel* Fox Entertainment Group* Hearst Corporation* Ultramar Diamond Shamrock* Warner Brothers* Yorkshire Cable
Pharmaceuticals/Health Care Amgen* American Home Products Corporation* Blue Cross Blue Shield* Dura Pharmaceuticals Genentech MedData Health Pharmacia & Upjohn* Zeneca (ICI)*
Retail/Consumer Packaged Goods Campbell Soup Dial* First Brands Benjamin Moore Long's Drug Stores* The Gap* Liz Claiborne Polo Ralph Lauren*
Transportation BAX Global* Roadway Express Ryder
Other Stanford University*
* Over $200,000 since January 1996.
RESEARCH AND DEVELOPMENT
As of December 31, 1999, we employed 74 people in our research and development organization. This team is responsible for the design, development and release of our products. The group is organized into four disciplines: development, quality assurance, documentation and program management. Members from each discipline, along with a product marketing manager from our marketing department, form separate product teams that work closely with sales, marketing, services, customers and prospects to better understand market needs and user requirements.
When appropriate, we also utilize third-parties to expand the capacity and technical expertise of our internal research and development team. On occasion, we have licensed third-party technology. We believe this approach shortens time to market without compromising competitive position or product quality, and we plan to continue to draw on third-party resources as needed in the future.
We have a well-defined software development methodology that we believe enables us to deliver products that satisfy real business needs for the global market while also meeting commercial quality expectations. Our methodology involves specifying and reviewing business requirements, functional requirements, prototypes, technical designs, test plans and documentation plans. We then perform iterative, scheduled quality assurance of code and documentation, followed by frequent stabilization of code and documentation. We test automation definition, instrumentation and execution as well as functions, components, systems, integration, performance, stress and international and Year 2000 compliance. A key component of our methodology is full product regression testing before beta or general availability releases and trial deployments in an internal production environment prior to release, external beta releases and general availability release. Failure to develop and introduce new products, or enhancements to existing products, in a timely manner in response to changing market conditions or customer requirements, may materially adversely affect our business, results of operations and financial condition.
We emphasize quality assurance throughout the software development life-cycle. We believe that a strong emphasis placed on analysis and design early in the project life reduces the number and costs of defects that may be found in later stages.
SALES, MARKETING AND DISTRIBUTION
We market and sell software and services through a direct sales force in the United States, the United Kingdom and Germany, as well as through distributors. As of December 31, 1999, we employed 145 people worldwide in our sales and marketing organization.
Marketing programs are focused on creating awareness as well as lead generation and customer references for our products. These programs are targeted at key executives such as chief executive officers, chief information officers and presidents of engineering, research and development, sales, service and marketing. Our marketing personnel engage in a variety of activities, including positioning our software products and services, conducting public relations programs, establishing and maintaining relationships with industry analysts and generating qualified sales leads, among others.
Our sales process consists of several phases: lead generation, initial contact, lead qualification, needs assessment, enterprise overview, product demonstration, proposal generation and contract negotiation. Although the typical sales cycle has been up to 120 days, certain sales cycles in the past have lasted substantially longer. In a number of instances, our relationships with systems integrators and other strategic partners have reduced sales cycles by generating qualified sales leads, making initial customer contacts and assessing needs prior to our introduction to the customer. Also, partners have assisted in the creation of presentations and demonstrations, which we believe enhances our competitive position.
We distribute our products through system integrators in the United States and distributors in Europe. Systems integrators typically possess expertise in vertical markets. They resell our products, bundling them in some cases with system-wide solutions. In other cases, they influence direct sales of our products. Distributors sublicense our products and provide service and support within their territories.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
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. We have three patent applications pending and two patent applications allowed in the United States. It is possible that our pending 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.
As part of our confidentiality procedures, we generally enter into non-disclosure agreements with our employees, distributors and corporate partners and into license agreements with respect to our software, documentation and other proprietary information. Despite these precautions, 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, 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 may from time to time receive notices from third parties claiming infringement by our products of third-party patent and other proprietary rights. On April 7, 1999, we were notified by another company that it is evaluating our products to determine whether our products infringe its U.S. patent and has requested that we enter into discussions with them as to whether it is necessary or appropriate for us to obtain a license. Although this company has not filed litigation against us, this company has filed litigation against one of our competitors, alleging infringement of its patent. Third parties, including the company that has contacted us regarding our products, 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.
COMPETITION
The market for our products is highly competitive, rapidly evolving and subject to rapidly changing technology. We compete principally against providers of decision support, data warehousing and enterprise 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.
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 currently compete more on the basis of our
products' functionality than on the basis of price. If our competitors develop similar or superior functionality, we may have difficulty competing more substantially 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 on the basis of certain factors, including:
- product performance;
- product features;
- user scalability;
- open architecture;
- ease of use;
- product reliability;
- analytical capabilities;
- time to market;
- customer support and
- product pricing.
EMPLOYEES
As of December 31, 1999, we had a total of 332 employees, including 74 people in research and development, 145 people in sales and marketing, 77 people in consulting, customer support and training and 36 people in general and administrative services. None of our employees is represented by a labor union, and we consider employee relations to be good.
ITEM 2.
ITEM 2. PROPERTIES
Our headquarters are located in Palo Alto, California and consist of approximately 60,000 square feet of office space leased through January 2001. We signed a new lease and plan to occupy additional office space in June 2000 in a building near our headquarters which consists of approximately 30,000 square feet of office space and is leased through June 2007. To help meet our future expansion needs, we recently signed leases for two buildings in Redwood City, California which will become our new corporate headquarters in July 2001. These buildings are leased through 2013 and consist of approximately 286,000 square feet of office space.
The Company leases approximately 19,000 square feet of office space in San Francisco, California primarily for sales, marketing and professional services activities. This facility is leased through November 2006.
We also lease other office space in the United States and other various countries under operating leases.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the year ended December 31, 1999.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning our executive officers and directors as of March 31, 2000:
- --------------- (1) Member of audit committee.
(2) Member of compensation committee.
Mr. Dhillon is one of the founders of Informatica and has been our Chief Executive Officer, our Secretary and a member of our board of directors since our inception. Prior to co-founding Informatica in February 1993, Mr. Dhillon was employed by Sterling Software, a software company, from December 1991 to November 1992, where his last position was project manager. Prior to that, he was a systems architect with Unisys Corporation. Mr. Dhillon holds a B.S.E.E. from Punjab University, India.
Mr. Nesamoney is also one of the founders of Informatica and has been a member of our board of directors and an officer since our inception. He is currently our Chief Operating Officer. Prior to co-founding Informatica in February 1993, Mr. Nesamoney was employed by Unisys Corporation from May 1988 to February 1993, where his last position was a development manager. Mr. Nesamoney holds an M.S.C.S. degree from Birla Institute of Technology & Science.
Mr. Harrison joined us in January 1996 as Senior Vice President, Sales and became Executive Vice President, Worldwide Sales in January 1999. Mr. Harrison held sales management responsibility at Oracle Systems from June 1995 to January 1996. From September 1989 to June 1995, he was Regional Vice President of Sales at Information Resources, an enterprise decision support software company. Mr. Harrison holds a B.S. degree in Operational Research and Economics from Aston University in England.
Mr. Fry has been our Chief Financial Officer and a Senior Vice President since December 1999. From November 1995 to November 1999, Mr. Fry was Vice President and Chief Financial Officer at Omnicell.com. From July 1994 to November 1995, he was Vice President and Chief Financial Officer at C*ATS Software, Inc. Mr. Fry holds a B.A. degree in Business Administration from the University of Hawaii and an M.B.A. degree in Finance and Marketing from Stanford University.
Mr. Pidwell has been one of our directors since February 1996. From January 1988 to January 1996, Mr. Pidwell was President and Chief Executive Officer of Rasna Corporation, a software company. Mr. Pidwell is currently a venture partner with Asset Management Associates and serves on the boards of directors of a number of private companies. Mr. Pidwell holds a B.S.E.E. in Electrical Engineering and an M.S.I.S.E. degree in Computer Systems Engineering from Ohio University.
Mr. Seawell has been one of our directors since December 1997. From January 1997 to August 1998, Mr. Seawell was Executive Vice President of NetDynamics, an internet applications server company. From March 1991 to January 1997, Mr. Seawell was Senior Vice President and Chief Financial Officer of Synopsys. Mr. Seawell holds a B.A. degree in Economics and an M.B.A. degree in Finance and Accounting from Stanford University. Mr. Seawell serves on the board of directors of NVIDIA Corporation, a 3D (three-dimensional) graphics processor company, and several privately held companies.
Mr. Worms has been one of our directors since September 1995. From 1982 to the present, Mr. Worms has served as Co-President of Partech International Capital Management, a venture capital firm that manages one of our investors. Mr. Worms holds an M.S. degree in Science from the Ecole Polytechnique in Paris, France and the Massachusetts Institute of Technology. Mr. Worms serves on the boards of directors of SangStat Medical Corporation and Business Objects, a software company, in addition to serving on the board of a number of private companies.
There are no family relationships among any of our directors or officers.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the Nasdaq National Market under the symbol "INFA." The following table sets forth, for the periods indicated, the high and low sales prices of the common stock as reported by the Nasdaq National Market since the Company's initial public offering of common stock at $8.00 per share on April 29, 1999. Prior to April 29, 1999, there was no public trading market for the common stock.
As of December 31, 1999, there were approximately 223 stockholders of record. The last reported sale price per share of the Company's common stock on December 31, 1999 on the Nasdaq National Market was $53.19.
The above information has been restated to reflect a two-for-one stock split effected in the form of a stock dividend to each stockholder of record as of February 18, 2000.
The Company has not paid cash dividends on its common stock and does not plan to pay cash dividends in the near future.
In April 1999, the Company completed the initial public offering of its common stock and realized net proceeds from the offering of approximately $43.5 million. The proceeds from this offering have and will continue to be used for general corporate purchases, including working capital.
On December 15, 1999 and in connection with the acquisition of all of the outstanding capital stock of Influence Software, Inc. (Influence), the Company issued 1,299,084 shares of unregistered common stock to the former stockholders of Influence. As of February 29, 2000, the Company also issued an additional 63,746 shares of unregistered common stock related to the exercise of Influence stock options.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA(1)
- --------------- See Note 1 of Notes to Consolidated Financial Statements for an explanation of the determination of the number of shares used to compute basic and diluted net loss per share.
(1) Amounts and per share data for all periods presented have been retroactively restated to reflect the merger of Influence in a pooling-of-interests transaction effective December 15, 1999.
(2) Amounts have been restated to reflect a two-for-one stock split, effected in the form of a stock dividend to each stockholder of record as of February 18, 2000.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-K 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; the impact of recent changes in accounting standards; costs, liabilities, exposure, and plans related to the Year 2000 problem; our ability to mitigate risks associated with the Year 2000 problem; 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 Item 7A
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK
The following discusses our exposure to market risk related to changes in interest rates, foreign currency exchange rates and equity prices. This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors including those set forth in "Factors That May Affect Future Results".
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 investments consist primarily of commercial paper. Due to the nature of our investments, we believe that there is no material risk exposure. All investments are carried at market value, which approximates cost.
FOREIGN CURRENCY RISK
We develop products in the United States and market our products in North and South America, Europe and the Asia-Pacific region. 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 our sales are primarily in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information contained in this Form 10-K, we have identified the following risks and uncertainties that may have a material adverse affect on our business, financial condition or results of operation. This section should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Form 10-K.
THE EXPECTED FLUCTUATION OF OUR QUARTERLY RESULTS COULD CAUSE OUR STOCK PRICE TO EXPERIENCE SIGNIFICANT FLUCTUATIONS OR DECLINES
Our 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;
- 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.
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 1997, 1998 and 1999, 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 analytic applications, 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.
We were incorporated in 1993 and therefore have a limited operating history upon which investors can evaluate our operations, products and prospects. We have incurred significant net losses since our inception, and it is possible we may not achieve profitability. We incurred net losses of $1.5 million, $9.3 million and $8.0 million in 1999, 1998 and 1997, respectively. As of December 31, 1999, we had an accumulated deficit of $23.9 million. In addition, we intend to increase our operating expenses significantly in 2000; therefore, our operating results will be adversely affected if revenues do not increase significantly.
BECAUSE WE SELL A FEW MAIN PRODUCTS, IF THEY DO NOT ACHIEVE BROAD MARKET ACCEPTANCE, OUR REVENUES WILL BE ADVERSELY AFFECTED
In 1999 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. There can be no assurance that this acquisition will be effectively assimilated into our business. The integration of Influence will place a 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, 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 connections with our acquisition of Influence.
From time to time, in the ordinary course of business, we may evaluate potential acquisitions of 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 Chief Operating Officer, 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.
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 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. See "Business -- Competition."
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 KPMG, PeopleSoft, PricewaterhouseCoopers and Andersen Consulting. 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.
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 requires 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. To the extent that potential customers divert resources and attention to Year 2000 issues, the sales cycle could be further lengthened.
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. We increased the number of our employees from 50 at December 31, 1996, to approximately 332 at December 31, 1999. Our revenues increased from $2.1 million in 1996 to $62.4 million in 1999. 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. As a result, some of our customers deferred purchasing the PowerMart product until this 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. Failure to develop and introduce new products, or enhancements to 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
International revenues accounted for 18%, 12% and 6% of our total consolidated revenues in 1999, 1998 and 1997, respectively. 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;
- 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 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.
OUR 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,
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 may from time to time receive notices from third parties claiming infringement by our products of third-party patent and other proprietary rights. On April 7, 1999, we were notified by another company that it is evaluating our products to determine whether our products infringe its U.S. patent and has requested that we enter into discussions with them as to whether it is necessary or appropriate for us to obtain a license. Although no litigation has been filed by this company against us this company has filed litigation against one of our competitors, alleging infringement of its patent. Third parties, including the company that has contacted us regarding our products, 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. See "Business -- Intellectual Property and Other Proprietary Rights."
YEAR 2000 ISSUES COULD NEGATIVELY AFFECT OUR BUSINESS
In prior years, we discussed the nature and progress of our plans to become Year 2000 ready. In late 1999, we completed our remediation and testing of systems. As a result of those planning and implementation efforts, we experienced no significant disruptions in mission critical information technology and non-information technology systems and believe those systems successfully responded to the Year 2000 date change. During 1999, we did not incur any material costs directly associated with our Year 2000 compliance efforts, except for the compensations expense associated with our salaried employees who devoted some of their time to our Year 2000 assessments and remediation efforts. We are not aware of any material problems resulting from Year 2000 issues, either with our products, our internal systems, or the products and services of third parties. We will continue to monitor our mission critical computer applications throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.
CERTAIN EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER INFORMATICA
Our officers, directors and principal stockholders (i.e., greater than 5% stockholders) will together control approximately 27% of our outstanding common stock as of February 29, 2000. As a result, these stockholders, if they act together, will be able to control the management and affairs of Informatica and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of Informatica and might affect the market price of our common stock.
OUR STOCK PRICE MAY FLUCTUATE SUBSTANTIALLY
The market price for the common stock will be affected by a number of factors, including the following:
- the announcement of new products or product enhancements by us or our competitors;
- quarterly variations in our or our competitors' results of operations;
- changes in earnings estimates or recommendations by securities analysts;
- developments in our industry and
- general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.
In addition, stock prices for many companies in the technology and emerging growth sectors have experienced wide fluctuations that have often been unrelated to the operating performance of such companies. Such factors and fluctuations, as well as general economic, political and market conditions, may materially adversely affect the market price of our common stock.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS CONTAIN PROVISIONS THAT COULD DISCOURAGE A TAKEOVER
Our basic corporate documents and Delaware law contain provisions that might enable our management to resist a takeover. These provisions might discourage, delay or prevent a change in the control of Informatica or a change in our management. Our amended and restated certificate of incorporation filed in connection with this offering provides that when we are eligible, we will have a classified board of directors, with each class of directors subject to re-election every three years. This classified board when implemented will have 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 you and other 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 the common stock.
CHANGES IN ACCOUNTING STANDARDS COULD AFFECT THE CALCULATION OF OUR FUTURE OPERATING RESULTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue in Financial Statements. SAB 101 provides guidance with respect to the recognition, presentation and disclosure of revenue in financial statements of all public registrants. We have not fully assessed the impact of the adoption of SAB 101 and has not determined the effect, if any, that it will have on our reported revenues or results of operations in future periods.
FORWARD-LOOKING STATEMENTS
Some of the statements under "Quantitative and Qualitative Disclosure About Market Risk," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this Form 10-K constitute forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those listed under "Quantitative and Qualitative Disclosure About Market Risk" and elsewhere in this Form 10-K.
In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms and other comparable terminology.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor anyone else assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of this Form 10-K.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Informatica Corporation
We have audited the accompanying consolidated balance sheets of Informatica Corporation as of December 31, 1999 and 1998, and the related consolidated statements of operations, redeemable convertible preferred stock and stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Informatica Corporation at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Palo Alto, California January 24, 2000
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INFORMATICA CORPORATION
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
See accompanying notes.
INFORMATICA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
See accompanying notes.
INFORMATICA CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE DATA)
See accompanying notes.
INFORMATICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes.
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
Informatica Corporation (the "Company") was incorporated in California in February 1993 and reincorporated in Delaware in March 1999. The Company operates in one business segment which provides software solutions that help large companies deploy, manage, maintain and grow systems that enable more effective business decision making.
On December 15, 1999, the Company acquired all of the outstanding stock of Influence Software, Inc. (Influence), a developer of analytic applications for eBusiness. The transaction was recorded using the pooling-of-interests method of accounting, and as such, financial information for all dates and periods prior to the acquisition has been restated to reflect the acquisition.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The functional currency of the Company's foreign subsidiaries is the local currency. The Company translates all assets and liabilities to U.S. dollars at the current exchange rates as of the applicable balance sheet date. Revenue and expenses are translated at the average exchange rate prevailing during the period. Gains and losses resulting from the translation for the foreign subsidiaries' financial statements are reported as a separate component of stockholders' equity. Net gains and losses resulting from foreign exchange transactions were not significant during any of the periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Changes in these estimates and assumptions may have a material impact on the financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, which consist of cash and highly liquid short-term government securities with insignificant interest rate risk and original maturities of three months or less at date of purchase, are stated at cost, which approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method over estimated useful lives of the related assets, generally three years or less.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with Financial Accounting Standards Board ("FASB") Statement No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed", under which certain software development costs incurred subsequent to the
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. Technological feasibility is established upon completion of a working model. Through December 31, 1999, costs incurred subsequent to the establishment of technological feasibility have not been significant and all software development costs have been charged to research and development expense in the accompanying consolidated statements of operations.
CONCENTRATIONS OF CREDIT RISK AND CREDIT EVALUATIONS
Financial instruments which subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company performs ongoing credit evaluations of its customers, which are primarily located in the U.S., Europe and Canada, and generally does not require collateral. Allowances for credit risks and for estimated future returns are provided upon shipment. Returns to date have not been material. Actual credit losses and returns may differ from the Company's estimates and such differences could be material to the financial statements.
REVENUE RECOGNITION
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 reseller 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.
Deferred revenue includes deferred 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. As of December 31, 1999 and 1998, there were $9.2 million and $3.3 million of unbilled receivables netted against deferred license revenue, respectively.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock option grants.
NET LOSS PER SHARE
Basic net 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 as their inclusion would be antidilutive.
The calculation of basic and diluted net loss per share is as follows:
If the Company had reported net income, 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 6,144,000, 4,480,000 and 3,372,000 common equivalent shares related to outstanding stock options and warrants not included in the calculations above (determined using the treasury stock method) for 1999, 1998 and 1997, respectively.
COMPREHENSIVE INCOME (LOSS)
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in the financial statements. The only item of other comprehensive income (loss) which the Company currently reports is foreign currency translation adjustments, which are included in accumulated other comprehensive income (loss) in the consolidated statements of redeemable convertible preferred stock and stockholders' equity (deficit). Tax effects of comprehensive income (loss) are not considered material.
INCOME TAXES
The Company accounts for income taxes in accordance with FASB Statement 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.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Included in property and equipment are assets acquired under capital lease obligations with an original cost of approximately $927,000 as of December 31, 1999 and 1998. Accumulated amortization of these assets was $342,000 and $146,000 at December 31, 1999 and 1998, respectively. The related amortization is included with depreciation expense.
3. LEASE OBLIGATIONS
The Company had an equipment financing agreement which provided up to $564,000 for the purchase of property and equipment and expired in January 1998. In February 1998, the Company entered into another equipment financing agreement with the same lender which increased the line to $1,510,000 for the purchase of property and equipment. Borrowings under these agreements bear interest at a rate of 3.07% and 3.19%, respectively, for 36 months. The Company is also required to choose to either pay a supplemental additional interest portion of 20% of the original purchase price due and payable at the end of the agreement term or to extend the agreement term for an additional year at a monthly interest rate of 2.05% of the original purchase amount. As of December 31, 1999, total borrowings under these agreements amounted to $927,000 of which $216,000 was outstanding.
The Company leases its office facilities and certain office equipment under noncancelable lease agreements which require the Company to pay operating costs, including property taxes, normal maintenance and insurance. Rent expense amounted to $2,005,000, $1,653,000 and $501,000 for 1999, 1998 and 1997, respectively.
Future minimum lease payments under noncancelable operating and capital leases are summarized as follows:
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY
BRIDGE FINANCING AND WARRANTS
In connection with the issuance of short-term promissory notes in May 1996, the Company granted warrants to the lenders to purchase up to 410,000 shares of Series C preferred stock at $1.25 per share. The warrants expire May 1, 2001. The Company deemed the fair value of the warrants to be $55,000, which was recorded as a discount on the notes. The fair value was determined using a Black-Scholes option pricing model with the following assumptions: a risk-free interest rate of 6.0%, no dividend yield or volatility factor, and an expected life of the warrant of five years. This discount was amortized to interest expense over the term of the notes during 1996. Upon the Company's initial public offering the warrants were converted into warrants to purchase 410,000 shares of common stock. In fiscal 1999, the Company issued a net of 397,546 shares of common stock upon the exercise of warrants, a portion of which were exercised pursuant to net exercise provisions, for a total of $212,000.
COMMON STOCK
At December 31, 1999, the Company has reserved the following shares of its common stock for future issuance:
On April 29, 1999 the Company completed an initial public offering in which it sold 6,000,000 shares of Common Stock, including 500,000 shares in connection with the exercise of the underwriters' over-allotment option, at $8 per share. The Company received $43.5 million in cash, net of underwriting discounts, commissions and other offering costs.
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 to each stockholder of record as of February 18, 2000 of one share of the Company's common stock for each share of common stock held. All references in the financial statements to number of shares, per share amounts, stock option data and market prices of the Company's common stock have been restated for the effect of the stock split.
1993 AND 1996 FLEXIBLE STOCK INCENTIVE PLANS
The Company's 1993 and 1996 Flexible Stock Plans (the "Stock Plans"), in effect through our initial public offering, authorized the granting of 8,454,500 incentive and nonstatutory common stock options to employees, directors, and consultants at exercise prices no less than 100% and 85%, respectively, of the fair market value of the common stock on the grant date, as determined by the Board of Directors. Options granted are exercisable over a maximum term of ten years and generally vest over a period of up to four years. In the event optionholders cease to be employed by the Company, all unvested options are forfeited and all vested options may be exercised within a 90 day period after termination; under the restricted portion of the plans, the Company also has the right to repurchase at the original purchase price any unvested shares if the holder is no longer employed by the Company. As of December 31, 1999, no outstanding common shares are subject to such repurchase rights. Options that are canceled under the 1996 Stock Plan will be available for future grants under the 1999 Stock Incentive Plan. There were no shares available for option grants under the 1996 Stock Plan at December 31, 1999.
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1999 STOCK INCENTIVE PLAN
The stockholders approved the 1999 Stock Incentive Plan (the "Incentive Plan") in April 1999 under which 1,300,000 shares have been reserved for issuance. In addition, any shares not issued under the 1996 Flexible Stock Incentive Plan will also be available for grant. The number of shares reserved under the Incentive Plan will automatically increase annually beginning on January 1, 2000 by the lesser of 8,000,000 shares or 5% of the total amount of fully diluted shares of common stock outstanding as of such date. Under the Incentive Plan, eligible employees may purchase stock options, stock appreciation rights, restricted shares and stock units. The exercise price for incentive stock options and non-qualified options may not be less than 100% and 85%, respectively, of the fair value of common stock at the option grant date. Options granted are exercisable over a maximum term of 10 years from the date of the grant and generally vest over a period of four years. As of December 31, 1999, the Company has 386,200 options available for grant under the Incentive Plan.
In connection with the acquisition of Influence, as discussed in Note 10, the Company converted options to purchase shares of Influence common stock into options to purchase shares of the Company's common stock. The number of shares of the Company's common stock issuable under each option and the exercise price for each grant were adjusted by an exchange ratio. The Company assumed the Stock Incentive Plan ("Influence plan") under which the options had been originally granted, however, no further options will be granted under the Influence plan. The converted options continue to be subject to the terms of the Influence plan. The Influence plan provided for the granting of incentive stock options and nonstatutory stock options. The exercise price of all options granted prior to the acquisition were determined by the Influence board of directors and were not less than the fair market value on the date of the grant. The options generally expire seven years from the date of the grant and vest over a period of four years from the date of the grant.
1999 NON-EMPLOYEE DIRECTOR STOCK INCENTIVE PLAN
The stockholders adopted the 1999 Non-Employee Director Stock Option Plan (the "Directors Plan") in April 1999 under which 500,000 shares have been reserved for issuance. Each non-employee joining the Board of Directors following the completion of the initial public offering will automatically receive options to purchase 50,000 shares of common stock at an exercise price per share equal to the fair market value of the common stock. These options are exercisable over a maximum term of five years and will vest in four equal annual installments on each yearly anniversary from the date of the grant. In addition, each non-employee director, who has been a member of the Board for at least six months prior to each annual stockholders meeting, will automatically receive options to purchase 10,000 shares of common stock at each such meeting. Each option will have an exercise price equal to the fair value of the common stock on the automatic grant date, a maximum term of five years and will vest on the first anniversary of the grant date. As of December 31, 1999, there have been no shares issued under the Directors Plan and 500,000 shares are available for future issuance.
EMPLOYEE STOCK PURCHASE PLAN
The stockholders adopted the Employee Stock Purchase Plan (the "Purchase Plan") in April 1999 under which 800,000 shares have been reserved for issuance. The number of shares reserved under the Purchase Plan will automatically increase beginning on January 1 of each year by the lesser of 3,200,000 shares or 2% of the total amount of fully diluted common stock shares outstanding on such date. Under the Purchase Plan, eligible employees may purchase common stock in an amount not to exceed 10% of the employees' cash compensation. The purchase price per share will be 85% of the lesser of the common stock fair market value either at the beginning of a rolling two-year offering period or at the end of each 6 month purchase period within the two year offering period. As of December 31, 1999, there have been no shares issued under the Purchase Plan and 800,000 shares are available for future issuance.
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the Company's stock option activity is set forth below:
The following table summarizes information concerning currently outstanding and exercisable options at December 31, 1999:
The Company uses the intrinsic value method of accounting for its employee stock-based compensation plans. Accordingly, no compensation cost is recognized for any of its 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. From inception through December 1999, the Company recorded deferred stock based compensation of $3,730,000 for the difference at the grant date between the exercise price and the deemed fair value of the common stock underlying the options. This amount is included as a component of stockholders' 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 approximately $742,000, $98,000 and $2,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pro Forma Effect of Stock-based Compensation
Pro forma information regarding results of operations and net loss per share is required by FASB Statement No. 123, "Accounting for Stock-Based Compensation," which also requires that the information be determined as if the Company had accounted for its employee stock options under the fair value method of FASB 123. For all grants that were granted prior to the Company's initial public offering in April 1999, the fair value of these options was estimated at the date of the grant using a Black-Scholes option pricing model with the following weighed average assumptions: a risk-free interest rate of 5.5%, 5.0% and 6.0% for 1999, 1998 and 1997, respectively, no dividend yield or volatility factors of the expected market price of the Company's common stock and a weighted average expected life of the option of 5 years. The fair value for the options granted subsequent to the Company's initial public offering was estimated at the date of grant using a Black-Scholes option pricing model using the following weighted-average assumptions: a risk-free interest rate of 5.5%, no dividend yield, volatility factor of the expected market price of the Company's common stock of 100% and a weighted average expected life of the option of five years.
The option valuation models are developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected life of the options. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been determined using the fair value at the grant dates for awards under those plans calculated using the minimum value method of FASB 123, the Company's net loss and basic and diluted net loss per share would have been increased to the pro forma amounts indicated below:
The weighted average fair value of options granted, which is the value assigned to the options under FASB 123, was $18.16, $0.43, and $0.06 for options granted during the years ended December 31, 1999, 1998 and 1997, respectively.
The pro forma impact of options on the net loss for the years ended December 31, 1999, 1998 and 1997 is not representative of the effects on net loss for future years, as future years will include the effects of additional years of stock option grants.
5. NOTES RECEIVABLE FROM STOCKHOLDERS
During 1995, certain officers of the Company purchased a total of 800,000 shares of the Company's common stock in exchange for promissory notes. The notes bear interest at 7.12% per annum, with interest and principal payable on May 5, 2000. The notes are secured by the common shares purchased by these officers.
6. NOTES PAYABLE TO STOCKHOLDERS
In 1997 and 1998, the Company issued promissory notes to stockholders in exchange for cash advances and payment for services. These notes bear interest at the bank's prime interest rate (8.5% at December 31,
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1999) plus 2% per annum, with a maximum rate of 10% per annum. Principal and accrued interest on these notes at December 31, 1999 and 1998 was $3.4 million and $3.1 million, respectively. The principal and accrued interest on these notes was repaid in February 2000.
7. INCOME TAXES
The federal, state and foreign income tax provision for the year ended December 31, 1999 is summarized as follows (in thousands):
Due to operating losses and the inability to recognize the benefits therefrom, there is no income tax provision for 1997 and 1998.
Influence elected to be taxed as an S-corporation under Subchapter S of the Internal Revenue Code through December 15, 1999. Consequently, Influence's stockholders were taxed on their proportionate share of the taxable income and no provision for income taxes has been provided in the statement of operations for the period beginning January 1, 1999 through December 15, 1999 and for the years ended December 31, 1998 and 1997. Influence's S-corporation status was terminated on December 15, 1999 when it was acquired by the Company.
A reconciliation of the provision computed at the statutory federal income tax rate to the income tax provision is as follows:
Significant components of the Company's deferred tax assets are as follows:
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FASB 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes the Company's historical operating performance and the reported cumulative net losses in all prior years, the Company has provided a full valuation allowance against its net deferred tax assets. The valuation allowance increased by $4,747,000 and $3,360,000 during the years ended December 31, 1999 and 1998, respectively.
As of December 31, 1999, approximately $4,600,000 of the valuation allowance reflected above relates to the tax benefits of stock option deductions which will be credited to equity when realized.
At December 31, 1999, the Company had net operating loss carryforwards for federal and state tax purposes of approximately $18,800,000 and $4,400,000, respectively. The Company also had federal and state research and development tax credit carryforwards of approximately $1,072,000 and $692,000, respectively. The net operating loss and tax credit carryforwards will expire at various dates beginning in 2000, if not utilized.
Utilization of net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. The annual limitation may result in the expiration of the net operating loss and credit carryforwards before utilization.
8. PROFIT SHARING PLAN
The Company has a profit sharing plan and trust under Section 401(k) of the Internal Revenue Code which covers substantially all employees. Eligible employees may contribute amounts to the plan via payroll withholdings, subject to certain limitations. Contributions by the Company are at the discretion of the Board of Directors. No discretionary contributions have been made by the Company to date.
9. MAJOR CUSTOMERS AND REVENUES BY GEOGRAPHIC AREA
Revenue was derived from customers in the following geographic areas:
10. BUSINESS COMBINATION
In December 1999, the Company acquired Influence, a developer of analytic applications for eBusiness. The merger was accounted for using the pooling-of-interests method of accounting and as such the Company's historical financial results for all dates and periods prior to the merger have been restated to reflect the merger. In connection with the acquisition, the Company issued 1,299,084 shares of its common stock to Influence's shareholders in exchange for all of the outstanding common stock. All outstanding options to purchase Influence's capital stock were converted into options to purchase 287,052 shares of Informatica common stock. In connection with the business combination, the Company incurred merger related costs of approximately $2,082,000, which consisted primarily of fees for investment banking, legal and accounting services incurred in conjunction with the merger. Of this amount, $310,000 was paid before December 31, 1999. The balance of $1,772,000 is included in current liabilities on the consolidated balance sheet.
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following information represents revenue and net loss of the separate companies for the periods preceding the business combination:
12. SUBSEQUENT EVENTS (UNAUDITED)
On February 11, 2000, the Company signed a definitive agreement to acquire Delphi Solutions AG, a distributor of Informatica products in Switzerland. The agreement is structured as a share purchase and will be accounted for as a purchase transaction. The purchase price includes payments associated with 1999 revenues and projections for 2000 revenues, and the first payment of approximately $3.6 million was paid in February 2000.
On February 22, 2000, the Company 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, the Company agreed to provide letters of credit totaling $12.0 million as a security deposit for the first year's lease payments until certain financial covenants are met.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors is included under the caption "Proposal One-Election of Directors" in Informatica's Notice of Annual Meeting to be held on May 25, 2000 (the "Proxy Statement") and is incorporated herein by reference. Information with respect to Executive Officers is included under the heading "Executive Officers and Directors" in Part I hereof after Item 4.
Information regarding delinquent filers pursuant to Item 405 of Regulation S-K is included under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" under the caption "Additional Information" in the Proxy Statement and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption "Executive Compensation and Other Information" in the Proxy Statement and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the heading "Security Ownership of Certain Beneficial Owners and Management" under the caption "Proposal One-Election of Directors" in the Proxy Statement and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption "Proposal One-Election of Directors" in the Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. FINANCIAL STATEMENTS
The following documents are included as Part II, Item 8, of this Annual Report on Form 10-K:
2. FINANCIAL STATEMENT SCHEDULE
The following schedule of the Company is included herein:
Valuation and Qualifying Accounts and Reserves (Schedule II)
All other schedules are omitted because they are not applicable or the amounts are immaterial or the required information is presented in the Consolidated Financial Statements or Notes thereto.
The following documents are included in Exhibit 23 hereto:
Exhibit 23.2 Consent of Ernst & Young LLP, Independent Auditors
3. EXHIBITS
See Item 14(c) below.
(b) REPORTS ON FORM 8-K
Report on Form 8-K, filed on December 29, 1999 for the purpose of filing the Company's press release announcing the Agreement and Plan of Merger dated December 15, 1999 by and among Informatica Corporation, I-1 Merger Corp., and Influence Software, Inc.
(c) EXHIBITS
See Exhibit Index.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Palo Alto, State of California on this 30th day of March, 2000.
INFORMATICA CORPORATION
By: /s/ GAURAV S. DHILLON ------------------------------------ Gaurav S. Dhillon Chief Executive Officer, Secretary and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
INFORMATICA CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
PROVISION FOR DOUBTFUL ACCOUNTS
SALES AND RETURN ALLOWANCES
EXHIBIT INDEX
- --------------- (1) Incorporated by reference to identically numbered Exhibit to Amendment No. 1 of the Company's Registration Statement on Form S-1/A (Commission File No. 333-72677), which was filed on April 8, 1999.
(2) Incorporated by reference to identically numbered Exhibit to the Company's Registration Statement on Form S-1 (Commission File No. 333-72677), which was filed on February 19, 1999.
(3) Incorporated by reference to identically numbered Exhibit to the Company's Current Report on Form 8-K (Commission File No. 333-72677), which was filed on December 29, 1999.