INFORMATICA CORP - 10-Q Quarterly Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

As of October 31, 2002, there were 81,025,830 shares of the registrant’s Common Stock outstanding.

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States. However, certain information or footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. All the amounts included in this report related to the financial statements as of September 30, 2002 and the three and nine months ended September 30, 2002 and 2001 are unaudited. The interim results presented are not necessarily indicative of results for any subsequent quarter, the year ended December 31, 2002 or any future period.

These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2001 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission in March 2002. The condensed consolidated balance sheet as of December 31, 2001 has been prepared from the audited 2001 consolidated financial statements of the Company.

Certain amounts in the Company’s 2001 condensed consolidated balance sheets and statements of operations were reclassified to conform with the current period presentation. Reimbursements received for out-of-pocket expenses have been reported as service revenues as a result of the adoption of Financial Accounting Standards Board (“FASB”) Staff Announcement Topic No. D-103, “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred” (“Topic D-103”), which was subsequently incorporated in Emerging Issues Task Force No. 01-14 (“EITF 01-14”). In prior periods, the out-of-pocket expenses were reported as a reduction of cost of service revenues. As a result, the following amounts were reclassified for the three and nine months ended September 30, 2001 (in thousands):

Long-term investments have been reclassified to short-term investments to conform to the current period presentation. In accordance with SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities,” and based on the Company’s intention to have the marketable securities available to support its current operations, the Company classifies all marketable securities as available-for-sale and as short-term investments.

Certain identifiable intangible assets with indefinite lives have been reclassified to goodwill to conform to the current period presentation.

The Company recognizes revenue in accordance with AICPA Statement of Position (“SOP”) 97-2, as amended by SOP 98-4, “Software Revenue Recognition.”

The Company generates revenues from sales of software licenses and services. The Company’s license revenues are derived from its business analytic software, which consists of data integration, and to a lesser extent, analytic applications and analytic delivery products. The Company receives software license revenues from licensing its products directly to end users and indirectly through resellers, distributors and original equipment manufacturers (“OEMs”). Service revenues are derived from maintenance contracts and training and consulting services performed for customers that license the Company’s products either directly from the Company or indirectly through resellers, distributors and OEMs.

License revenues are recognized when a noncancelable license agreement has been signed, the product has been shipped, the fees are fixed or determinable, collectibility is probable and vendor-specific objective evidence exists to allocate the total fee to elements of the arrangement. Vendor-specific objective evidence of fair value is based on the price charged when an element is sold separately. In the case of an element not yet sold separately, the price is established by the Company’s authorized management. If an acceptance period is required, revenue is recognized upon customer acceptance or the expiration of the acceptance period. For the data integration and analytic delivery products sold directly to end users, revenue is recognized upon shipment and when collectibility is probable. For the analytic applications suites, the Company recognizes the license and maintenance revenue ratably over the maintenance period, generally one year. Support for the analytic applications suites for the first year is never sold separately and in consideration of the complexities of the implementation the customer is entitled to receive support services that are different than the standard annual support services of our other products. The Company also enters into reseller arrangements that typically provide for sublicense fees based on a percentage of list prices. For data integration and analytic delivery products sold indirectly through our OEMs, resellers and distributors, the Company recognizes revenue upon shipment if collectibility is probable and there is established credit history consisting of sales of at least one million dollars and with timely payment history, generally for the last twelve months. For other OEMs, specific resellers, distributors and specific international customers who do not have established credit history, the Company recognizes revenue at the time payment is received for the Company’s products, rather than at the time of sale. The Company’s standard agreements do not contain product return rights.

Maintenance revenues, 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 primarily on a time-and-materials basis or, to a lesser extent, a fixed fee arrangement under separate service arrangements related to the installation and implementation of the Company’s software products. Training revenues are generated from classes offered at the Company’s headquarters, sales offices and customer locations. Revenues from consulting and training services are recognized as the services are performed. When a contract includes both license and service elements, the license fee is recognized on delivery of the software or cash collections, provided services do not include significant customization or modification of the base product, and are not otherwise essential to the functionality of the software and the payment terms for licenses are not dependent on additional acceptance criteria.

Deferred revenue includes deferred license, maintenance, training and consulting revenue. Deferred revenue amounts do not include items which are both deferred and unbilled. The Company’s practice is to net unpaid deferred items against the related receivables balances from those OEMs, specific resellers, distributors and specific international customers for which the Company defers revenue until payment is received.

The Company has adopted FASB Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”), and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), effective January 1, 2002. SFAS 142 requires that goodwill be separately disclosed from other intangible assets and no longer be amortized, but instead, be tested for impairment on a periodic basis. The Company has completed the transitional impairment test on the adoption of SFAS 142. Based on current market conditions, no impairment loss was recorded for the three and nine months ended September 30, 2002. The Company will perform its annual impairment test of goodwill in the fourth quarter of 2002. Any subsequent impairment losses will be reflected as an operating expense in the consolidated statements of operations. Notwithstanding the results of our annual impairment test of goodwill, application of the nonamortization provisions of SFAS 142 is expected to result in a decrease in amortization of goodwill of $21.8 million in 2002 as compared to 2001.

In addition, certain identifiable intangible assets with indefinite lives are also not amortized. Under SFAS 141, assembled workforce is not considered a separate intangible asset. As a result, the Company reclassified the carrying amount of $0.8 million of assembled workforce to goodwill as of January 1, 2002. For comparative purposes, the Company has made this reclassification as of December 31, 2001.

Amortization expense of intangible assets was approximately $0.3 million for both the three months ended September 30, 2002 and 2001, and approximately $0.9 million for both the nine months ended September 30, 2002 and 2001. The expected amortization expense related to identifiable intangible assets is $1.1 million and $0.5 million for the years ended December 31, 2002 and 2003, respectively.

As required by SFAS 142, the results for the three and nine months ended September 30, 2001 have not been restated. The following table discloses the effect on net loss and basic and diluted net loss per share as if

the Company accounted for its goodwill under SFAS 142 for all periods presented (in thousands, except per share data):

Basic and diluted net loss per share is presented in conformity with the FASB SFAS No. 128, “Earnings Per Share”, for all periods presented. Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share reflects the potential dilution of securities by adding other common stock equivalents, including outstanding stock options, to the weighted average number of common shares outstanding during the period, if dilutive. Potentially dilutive securities have been excluded from the computation of diluted net loss per share for the three and nine months ended September 30, 2002 and 2001, as their inclusion would be antidilutive.

The calculation of basic and diluted net loss per share is as follows (in thousands, except per share data):

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 2,820,000 and 4,263,000 common stock equivalents for the three months ended September 30, 2002 and 2001, respectively, and 3,528,000 and 5,478,000 common stock equivalents for the nine months ended September 30, 2002 and 2001, respectively (determined using the treasury stock method).

The components of accumulated other comprehensive income are as follows (in thousands):

The Company accounts for income taxes in accordance with SFAS 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.

The Company has adopted SFAS 141 and SFAS 142 effective January 1, 2002. SFAS 141 requires recognition of goodwill as an asset, but SFAS 142 mandates that goodwill and other intangible assets with indefinite lives will no longer be amortized after December 2001. Under the new standards, these assets are subject to annual impairment tests using a fair-value-based approach in accordance with SFAS 142. The change from an amortization approach to an impairment approach applies to previously recorded goodwill and other intangible assets as well as goodwill and other intangible assets arising from acquisitions completed after June 30, 2001. Intangible assets with finite lives will continue to be amortized over their useful lives. The Company has completed the transitional impairment test on the adoption of SFAS 142. Based on current market conditions, no impairment loss was recorded for the three and nine months ended September 30, 2002. The Company will perform its annual impairment test of goodwill in the fourth quarter of 2002. Any subsequent impairment losses will be reflected as an operating expense in the consolidated statements of operations. See Note 3.

The Company has adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), in the first quarter of 2002. SFAS 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (“SFAS 121”) and portions of Accounting Principles Board Opinion 30, “Reporting the Results of Operations” (“APB 30”). SFAS 144 provides a single accounting model for long-lived assets, other than goodwill and other intangibles, to be disposed of and addresses significant implementation issues. The adoption of SFAS 144 did not have a material impact on the Company’s operating results or financial condition.

Beginning with the three months ended March 31, 2002, the Company has adopted FASB Staff Topic D-103, which was subsequently incorporated in EITF 01-14 and requires that all out-of-pocket expenses billed to a customer be classified as revenue, rather than a reduction of expenses. Comparative financial statements for the three and nine months ended September 30, 2001 were reclassified to comply with the guidance in EITF 01-14. The application of EITF 01-14 will not result in any impact to operating or net income (loss) in any prior or future periods as it increases both service revenues and cost of service revenues in the same amount. See Note 1.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses financial accounting and reporting for costs associated with an exit or disposal activity and requires such costs to be recognized when the liability is incurred. Previous guidance in EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Certain Costs Incurred in a Restructuring)” (“EITF 94-3”), required that a liability for an exit cost be recognized at the date of a company’s commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated by a company after December 31, 2002. The adoption of SFAS 146 is not expected to have a material effect on the Company’s financial position or results of operations.

In February 2000, the Company entered into two lease agreements for new corporate headquarters in Redwood City, California. The Company occupied the new corporate headquarters in August 2001. The lease expires in July 2013. The Company paid for tenant improvements, primarily related to the exercise of build-to-suit options under the facility lease agreement. The total cost of leasehold improvements for this facility through its completion in June 2002 was approximately $33.4 million. As part of these agreements, the Company purchased certificates of deposit totaling $12.2 million as a security deposit for the first year’s lease payments until certain financial covenants are met. These certificates of deposit are classified as long-term restricted cash on the Company’s consolidated balance sheet.

In January 2002, the Company entered into a thirty-six month operating lease agreement for data storage equipment. Future minimum lease payments over the thirty-six month lease term are approximately $1.6 million, or approximately $45,000 per month.

During the three months ended September 30, 2001, the Company recorded facilities restructuring charges of approximately $12.1 million, consisting of $1.5 million in leasehold improvement and asset write-offs and $10.6 million related to the consolidation of excess leased facilities in the San Francisco Bay Area and Texas.

During the three months ended September 30, 2002, the Company recorded additional facilities restructuring charges of approximately $17.0 million, consisting of $15.1 million related to estimated facility lease losses and $1.9 million in leasehold improvement and asset write-offs related to the consolidation of excess leased facilities in the San Francisco Bay Area and Texas as a result of continued deterioration of the commercial real estate market in these areas. These charges represent adjustments to the original assumptions including, the time period that the buildings will be vacant, expected sublease rates, expected sublease terms and the estimated time to sublease. The Company calculated the estimated costs for the additional restructuring charges with the assistance of current market information and trend analysis provided by a commercial real estate brokerage firm retained by the Company.

Net cash payments for the nine months ended September 30, 2002 related to the consolidation of excess facilities amounted to $3.4 million. Actual future cash requirements may differ from the restructuring liability balances as of September 30, 2002 if the Company continues to be unable to sublease the excess leased facilities, there are changes to the time period that facilities are vacant, or the actual sublease income is different from current estimates. As of September 30, 2002, $21.1 million of lease termination costs, net of related costs and anticipated sublease income related to facilities to be subleased, remains accrued and is expected to be utilized by 2007. If the Company is unable to sublease any of the available vacant facilities during the remaining lease terms from the fourth quarter of 2004 through 2007, facilities restructuring charges could increase by approximately $3.2 million. If the Company does not occupy certain available vacant facilities during the remaining lease terms from 2008 through 2013, facilities restructuring charges could increase by approximately an additional $15.5 million.

A summary of the activity of the facilities restructuring charges for the nine months ended September 30, 2002 is as follows (in thousands):

As of September 30, 2002, $5.0 million of the $21.1 million restructuring liabilities was classified as current and the remaining $16.1 million was classified as noncurrent.

In July 2001, the Company adopted a voluntary stock option exchange program for its employees. Under the program, the Company’s employees were given the option to cancel outstanding stock options previously granted in exchange for a new non-qualified stock option grant for an equal number of shares to be granted at a future date, at least six months and one day from the cancellation date of the exchanged options, which was September 14, 2001. Under the exchange program, options to purchase approximately 7.9 million shares of the Company’s common stock were tendered and cancelled. On March 15, 2002, replacement options were granted to participating employees under the Stock Option Exchange Program for approximately 7.7 million shares of common stock. Each participant received a one-for-one replacement option for each option included in the exchange at an exercise price of $7.90 per share, which was the fair market value of the Company’s common stock on March 15, 2002. The new options have terms and conditions that are substantially the same as those of the cancelled options. The exchange program did not result in any additional compensation charges or variable plan accounting.

In September 2002, the Company’s Board of Directors authorized a one-year stock repurchase program for up to five million shares of the Company’s common stock. Purchases will be made from time to time in the open market and will be funded from available working capital. The number of shares to be purchased and the timing of purchases will be based on the level of the Company’s cash balances, general business and market conditions, and other factors, including alternative investment opportunities.

On November 8, 2001, a purported securities class action complaint was filed in the United States District Court for the Southern District of New York. The case is now captioned as In re Informatica Corporation Initial Public Offering Securities Litigation, Civ. No. 01-9922 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) (S.D.N.Y.).

On or about April 19, 2002, plaintiffs electronically served an amended complaint. The amended complaint is brought purportedly on behalf of all persons who purchased the Company’s common stock from April 29, 1999 through December 6, 2000. It names as defendants the Company; one of the Company’s current officers; one of the Company’s former officers; and several investment banking firms that served as underwriters of the Company’s April 29, 1999 initial public offering and September 28, 2000 secondary public offering. The amended complaint alleges liability as to all defendants under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the offerings did not disclose that: (1) the underwriters had agreed to allow certain customers to purchase shares in the offerings in exchange for excess commissions paid to the underwriters; and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The amended complaint also alleges that false analyst reports were issued. No specific damages are claimed.

The Company is aware that similar allegations have been made in other lawsuits filed in the Southern District of New York challenging over 300 other initial public offerings and secondary offerings conducted in 1999 and 2000. Those cases have been consolidated for pretrial purposes before the Honorable Judge Shira A. Scheindlin. On July 15, 2002, the Company and its affiliated individual defendants (as well as all other issuer defendants) filed a motion to dismiss the complaint. The Company believes that it has meritorious defenses to the claims against it, and intends to defend itself vigorously.

On July 15, 2002, the Company filed a patent infringement action in U.S. District Court in Northern California against Acta Technology, Inc. (“Acta”), asserting that certain Acta products infringe on three of the Company’s patents: U.S. Patent No. 6,014,670, entitled “Apparatus and Method for Performing Data Transformations in Data Warehousing”; U.S. Patent No. 6,339,775, entitled “Apparatus and Method for Performing Data Transformations in Data Warehousing” (this patent is a continuation-in-part of and claims the benefit of U.S. Patent No. 6,014,670); and U.S. Patent No. 6,208,990, entitled “Method and Architecture for Automated Optimization of ETL Throughput in Data Warehousing Applications.” On July 17, 2002, the Company filed an amended complaint alleging that Acta products also infringe on one additional Company patent: U.S. Patent No. 6,044,374, entitled “Object References for Sharing Metadata in Data Marts.” In the suit, the Company is seeking an injunction against future sales of the infringing Acta products, as well as damages for past sales of the infringing products. The Company has asserted that Acta’s infringement of the Informatica patents was willful and deliberate. Acta answered the complaint on September 5, 2002, and filed counterclaims against the Company seeking a declaration that each patent asserted is not infringed and is invalid and unenforceable. Acta did not make any claims for monetary relief against the Company.

The Company is also party to various legal proceedings and claims, either asserted or unasserted, arising from the normal course of business activities. In management’s opinion, resolution of these matters is not expected to have a material adverse impact on the Company’s results of operations, cash flows or its financial position. However, depending on the amount and timing, an unfavorable resolution of the matter could materially affect the Company’s future results of operations, cash flows or financial position in a particular period.

This Form 10-Q includes “forward-looking statements” within the meaning of the federal securities laws, particularly statements referencing trends in our operating results; the sufficiency of our cash balances and cash flows for the next twelve months; potential investments of cash or stock to acquire or invest in complementary businesses, products or technologies; the impact of recent changes in accounting standards; and assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “intends,” “plans,” “anticipates,” “estimates,” “potential,” or “continue,” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to risks and uncertainties, including but not limited to the factors set forth in “Risk Factors” and elsewhere in this report. All forward-looking statements and reasons why results may differ included in this report are made as of the date hereof, and we assume no obligation to update any such forward-looking statements or reasons why actual results may differ.

The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this report.

We are a leading provider of business analytics software that helps companies monitor and manage the performance of key business operations across the enterprise. Our business analytics products span the entire “build to buy” spectrum, enabling customers to buy packaged analytic applications or build their own best-of-breed warehousing solutions — whichever approach best suits their requirements and resources.

We sell our software licenses and services through direct sales forces in the United States as well as Belgium, Canada, France, Germany, the Netherlands, Switzerland and the United Kingdom, and also through distributors throughout Asia-Pacific, Australia, Europe, Japan and Latin America. As a percentage of our total consolidated revenue, international revenues from both our direct sales force and international indirect partners were 28% and 25% for the three and nine months ended September 30, 2002, respectively, compared to 28% for both the three and nine months ended September 30, 2001. Substantially all of our international sales have been in Europe. Sales outside of North America and Europe for each of the three and nine months ended September 30, 2002 and 2001 were less than 3% of total consolidated revenues, although we anticipate further expansion outside of these two regions in the future.

We generate revenues from sales of software licenses and services. Our license revenues are derived from our business analytic software, which consists of data integration and, to a lesser extent, analytic applications and analytic delivery products. We receive software license revenues from licensing our products directly to end users and indirectly through resellers, distributors and OEMs. We receive service revenues from maintenance contracts and training and consulting services that we perform for customers that license our products either directly from us or indirectly through resellers, distributors and OEMs.

We recognize revenue in accordance with AICPA SOP 97-2, as amended by SOP 98-4, “Software Revenue Recognition.” We recognize license revenues when a noncancelable license agreement has been signed, the product has been shipped, the fees are fixed or determinable, collectibility is probable and vendor-specific objective evidence of fair value 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 yet sold separately, the price is established by our authorized management. If an acceptance period is required, we recognize revenue upon customer acceptance or the expiration of the acceptance period. For the data integration and analytic delivery products sold directly to end users, we recognize revenue upon shipment and when collectibility is probable. For our analytic applications suites, we recognize the license and

maintenance revenue ratably over the maintenance period, generally one year. Support for the analytic applications suites for the first year is never sold separately and in consideration of the complexities of the implementation the customer is entitled to receive support services that are different than the standard annual support services of our other products. We also enter into reseller and distributor arrangements that typically provide for sublicense or end user license fees based on a percentage of list prices. For data integration and analytic delivery products sold indirectly through our OEMs, resellers and distributors, we recognize revenue upon shipment if collectibility is probable and there is established credit history consisting of sales of at least one million dollars and with timely payment history, generally for the last twelve months. For other OEMs, specific resellers, distributors and specific international customers who do not have established credit history, we recognize revenue at the time payment is received for our products, rather than at the time of sale. Our standard agreements do not contain product return rights.

In October 2002, we announced the immediate availability of unbundled analytic component products. The analytic component products will be sold on a stand alone basis with our standard annual support. We anticipate that revenue for these products will be recognized consistent with the revenue recognition for our data integration products.

We recognize maintenance revenues, which consist of fees for ongoing support and product updates, ratably over the term of the contract, typically one year. Consulting revenues are primarily related to implementation services and product enhancements performed on primarily a time-and-materials basis or, to a lesser extent, a fixed fee arrangement under separate service arrangements related to the installation and implementation of our software products. Training revenues are generated from classes offered at our headquarters, sales offices and customer locations. Revenues from consulting and training services are recognized as the services are performed. When a contract includes both license and service elements, the license fee is recognized on delivery of the software or cash collections, provided services do not include significant customization or modification of the base product, and are not otherwise essential to the functionality of the software and the payment terms for licenses are not dependent on additional acceptance criteria.

Deferred revenue includes deferred license, maintenance, training and consulting revenue. Deferred revenue amounts do not include items which are both deferred and unbilled. Our practice is to net unpaid deferred items against the related receivables balances from those OEMs, specific resellers, distributors and specific international customers for which we defer revenue until payment is received.

The following table presents certain financial data as a percentage of total revenues for the three and nine months ended September 30, 2002 and 2001:

Our total revenues were $47.6 million and $47.1 million for the three months ended September 30, 2002 and 2001, respectively, and $145.3 million and $149.8 million for the nine months ended September 30, 2002 and 2001, respectively. Our license revenues were $22.3 million for the three months ended September 30, 2002 compared to $27.2 million for the three months ended September 30, 2001. License revenues were $75.2 million for the nine months ended September 30, 2002 compared to $90.8 million for the nine months ended September 30, 2001. The decreases in license revenue in 2002 were due primarily to decreases in the number of licenses sold, which we believe was caused by weak global economic conditions, principally reflecting reduced or delayed information technology (“IT”) spending by our customers. Service revenues increased to $25.4 million for the three months ended September 30, 2002 from $19.9 million for the three months ended September 30, 2001. Service revenues increased to $70.1 million for the nine months ended September 30, 2002 from $59.1 million for the nine months ended September 30, 2001. These increases were primarily due to an increase in professional services utilization rates and an increase in maintenance revenues

associated with strong renewal maintenance. We believe that the utilization rate for our professional services will decline slightly during the fourth quarter of 2002 and we expect maintenance revenue to remain strong based on our growing customer base.

Service revenues for the three and nine months ended September 30, 2001 were reclassified to conform with the current year presentation in accordance with EITF 01-14 (see Note 1 to the Condensed Consolidated Financial Statements). In prior periods, customer reimbursements for our out-of-pocket expenses were reported as a reduction of cost of service revenues. As a result, the following amounts were reclassified for the three and nine months ended September 30, 2001 (in thousands):

Our international revenues were $13.3 million and $13.4 million for the three months ended September 30, 2002 and 2001, respectively. For the nine months ended September 30, 2002 and 2001, international revenues were $35.6 million and $42.2 million, respectively. The decrease for the nine months ended September 30, 2002 from the nine months ended September 30, 2001 was due primarily to the weak macroeconomic environment in Europe in the first quarter of 2002 compared to record European revenues, particularly in the United Kingdom and Germany, in the first quarter of 2001.

As a result of these license revenue trends and continued uncertainty in IT spending by our customers and prospects, our ability to meet our forecasted sales for the fourth quarter will be highly dependent on our success in converting our sales pipeline into license revenues from orders received and shipped within the quarter. See “Risk Factors — If we are unable to accurately forecast revenues, it may harm our business or results of operations.” and “Risk Factors — We expect seasonal trends to cause our quarterly revenues to fluctuate.” In addition, our future prospects will be directly affected by our ability to successfully license our data integration products and our analytic application products. We recently released our new analytic delivery platform and new versions of our analytic applications and data integration products, and we are releasing unbundled analytic component products starting in the fourth quarter of 2002. The degree of market acceptance for these products is currently uncertain. If we are not able to successfully license our products, our net revenues and operating results would be adversely affected. See “Risk Factors — Because we sell a limited number of products, if these products do not achieve broad market acceptance, our revenues will be adversely affected” and “Risk Factors — Changes in our product packaging may impact market acceptance of our products or adversely affect our results of operations.”

Our quarterly operating results have fluctuated in the past and are likely to do so in the future. In particular, our product revenues are not predictable with any significant degree of certainty. In addition, we have historically recognized a substantial portion of our revenues in the last month of each quarter, and more recently, in the last few weeks of each quarter. See “Risk Factors — The expected fluctuation of our quarterly results could cause our stock price to experience significant fluctuations or declines.”

Our cost of license revenues consists primarily of software royalties, product packaging, documentation, and production costs. Cost of license revenues was $1.4 million for both the three months ended Septem-

ber 30, 2002 and 2001 and was approximately 6% and 5% of license revenues for the three months ended September 30, 2002 and 2001, respectively. Cost of license revenues was $4.5 million for the nine months ended September 30, 2002 compared to $2.6 million for the nine months ended September 30, 2001 and was approximately 6% and 3% of license revenues for the nine months ended September 30, 2002 and 2001, respectively. The slight decrease in cost of license revenues for the three months ended September 30, 2002 from the three months ended September 30, 2001 was primarily attributable to lower license revenues. The increase in cost of license revenues as a percentage of license revenues during this same period was primarily attributable to an increase in royalty-bearing products. The increase in both absolute dollars and percentage of license revenues for the nine months ended September 30, 2002 from the nine months ended September 30, 2001 was due primarily to a higher percentage mix of royalty-bearing products. For the fourth quarter of 2002, we expect the cost of license revenues as a percentage of license revenues to be relatively consistent with the third quarter of 2002 level.

Our cost of service revenues is a combination of costs of maintenance, training and consulting revenues. Our cost of maintenance revenues consists primarily of costs associated with software upgrades, telephone and on-line support services and on-site visits. Because we believe that providing a high level of support to customers is a strategic advantage, we have invested significantly in personnel and infrastructure. Cost of training revenues consists primarily of the costs of providing training classes and materials at our headquarters, sales and training offices and customer locations. Cost of consulting revenues consists primarily of personnel costs and expenses incurred in providing consulting services at customers’ facilities. Cost of service revenues was $9.8 million for the three months ended September 30, 2002 and $10.7 million for the three months ended September 30, 2001, representing 38% and 54% of service revenues, respectively. Cost of service revenues was $29.4 million for the nine months ended September 30, 2002 and $32.3 million for the nine months ended September 30, 2001, representing 42% and 55% of service revenues, respectively.

Cost of service revenues decreased for the three and nine months ended September 30, 2002 from the three and nine months ended September 30, 2001 due to a reduction in headcount in consulting services, increased utilization rates of consulting service employees, decreased spending for outside contractors and strong maintenance renewal revenue. For the fourth quarter of 2002, we expect our cost of service revenues as a percentage of service revenues to be above or relatively consistent with the third quarter of 2002 level.

Cost of service revenues for the three and nine months ended September 30, 2001 were reclassified to conform with the current year presentation in accordance with EITF 01-14 (see Note 1 to the Condensed Consolidated Financial Statements). In prior periods, customer reimbursements for our out-of-pocket expenses were reported as a reduction of cost of service revenues. As a result, the following amounts were reclassified for the three and nine months ended September 30, 2001 (in thousands):

Our research and development expenses consist primarily of salaries and other personnel-related expenses associated with the development of new products, the enhancement and localization of existing products, quality assurance and development of documentation for our products. Research and development expenses decreased to $11.3 million for the three months ended September 30, 2002 from $13.2 million for the three

months ended September 30, 2001. Research and development expenses decreased slightly to $34.9 million for the nine months ended September 30, 2002 from $35.1 million for the nine months ended September 30, 2001. The decrease for the three months ended September 30, 2002 was due primarily to decreased spending for outside contractors and overall tightened expense controls, including 5% to 10% salary reductions and a one-week shutdown during the three months ended September 30, 2002. For the nine months ended September 30, 2002, these cost reductions were partially offset by the increased rent expense associated with the move to our new headquarter facilities located in Redwood City in August 2001. To date, all software development costs have been expensed in the period incurred because costs incurred subsequent to the establishment of technological feasibility have not been significant. We believe that continued investment in research and development is critical to attaining our strategic objectives. For the fourth quarter of 2002, we expect research and development expense as a percentage of total revenues will remain at or slightly below the third quarter of 2002 level.

Our sales and marketing expenses consist primarily of personnel costs, including commissions, as well as costs of public relations, seminars, marketing programs, lead generation, travel and trade shows. Sales and marketing expenses decreased to $21.0 million for the three months ended September 30, 2002 from $26.2 million for the three months ended September 30, 2001. Sales and marketing expenses decreased to $64.9 million for the nine months ended September 30, 2002 from $74.2 million for the nine months ended September 30, 2001. The decreases were due to lower commission expenses associated with lower license revenues and lower compensation expenses associated with reduced headcount in sales and marketing, partially offset by increased rent expense associated with the move to our new headquarter facilities located in Redwood City in August 2001. Additionally, sales and marketing expenses decreased as a result of the 5% to 10% salary reductions and the one-week shutdown during the three months ended September 30, 2002. For the fourth quarter of 2002, we expect sales and marketing expense as a percentage of total revenues will remain at or slightly above the third quarter of 2002 level.

Our general and administrative expenses consist primarily of personnel costs for finance, human resources, legal and general management, as well as professional services expense associated with recruiting, legal and accounting. General and administrative expenses decreased to $5.3 million for the three months ended September 30, 2002 from $5.5 million for the three months ended September 30, 2001. General and administrative expenses increased to $15.1 million for the nine months ended September 30, 2002 from $14.5 million for the nine months ended September 30, 2001. For the three months ended September 30, 2002 as compared to the three months ended September 30, 2001, the slight increase in expenses was due primarily to increased bad debt expense associated with customers that filed for bankruptcy, partially offset by reduced compensation and employee-related expenses associated with the 5% to 10% salary reductions and the one-week shutdown during the three months ended September 2002. The increase for the nine months ended September 30, 2002 from the nine months ended September 30, 2001 was due primarily to increased spending for legal services, accounting services, outside contractors, increased bad debt expense and increased rent expense associated with the move to our new headquarter facilities located in Redwood City in August 2001. This increase was partially offset by the 5% to 10% salary reductions and the one-week shutdown during the three months ended September 30, 2002. For the fourth quarter of 2002, we expect general and administrative expenses as a percentage of total revenues will remain at or slightly below the third quarter of 2002 level.

Bad debt expense charged to operations was $0.8 million and $90,000 for the three months ended September 30, 2002 and 2001, respectively, and $1.0 million and $0.3 million for the nine months ended September 30, 2002 and 2001, respectively, representing less than 2% of total revenues in each of these periods. For the three months ended September 30, 2002, $0.7 million was charged to bad debt expense associated with customers that filed for bankruptcy during the quarter.

Amortization of stock-based compensation amounted to $52,000 and $0.3 million for the three months ended September 30, 2002 and 2001, respectively, and $0.2 million and $0.9 million for the nine months ended September 30, 2002 and 2001, respectively. We expect to record amortization of stock-based compensation of approximately $30,000 in the fourth quarter of 2002.

Goodwill represents the excess of the aggregate purchase price over the fair value of the tangible and identifiable intangible assets we have acquired. Intangible assets include core technology, assembled workforce and patents. Amortization of goodwill and intangible assets associated with our business combinations and strategic alliance has been amortized on a straight-line basis over their expected useful lives ranging from two years to three years.

We have adopted SFAS 142 effective January 1, 2002. SFAS 142 requires that goodwill be separately disclosed from other intangible assets, and no longer be amortized but tested for impairment on a periodic basis. We completed the transitional impairment test on the adoption of SFAS 142. Based on current market conditions, no impairment loss was recorded for the three and nine months ended September 30, 2002. We will perform our annual impairment test of goodwill in the fourth quarter of 2002. Any subsequent impairment losses will be reflected as an operating expense in the consolidated statement of operations. Notwithstanding the results of our annual impairment test of goodwill, application of the nonamortization provisions of SFAS 142 is expected to result in a decrease in amortization of goodwill of $21.8 million in 2002 as compared to 2001.

In addition, certain identifiable intangible assets with indefinite lives are also not amortized. Under SFAS 141, assembled workforce is not considered a separate intangible asset. As a result, we reclassified the carrying amount of $0.8 million of assembled workforce to goodwill as of January 1, 2002. For comparative purposes, we have made this reclassification as of December 31, 2001.

As required by SFAS 142, the results for the three and nine months ended September 30, 2001 have not been restated. See Note 3 to the Condensed Consolidated Financial Statement, which discloses the effect on net loss and basic and diluted loss per share as if we accounted for its goodwill under SFAS 142 for all periods presented.

We will continue to amortize intangible assets on a straight-line basis over their expected useful lives. Amortization of goodwill and intangible assets amounted to $0.3 million and $7.0 million for the three months ended September 30, 2002 and 2001, respectively, and $0.9 million and $20.4 million for the nine months ended September 30, 2002 and 2001, respectively. The decrease is due to the adoption of FAS 141 and FAS 142 effective January 1, 2002. For the intangible assets that we will continue to amortize, we expect amortization expense to be approximately $0.2 million for the fourth quarter of 2002 and $0.5 million for 2003. It is likely that we will continue to expand our business both through acquisitions and internal development. Any additional acquisitions or impairment of goodwill and other purchased intangible assets could result in additional merger and acquisition related expenses.

During the three months ended September 30, 2001, we recorded facilities restructuring charges of approximately $12.1 million, consisting of $1.5 million in leasehold improvement and asset write-offs and $10.6 million related to the consolidation of excess leased facilities in the San Francisco Bay Area and Texas.

During the three months ended September 30, 2002, we recorded additional facilities restructuring charges of approximately $17.0 million, consisting of $15.1 million related to estimated facility lease losses and $1.9 million in leasehold improvement and asset write-offs related to the consolidation of excess leased facilities in the San Francisco Bay Area and Texas as a result of continued deterioration of the commercial real estate market in these areas. These charges represent adjustments to the original assumptions including, the time period that the buildings will be vacant, expected sublease rates, expected sublease terms and the estimated time to sublease. We calculated the estimated costs for the additional restructuring charges with the

Net cash payments for the nine months ended September 30, 2002 related to the consolidation of excess facilities amounted to $3.4 million. Actual future cash requirements may differ from the restructuring liability balances as of September 30, 2002 if we continue to be unable to sublease the excess leased facilities, there are changes to the time period that facilities are vacant or the actual sublease income is different from current estimates. As of September 30, 2002, $21.1 million of lease termination costs, net of anticipated sublease income related to facilities to be subleased, remains accrued and is expected to be utilized by 2007. If we are unable to sublease any of the available vacant facilities during the remaining lease terms from the fourth quarter of 2004 through 2007, facilities restructuring charges could increase by approximately $3.2 million. If we do not occupy certain available vacant facilities during the remaining lease terms from 2008 through 2013, facilities restructuring charges could increase by approximately an additional $15.5 million.

Interest income and other, net represents primarily interest income earned on our cash, cash equivalents, short-term investments and restricted cash, foreign currency gains and losses, and gains and losses on the sale or disposal of property and equipment. Interest income and other, net was $1.2 million for the three months ended September 30, 2002 and $2.3 million for the three months ended September 30, 2001. Interest income and other, net decreased to $4.7 million for the nine months ended September 30, 2002 from $7.3 million for the nine months ended September 30, 2001. The decrease for the three months ended September 30, 2002 from the three months ended September 30, 2001 was attributable to lower interest income earned on our cash, cash equivalents, investments, restricted cash, and unrealized foreign currency losses, partially offset by a decrease in losses on property and equipment disposals. The decrease for the nine months ended September 30, 2002 from the nine months ended September 30, 2001 was primarily due to lower interest income earned on our cash, cash equivalents, investments and restricted cash, partially offset by unrealized foreign currency gains and losses on property and equipment disposals. We currently do not engage in any foreign currency hedging activities and, therefore, are susceptible to fluctuations in foreign exchange gains or losses in our results of operations in future reporting periods.

We recorded a provision for income taxes of $64,000 and $0.3 million for the three and nine months ended September 30, 2002 and 2001, respectively, which primarily represents foreign income taxes attributable to foreign operations. We did not record an income tax provision for the three months ended September 30, 2001 and recorded an income tax provision of $1.3 million for the nine months ended September 30, 2001. The income tax provision for the nine months ended September 30, 2001 primarily represented foreign income taxes attributable to foreign operations. Unanticipated events may occur during the remaining periods of this year that would cause revision of the expected effective tax rate.

Our financial statements are based on the selection and application of significant accounting policies, which require our management to make significant estimates and assumptions. We believe that the following areas are some of the more critical judgments areas in the application of our accounting policies that currently affect our financial condition and results of operations.

We recognize revenues in accordance with SOP 97-2. We recognize license revenues when a noncancelable license agreement has been signed, the product has been shipped, the fees are fixed or determinable, collectibility is probable and vendor-specific objective evidence of fair value exists to allocate the total fee to elements of the arrangement. The determination regarding the probability of collection is based on

We maintain allowances for sales returns on revenue in the same period as the related revenues are recorded. These estimates require management judgment and are based on historical sales returns and other known factors. If these estimates do not adequately reflect future sales returns, revenue could be overstated.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers was to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. For example, we recorded an additional bad debt expense for the three months ended September 30, 2002 related to customers that filed for bankruptcy.

We have significant intangible assets related to goodwill and other acquired intangibles. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgment. Changes in strategy and/or market conditions could significantly impact these judgments and require adjustments to recorded asset balances. We completed the transitional impairment tests of goodwill on the adoption of SFAS 142. Based on current market conditions, the adoption of SFAS 142 on January 1, 2002 did not result in a write down of our goodwill and intangible assets. We will perform our annual impairment test of goodwill in the fourth quarter of 2002.

During 2002 and 2001, we recorded significant liabilities in connection with our restructuring program. The accrued restructuring charges represent gross lease obligations and estimated commissions and other costs, offset by estimated gross sublease income expected to be received over the remaining lease terms. These liabilities include management’s estimates pertaining to sublease activities. We will continue to evaluate the commercial real estate market conditions quarterly to determine if our estimates of the amount and timing of future sublease income are reasonable based on current and expected commercial real estate market conditions. If we determine that there is further deterioration in the estimated sublease rates or in the expected time to sublease our vacant space, we may incur additional restructuring charges in the future and our cash position could be adversely affected.

We recorded a valuation allowance to reduce our deferred tax assets to the amount that is likely to be realized. We have considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance; however, if it were determined that we would be able to realize all or part of our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period in which such determination was made. Likewise, if we determined that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period in which such determination was made.

We have adopted SFAS 141 and SFAS 142 effective January 1, 2002. SFAS 141 requires recognition of goodwill as an asset, but SFAS 142 mandates that goodwill and other intangible assets with indefinite lives will no longer be amortized after December 2001. Under the new standards, these assets are subject to annual impairment tests using a fair-value-based approach in accordance with SFAS 142. The change from an amortization approach to an impairment approach applies to previously recorded goodwill and other intangible assets as well as goodwill and other intangible assets arising from acquisitions completed after June 30, 2001. Intangible assets with finite lives will continue to be amortized over their useful lives. We have completed the

transitional impairment test on the adoption of SFAS 142. Based on current market conditions, no impairment loss was recorded for the three and nine months ended September 30, 2002. We will perform our annual impairment test of goodwill in the fourth quarter of 2002. Any subsequent impairment losses will be reflected as an operating expense in the consolidated statement of operations.

We have adopted SFAS 144 in the first quarter of 2002. SFAS 144 supersedes SFAS 121 and portions of APB 30. SFAS 144 provides a single accounting model for long-lived assets, other than goodwill and other intangibles, to be disposed of and addresses significant implementation issues. The adoption of SFAS 144 did not have a material impact on our operating results or financial condition.

We have adopted EITF 01-14, which requires that all out-of-pocket expenses billed to a customer be classified as revenue, rather than a reduction of expenses, beginning with the three months ended March 31, 2002. Comparative financial statements for the prior year period were reclassified to comply with the guidance in EITF 01-14. The application of EITF 01-14 will not result in any impact to operating or net income (loss) in any prior or future periods as it increases both service revenues and cost of service revenues in the same amount.

In July 2002, the FASB issued SFAS 146, which addresses financial accounting and reporting for costs associated with an exit or disposal activity and requires such costs to be recognized when the liability is incurred. Previous guidance in EITF 94-3 required that a liability for an exit cost be recognized at the date of a company’s commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated by a company after December 31, 2002. The adoption of SFAS 146 is not expected to have a material effect on our financial position or results of operations.

We have funded our operations primarily through cash flows from operations and public offerings of our common stock. In the past, we also funded our operations through private sales of preferred equity securities and capital equipment leases. As of September 30, 2002, we had $237.9 million in cash and cash equivalents, short-term investments and restricted cash, of which $12.2 million of cash is restricted under the terms of our Pacific Shores property leases.

Our operating activities resulted in net cash inflows of $13.5 million for the nine months ended September 30, 2002. The operating cash inflows were primarily due to increases in accrued liabilities, accrued restructuring charges and deferred revenues. The uses of cash were due primarily to the net loss (offset by non-cash charges for depreciation and amortization, provision for doubtful accounts and restructuring charges), an increase in accounts receivable and decreases in accounts payable and accrued compensation and related expenses. For the nine months ending September 30, 2001, our operating activities resulted in net cash inflows of $8.4 million. The cash inflows for the nine months ended September 30, 2001 were primarily due to a decrease in accounts receivable and increases in accrued compensation and related expenses, accrued, restructuring charges and deferred revenues. Uses of cash were primarily due to the net loss (offset by non-cash charges for depreciation and amortization, amortization of stock-based compensation, amortization of goodwill and intangible assets and restructuring charges) and an increase in prepaid expenses and other current assets and decreases in accounts payable and accrued liabilities.

Investing activities used cash of $70.7 million for the nine months ended September 30, 2002 and $104.6 million for the nine months ended September 30, 2001. Of the $70.7 million net cash used in investing activities for the nine months ended September 30, 2002, $218.3 million was associated with purchases of investments and $5.4 million was used for purchases of property and equipment, offset by $153.0 million generated from the sales and maturities of investments. Short-term investments represent investments in high credit quality corporate bonds and notes and U.S. government bonds with durations of up to two years in accordance with our investment policy. Of the $104.6 million net cash used in investing activities for the nine months ended September 30, 2001, $242.4 million was associated with purchases of investments, $22.9 million was used for purchases of property and equipment and $8.1 million was transferred from restricted cash, offset by $166.4 million generated from the sales and maturities of investments. Investing activities for the nine

Financing activities provided cash of $7.5 million and $10.5 million for the nine months ended September 30, 2002 and 2001, respectively, and consisted principally of proceeds from the issuance of common stock from stock option exercises and under our employee stock purchase plan in both periods.

As of September 30, 2002, our principal commitments consisted of obligations under operating leases. Our future minimum lease payments under noncancelable operating leases as of December 31, 2001 were as follows: $16.0 million in 2002; $16.5 million in 2003; $17.0 million in 2004; $17.6 million in 2005; $17.7 million in 2006; and $109.6 million thereafter. In September and October 2002, we signed two sublease agreements related to excess facilities included in our facilities restructuring charges. Our future sublease income will reduce our obligations under operating leases as of December 31, 2001 as follows: $0.1 million in 2002; $0.6 million in 2003; $0.6 million in 2004; $0.5 million in 2005; and $39,000 in 2006. In January 2002, we entered into a thirty-six month operating lease agreement for data storage equipment. Future minimum lease payments over the thirty-six month lease term are as follows: $0.5 million in 2002; $0.5 million in 2003; and $0.6 million in 2004.

In February 2000, we entered into two lease agreements for new corporate headquarters in Redwood City, California. We began occupying the new corporate headquarters in August 2001. The lease expires in July 2013. We paid for tenant improvements, primarily related to the exercise of build-to-suit options under the facility lease agreement. The total cost of leasehold improvements for this facility through its completion in June 2002 was approximately $33.4 million. Total expenditures for furniture, fixtures and equipment for this facility were approximately $10.3 million. As part of these agreements, we have purchased certificates of deposit totaling $12.2 million as a security deposit for the first year’s lease payments until certain financial covenants are met. These certificates of deposit are classified as long-term restricted cash on the consolidated balance sheet.

Deferred revenue includes deferred license, maintenance, training and consulting revenue. Deferred license revenue amounts do not include items which are both deferred and unbilled. Our practice is to net unpaid deferred items against the related receivables balances from those OEMs, specific resellers, distributors and specific international customers for which we defer revenue until payment is received.

In September 2002, our Board of Directors authorized a one-year stock repurchase program for up to five million shares of our common stock. Purchases will be made from time to time in the open market and will be funded from available working capital. The number of shares to be purchased and the timing of purchases will be based on the level of our cash balances, general business and market conditions, and other factors, including alternative investment opportunities.

We believe that our cash balances and the cash flows generated by operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. However, because our operating results may fluctuate significantly as a result of a decrease in customer demand or the acceptance of our products, we may not in the future be able to generate positive cash flows from operations. If this occurred, we would require additional funds to support our working capital requirements, or for other purposes, and may seek to raise such additional funds through public or private equity financings or from other sources. We may not be able to obtain adequate or favorable financing at that time. Any financing we obtain may dilute your ownership interests.

A portion of our cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, we may evaluate potential acquisitions of such businesses, products or technologies.

Investors should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones facing our company. Additional risks not presently known to us or that we currently believe are immaterial may also impair our business operations. Our business could be

harmed by any of these risks. The trading price of our common stock could decline due to any of these risks and investors may lose all or part of their investment. In assessing these risks, investors should also refer to the other information contained in our other Securities and Exchange Commission filings, including our Form 10-K for the year ended December 31, 2001.

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 that 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;

	•	the length and variability of our sales cycle for our products, particularly our analytic applications and our new analytic delivery platform;

	•	general economic and political conditions, which may affect our customers’ capital investment and information technology spending levels;

	•	market acceptance of our products;

	•	the mix of our products and services sold and the mix of distribution channels utilized;

	•	announcement, 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;

	•	our success with our sales and marketing programs;

	•	technological changes in computer systems and environments; and

	•	increased competition from partnerships formed by our current and former partners and our competitors.

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 each quarter, and more recently, in the last few weeks of each 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 harm our revenues and results of operations.

Our quarterly product license revenues are difficult to forecast and are vulnerable to short-term fluctuations in customer demand. Because we do not have a substantial backlog of orders, our license revenues generally reflect orders shipped in the same quarter they are received, and certain license revenues are dependent on cash collections from specific international customers and specific resellers. 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, some of which we have little or no control, such as (1) size and timing of individual license transactions, the closing of which tends to be delayed by customers until the end of a fiscal quarter as a negotiating tactic, (2) potential for delay or deferral of customer implementations of our software, (3) changes in customer budgets, (4) seasonality of technology purchases, (5) direct sales force effort to meet or exceed quarterly and year-end quotas, (6) lower European sales during the summer months, and (7) other general economic and political conditions. By comparison, 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 revenue shortfalls may 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 condition. Due to the uncertainty surrounding our revenues, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. Therefore, you should not take our quarterly results to be indicative of our future performance. Moreover, our future operating results may fall below the expectations of stock analysts and investors. If this happens, the price of our common stock may fall.

General economic or political conditions may reduce our revenues and harm our business.

As our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic and political conditions. Because of the economic slowdown in the United States and in Europe, and the terrorist events of September 11, 2001, companies in many industries are delaying or reducing technology purchases. We experienced the impact of the September 11, 2001 events in the fourth quarter of 2001 and the economic slowdown in 2001 and the first three quarters of 2002 with reductions in capital expenditures by our end-user customers, longer sales cycles, deferral or delay of purchase commitments for our products and increased price competition. In particular, these factors have negatively impacted the rate of market acceptance of our analytic applications. As a result, if the current economic conditions in the U.S. and Europe continue or worsen, if a wider or global economic slowdown occurs, or if there is an escalation in regional conflicts, we may fall short of our revenue expectations for the fourth quarter of 2002 or for the entire year. These conditions would negatively affect our business and results of operations. In addition, weakness in the end-user market could negatively affect the cash flow of our reseller customers who could, in turn, delay paying their obligations to us. This would increase our credit risk exposure, which would harm our financial condition.

If we are unable to accurately forecast revenues, it may harm our business or results of operations.

We use a “pipeline” system, a common industry practice, to forecast sales and trends in our business. Our sales personnel monitor the status of all proposals, including the date when they estimate that a customer will make a purchase decision and the potential dollar amount of the sale. We aggregate these estimates periodically in order to generate a sales pipeline. We compare the pipeline at various points in time to look for trends in our business. While this pipeline analysis may provide us with some guidance in business planning and budgeting, these pipeline estimates are necessarily speculative and may not consistently correlate to revenues in a particular quarter or over a longer period of time. Additionally, because we have historically recognized a substantial portion of our license revenues in the last month of each quarter, and more recently, in the last few weeks of each quarter, we may not be able to adjust our cost structure in a timely manner in response to variations in the conversion of the sales pipeline into license revenues. Any change in the conversion of the pipeline into customer sales or in the pipeline itself could cause us to improperly plan or budget and thereby adversely affect our business, financial conditions or results of operations. In particular, the general economic slowdown has caused customer purchases to be reduced in amount, deferred or cancelled, and therefore has reduced the overall license pipeline conversion rates in 2002 and could continue to reduce the rate of conversion of the sales pipeline into license revenue in the future.

Changes in our product packaging may impact market acceptance of our products or adversely affect our results of operations.

We recently unbundled our analytic application products in order to create smaller, modularized components, which may be licensed to customers on an individual basis. The success of this new product packaging initiative is subject to significant risks, including the following:


	•	customers may be confused by the change in the product packaging and may delay or defer purchases;

	•	our sales and marketing efforts may not be successful;

	•	sales of the new product packaging may result in lower transaction sizes, and if there is not a corresponding increase in unit volume, our revenues and margins may decrease; and


	•	we may experience difficulties in managing the modularization of the products in our research and development department or order management processes.

To the extent that we encounter or are unable to successfully manage any of the risks outlined above, our revenues and the results of our business operations may be adversely affected.

The lengthy sales cycle and implementation process of our products makes our revenues susceptible to fluctuations.

Our sales cycle can be lengthy because the expense, complexity, broad functionality and company-wide deployment of our products, particularly our analytic applications suites, typically require executive-level approval from our customers before they can purchase our products. In addition, to successfully sell our products, we frequently must educate our potential customers about the full benefits of our products, which also 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 products or competitors’ new products; or

	•	potential downturns in general economic or political conditions.

Further, our sales cycle may lengthen as we continue to focus our sales efforts on large corporations. The implementation of our products, particularly our analytic applications suites, can be a complex and time-consuming process, the length and cost of which may be difficult to predict. We also recently hired Clive Harrison as our new Executive Vice President, Worldwide Field Operations, replacing Kyle Bowker in that position. The process of implementing this change, and integrating Mr. Harrison, may detract from our sales efforts and operations and have an adverse effect on our business in the near term. If our sales cycle and implementation process lengthens unexpectedly, it could adversely affect the timing of our revenues or increase costs, either of which may independently cause fluctuations in our revenue and results of operations.

If the market in which we sell our products and services does not meet our expectations, it will adversely affect our revenues.

The market for software solutions, including enterprise analytic software, 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 meet our forecasts at the rate we anticipate, we will not be able to sell as much of our software products and services, and 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 that only a limited number of large companies have deployed these software solutions. 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.

The higher fees for, and potentially longer sales cycle of, our analytic applications suites could be especially affected by the global economic slowdown, where larger transaction sizes receive closer scrutiny by our potential customers.

Because we sell a limited number of products, if these products do not achieve broad market acceptance, our revenues will be adversely affected.

To date, substantially all of our revenues have been derived from our data integration products such as PowerCenter, PowerMart, PowerConnect and related services, and to a lesser extent, our analytic applications, analytic delivery 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 any of these products do not achieve market acceptance, our revenues could decrease. In particular, we recently released our new analytic delivery platform and new versions of our analytic applications, and the degree of market acceptance for these products is currently uncertain. Market acceptance of our products could be affected if, among other things, competition substantially increases in the enterprise analytic software marketplace or transactional applications suppliers integrate their products to such a degree that the utility of the data integration functionality that our products provide is minimized or rendered unnecessary.

Recent terrorist activities and resulting military and other actions could adversely affect our business.

The terrorist attacks in New York and Washington, D.C. on September 11, 2001 disrupted commerce throughout the United States and Europe. In response to such attacks, the United States is actively using military force to pursue those behind these attacks and initiating broader actions against global terrorism. The continued threat of terrorism within the United States and Europe, the escalation of military action or regional conflicts and heightened security measures in response to such further threats may cause significant disruption to commerce throughout the world. To the extent that such disruptions result in further reductions in capital expenditures or spending on information technology, longer sales cycles, deferral or delay of customer orders, or an inability to effectively market our products, our revenues would decline, which would materially and adversely affect our business and results of operations.

Difficulties we may encounter managing our business could harm our results of operations.

In the past, we have experienced a period of rapid and substantial growth that has placed a strain on our administrative and operational infrastructure and, if such growth resumes, will continue to place a strain on our administrative and operational infrastructure. If such growth resumes and we are unable to manage this growth effectively, our business, results of operations or financial condition may be significantly harmed. Our ability to manage our operations and growth effectively requires us to continue to improve our sales, operational, financial and management controls, reporting systems and procedures and hiring programs.

We may not be able to successfully implement improvements to our sales, customer support, management information and control systems in an efficient or timely manner, and we may discover deficiencies in existing systems and controls. We are currently in the process of implementing improvements to our control systems and have licensed technology from a third party to accomplish this objective. We may experience difficulties in the implementation process or in connection with the third-party software, which could divert our resources, including attention of management.

The loss of key personnel or the inability to attract and retain additional personnel could harm our business, results of operations and financial condition.

We believe our success depends upon our ability to attract and retain highly skilled personnel and key members of our management team. We currently do not have any key-man life insurance relating to our key personnel, and their employment is at-will and not subject to employment contracts. We may not be successful in attracting, assimilating and retaining key personnel in the future. Specifically, Diaz Nesamoney, one of our founders, recently resigned as a director and President and Chief Operating Officer, and Kyle Bowker recently resigned as Executive Vice President, Worldwide Field Operations. We recently hired Clive Harrison as our new Executive Vice President, Worldwide Field Operations, replacing Kyle Bowker in that position. These changes and the process of implementing this change and integrating Mr. Harrison into the current management team may detract from our sales efforts and operations and have an adverse effect on our business, results of operations and financial condition.

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, which often experiences less growth than other quarters. As a result, we historically have experienced relatively higher bookings in the fourth quarter and relatively lighter bookings in the first quarter. 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 tend to be relatively lower during the summer months than during other periods. Due to the economic slowdown beginning in 2001, our 2001 and 2002 quarterly revenues may not be indicative of seasonal trends that were experienced in prior years. When the global economy recovers, we expect that seasonal trends may continue in the foreseeable future.

Our stock price fluctuates as a result of factors other than our operating results.

The market price for our common stock has experienced significant fluctuations and may continue to fluctuate significantly. The market price for our common stock may be affected by a number of factors, including our operating results and the following:


	•	the announcement of new products or product enhancements by our competitors;

	•	quarterly variations in our competitors’ results of operations;

	•	changes in earnings estimates by securities analysts;

	•	changes in recommendations by securities analysts;

	•	developments in our industry;

	•	changes in accounting rules, such as the recording of expenses related to employee stock option grants; 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. After periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. We and certain of our officers and directors are named as defendants in a purported class action complaint, which has been filed on behalf of certain persons who purchased our common stock between April 29, 1999 and December 6, 2000. The complaint seeks unspecified damages from alleged violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. See Part II, Item 1. Legal Proceedings. Such factors and fluctuations, as well as general economic, political and market conditions, may cause the market price of our common stock to decline, which may impact our operations.

We rely on third-party technologies, and if we are unable to use or integrate these technologies, our product and service development may be delayed.

We intend to continue to license technologies that are developed and maintained by third parties, including applications used in our research and development activities and technologies, which are integrated into our products and services. We rely on these third parties’ abilities to enhance their current technologies and to respond to emerging industry standards and other technological changes. If we cannot obtain, integrate or continue to license any of these technologies, we may experience a delay in product and service development until equivalent technology can be identified, licensed and integrated. These technologies may not continue to be available to us on commercially reasonable terms or at all. Although we believe there are other sources for these technologies, any significant interruption in the supply of these technologies could adversely impact our business operations unless and until we can secure another source. We may not be able to


	•	risks of product malfunction after new technology is integrated;

	•	the diversion of resources from the development of our own proprietary technology; and

	•	our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs.

Our products are designed to interoperate with and provide access to a wide range of third-party developed and maintained hardware and software technologies, which are used by our customers. The future design and development plans of the third parties that maintain these technologies are not within our control and may not be in line with our future product development plans. We may also rely on such third parties to provide us with access to these technologies so that we can properly test and develop our products designed to interoperate with the third-party technologies. These third parties may in the future refuse to provide us with the necessary access to their technologies. We may not be able to continue to ensure that our products will interoperate with or provide access to these third-party developed technologies developed in the future, which may harm our business and operating results.

The market for our products is highly competitive, quickly evolving and subject to rapidly changing technology. Many of our competitors or potential 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 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 harm our business, results of operations or financial condition. We compete principally against providers of data warehousing and analytic applications. Such competitors include Acta Technology, Ascential Software Corporation, Broadbase Software, Inc., E.piphany Inc. and Sagent Technology, Inc.

In addition, we compete against business intelligence vendors, database vendors and enterprise application vendors that currently offer, or may develop, products with functionalities that compete with our solutions, such as Brio Technology, Inc., Business Objects, Cognos Inc., Hyperion Solutions Corporation and Microstrategy Inc. We also compete against certain database and enterprise application vendors which offer products that typically operate specifically with these competitors’ proprietary databases. Such potential competitors include IBM, Microsoft, Oracle, PeopleSoft, SAP and Siebel Systems.

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 strategic partners. In addition to our direct sales force, we rely on established relationships with a variety of strategic partners, such

as systems integrators, resellers and distributors, for marketing, licensing, implementing and supporting our products in the United States and internationally. We also rely on relationships with strategic technology partners, such as enterprise resource planning providers and enterprise application providers, for the promotion and implementation of our solutions.

In particular, our ability to market our products depends substantially on our relationships with significant strategic partners, including Accenture, BEA Systems, Deloitte Consulting, Hewlett-Packard, i2 Technologies, IBM, KPMG Consulting, Mitsubishi Electric, PeopleSoft, PwC Consulting, Siebel Systems and Sybase. In addition, our strategic 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, selling and implementing our products.

We may not be able to maintain our strategic partnerships or attract sufficient additional strategic partners who are able to market our products effectively, who are qualified to provide timely and cost-effective customer support and service or who have the technical expertise and personnel resources necessary to implement our products for our customers. In particular, if our strategic partners do not devote resources to implement our products, we may incur substantial additional costs associated with hiring and training additional qualified technical personnel to timely implement solutions for our customers. Furthermore, our relationships with our strategic partners may not generate enough revenue to offset the significant resources used to develop these relationships.

We have a number of relationships with resellers, systems integrators and distributors which assist us in obtaining broad market coverage for our products and services. We have generally avoided exclusive relationships with resellers and distributors of our products. Our discount policies, sales commission structure and reseller licensing programs are intended to support each distribution channel with a minimum level of channel conflicts. Any failure to minimize potential channel conflicts could materially and adversely affect our business, operating results and financial condition.

Any significant defect in our products could cause us to lose revenue and expose us to product liability claims.

The software products we offer are inherently complex and despite extensive testing and quality control, have in the past and may in the future contain errors or defects, especially when first introduced. These defects and errors could cause damage to our reputation, loss of revenue, product returns, order cancellations or lack of market acceptance of our products, and as a result, harm 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. For example, we issued corrective releases to fix problems with the version of our PowerMart released in the first quarter of 1998. As a result, we had to allocate significant customer support resources to address these problems. Our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. The limitation of liability provisions contained in our license agreements, however, may not be effective as a result of existing or future national, federal, state or local laws or ordinances or unfavorable judicial decisions. Although we have not experienced any product liability claims to date, the sale and support of our products entails the risk of such claims, which could be substantial in light of the use of our products in enterprise-wide environments. If a claimant successfully brings a product liability claim against us, it would likely significantly harm our business, results of operations or financial condition.

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 applications could minimize the importance of the integration functionality of our products and materially adversely affect the competitiveness and market acceptance of our products. Our success depends upon our ability to enhance existing products, to respond to changing customer requirements and to develop and introduce in a timely manner new products that keep pace with technological and competitive developments and emerging industry standards. We have in the past experienced delays in releasing new products and product enhancements and may experience similar delays in the future. As a result, in the past some of our customers deferred purchasing the PowerMart product until the next upgrade was released. Future delays or problems in the installation or implementation of our new releases may cause customers to forego purchases of our products and purchase those of our competitors instead. 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.

We recognize revenue from specific customers at the time we receive payment for our products, and if these customers do not make timely payment, our revenues could decrease.

Based on limited credit history, we recognize revenue from sales to OEMs, specific resellers, distributors and specific international customers at the time we receive payment for our products, rather than at the time of sale. If these customers do not make timely payment for our products, our revenues could decrease. If our revenues decrease, the price of our common stock may fall.

We have a limited operating history and a history of losses, and we may not be able to achieve profitable operations.

We were incorporated in 1993 and began selling our products in 1996; and therefore, we 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 we may not consistently achieve profitability.

Our international operations expose us to greater intellectual property, collections, exchange rate fluctuations, regulatory and other risks, which could limit our future growth.

We may expand our international operations in the future, and as a result, we may face significant additional risks. Our failure to manage our international operations and the associated risks effectively could limit the future growth of our business. The expansion of our existing international operations and entry into additional international markets will require significant management attention and financial resources.

Our international operations face numerous risks. Our products must be localized — customized to meet local user needs — in order to be sold in particular foreign countries. Developing local versions of our products for foreign markets is difficult and can take longer than we anticipate. We currently have limited experience in localizing products and in testing whether these localized products will be accepted in the targeted countries. We cannot assure you that our localization efforts will be successful. In addition, we have only a limited history of marketing, selling and supporting our products and services internationally. As a result, we must hire and train experienced personnel to staff and manage our foreign operations. However, we may experience difficulties in recruiting and training an international staff. We must also be able to enter into strategic relationships with companies in international markets. If we are not able to maintain successful strategic relationships internationally or recruit additional companies to enter into strategic relationships, our future success in these international markets could be limited.

Our international business is subject to a number of risks, including the following:


	•	greater difficulty in staffing and managing foreign operations;

	•	sales seasonality;

	•	greater risk of uncollectible accounts;

	•	longer collection cycles;


	•	greater difficulty in protecting intellectual property;

	•	potential unexpected changes in regulatory practices and tariffs;

	•	potential unexpected changes in tax laws and treaties;

	•	the impact of fluctuating exchange rates between the U.S. dollar and foreign currencies in markets where we do business because we do not engage in any hedging activities; and

	•	general economic and political conditions in these foreign markets.

We may encounter difficulties predicting the extent of the future impact of these conditions. These factors and other factors could harm our ability to gain future international revenues and, consequently, materially impact our business, results of operations and financial condition.

If we are not able to adequately protect our proprietary rights, our business could be harmed.

Our success depends upon our proprietary technology. We believe that our product developments, product enhancements, name recognition and the technological and innovative skills of our personnel are essential to establishing and maintaining a technology leadership position. We rely on a combination of patent, copyright, trademark and trade secret rights, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. However, these legal rights and contractual agreements may provide only limited protection. Our pending patent applications may not be allowed or our competitors may successfully challenge the validity or scope of any of our six issued patents or any future issued patents. Our patents alone may not provide us with any significant competitive advantage, and third parties may develop technologies that are similar or superior to our technology or design around our patents. Third parties could copy or otherwise obtain and use our products or technology without authorization, or develop similar technology independently. We cannot easily monitor any unauthorized use of our products, and, although we are unable to determine the extent to which piracy of our software products exists, software piracy is a prevalent problem in our industry in general.

The risk of not adequately protecting our proprietary technology and our exposure to competitive pressures may be increased if a competitor should resort to unlawful means in competing against us. We are currently investigating whether one or more former employees, recruited and hired by a competitor, may have misappropriated our trade secrets, including sensitive products and marketing information and detailed sales information regarding existing and potential customers and unlawfully used that information to benefit the competitor in gaining a competitive advantage against us.

We have entered into agreements with many of our customers and partners that require us to place the source code of our products into escrow. Such agreements generally provide that such parties will have a limited, non-exclusive right to use such code if: (i) there is a bankruptcy proceeding by or against us; (ii) we cease to do business; or (iii) we fail to meet our support obligations. Although our agreements with these third parties limit the scope of rights to use of the source code, we may be unable to effectively control such third-party’s actions.

Furthermore, effective protection of intellectual property rights is unavailable or limited in various foreign countries. The protection of our proprietary rights may be inadequate and our competitors could independently develop similar technology, duplicate our products or design around any patents or other intellectual property rights we hold.

We may be forced to initiate litigation in order to protect our proprietary rights. For example, on July 15, 2002, we filed a patent infringement lawsuit against Acta Technology, Inc. See Part II, Item 4, Legal Proceedings. Although this lawsuit is in the early stages, litigating claims related to the enforcement of proprietary rights can be very expensive and can be burdensome in terms of management time and resources, which could adversely affect our business and operating results.

We may face intellectual property infringement claims that could be costly to defend and result in our loss of significant rights.

As is common in the software industry, we have received and may continue from time to time to receive notices from third parties claiming infringement by our products of third-party patent and other proprietary rights. Third parties could claim that our current or future products infringe their patent or other proprietary rights. As the number of software products in our target markets increases and the functionality of these products further overlaps, we may become increasingly subject to claims by a third party that our technology infringes such party’s proprietary rights. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements, any of which could adversely affect our business, financial condition and operating results. Although we do not believe that we are currently infringing any proprietary rights of others, legal action claiming patent infringement could be commenced against us, and we may not prevail in such litigation given the complex technical issues and inherent uncertainties in patent litigation. The potential effects on our business that may result from a third-party infringement claim include the following:


	•	we may be forced to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, or at all;

	•	we may be required to indemnify our customers;

	•	we may be forced to significantly increase our development efforts and resources to redesign our products as a result of these claims; and

	•	we may be forced to discontinue the sale of some or all of our products.

Our business could suffer as a result of our strategic acquisitions and investments.

In December 1999, we acquired Influence, a developer of analytic applications. In February 2000, we acquired Delphi, a distributor of our products in Switzerland. In August 2000, we acquired Zimba, a provider of applications that enable mobile professionals to have real-time access to enterprise and external information through wireless devices, voice recognition technologies and the Internet. In April 2000, we acquired certain PwC intellectual property rights and personnel. In November 2000, we acquired certain intellectual property from QRB Developers. In January 2001, we acquired syn-T-sys, a distributor of our products in the Netherlands and Belgium. In June 2001, we acquired Informatica Partners, a distributor of our products in France. Our attempts to effectively integrate these companies, their intellectual property, or their personnel, have placed an additional burden on our management and infrastructure. These acquisitions will subject us to a number of risks, including:


	•	the loss of key personnel, customers and business relationships;

	•	difficulties associated with assimilating and integrating the technology, new personnel and operations of the acquired company;

	•	the potential disruption of our ongoing business;

	•	the expense associated with maintenance of uniform standards, controls, procedures, employees and clients;

	•	the risk of product malfunction after new technology is integrated;

	•	the diversion of resources from the development of our own proprietary technology;

	•	our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs; and

	•	the risk of impairment write-offs.

There can be no assurance that we will be successful in overcoming these risks or any other problems encountered in connection with our acquisitions.

We may engage in future acquisitions or investments that could dilute our existing stockholders, or cause us to incur contingent liabilities, debt or significant expense.

From time to time, in the ordinary course of business, we may evaluate potential acquisitions of, or investments in, related businesses, products or technologies. Future acquisitions could result in the issuance of dilutive equity securities, the incurrence of debt or contingent liabilities. There can be no assurance that any strategic acquisition or investment will succeed. Any future acquisition or investment could harm our business, financial condition and results of operation.

We may need to raise additional capital in the future, which may not be available on reasonable terms to us, if at all.

We may not generate sufficient revenue from operations to offset our operating or other expenses. As a result, in the future, we may need to raise additional funds through public or private debt or equity financings. We may not be able to borrow money or sell more of our equity securities to meet our cash needs. Even if we are able to do so, it may not be on terms that are favorable or reasonable to us. If we are not able to raise additional capital when we need it in the future, our business could be seriously harmed.

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. In addition, we have adopted a stockholder rights plan. Under the plan, we issued a dividend of one right for each outstanding share of common stock to stockholders of record as of November 12, 2001. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our Board of Directors, the plan could make it more difficult for a third party to acquire us — or a significant percentage of our outstanding capital stock — without first negotiating with our Board of Directors regarding such acquisition.

Our bylaws provide that we have a classified Board of Directors, with each class of directors subject to re-election every three years. This classified board has the effect of making it more difficult for third parties to insert their representatives on our Board of Directors and gain control of Informatica. These provisions could also discourage proxy contests and make it more difficult for 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.

Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. We do not have a detailed disaster recovery plan. Our facilities in the State of California are currently subject to electrical blackouts as a consequence of a shortage of available electrical power, which occurred during 2001. In the event these blackouts are reinstated, they could disrupt the operations of our affected facilities. In connection with the shortage of available power, prices for electricity may continue to increase in the foreseeable future. Such price changes will increase our operating costs, which could in turn hurt our profitability. In addition, we do not carry sufficient business interruption insurance to compensate us for losses that may occur, and any losses or damages incurred by us could have a material adverse effect on our business.

The following discusses our exposure to market risk related to changes in interest rates and foreign currency exchange rates. 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 “Risk Factors”.

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment. Our investments consist primarily of commercial paper, government notes and bonds, corporate bonds and municipal securities. Due to the nature of our investments, we believe that there is no material interest rate risk exposure. All investments are carried at market value, which approximates cost.

We market and sell our software and services through our direct sales force in the United States as well as Belgium, Canada, France, Germany, the Netherlands, Switzerland and the United Kingdom. We also have relationships with distributors in various regions, including Asia-Pacific, Australia, Europe, Japan and Latin America. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As our sales are primarily in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets. We translate foreign currencies into U.S. dollars for reporting purposes and currency fluctuations may have a quarterly impact on our financial results. To date, we have not engaged in any foreign currency hedging activities.

Our chief executive officer and our chief financial officer, after evaluating our “disclosure controls and procedures” (as defined in Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-14(c) and 15d-14(c)) as of a date (the “Evaluation Date”) within 90 days before the filing date of this Quarterly Report on Form 10-Q, have concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Subsequent to the Evaluation Date, there were no significant changes in our internal controls or in other factors that could significantly affect our internal controls, including any corrective actions with regard to significant deficiencies or material weaknesses. As a result, no corrective actions were required or undertaken.

statement for the offerings did not disclose that: (1) the underwriters had agreed to allow certain customers to purchase shares in the offerings in exchange for excess commissions paid to the underwriters; and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The amended complaint also alleges that false analyst reports were issued. No specific damages are claimed.

We are aware that similar allegations have been made in other lawsuits filed in the Southern District of New York challenging over 300 other initial public offerings and secondary offerings conducted in 1999 and 2000. Those cases have been consolidated for pretrial purposes before the Honorable Judge Shira A. Scheindlin. On July 15, 2002, we and our affiliated individual defendants (as well as all other issuer defendants) filed a motion to dismiss the complaint. We believe that we have meritorious defenses to the claims against us, and we intend to defend ourselves vigorously.

On July 15, 2002, we filed a patent infringement action in U.S. District Court in Northern California against Acta Technology, Inc., asserting that certain Acta products infringe on three of our patents: U.S. Patent No. 6,014,670, entitled “Apparatus and Method for Performing Data Transformations in Data Warehousing”; U.S. Patent No. 6,339,775, entitled “Apparatus and Method for Performing Data Transformations in Data Warehousing” (this patent is a continuation-in-part of and claims the benefit of U.S. Patent No. 6,014,670); and U.S. Patent No. 6,208,990, entitled “Method and Architecture for Automated Optimization of ETL Throughput in Data Warehousing Applications.” On July 17, 2002, we filed an amended complaint alleging that Acta products also infringe on one additional patent: U.S. Patent No. 6,044,374, entitled “Object References for Sharing Metadata in Data Marts.” In the suit, we are seeking an injunction against future sales of the infringing Acta products, as well as damages for past sales of the infringing products. We have asserted that Acta’s infringement of the Informatica patents was willful and deliberate. Acta answered the complaint on September 5, 2002, and filed counterclaims against us seeking a declaration that each patent asserted is not infringed and is invalid and unenforceable. Acta did not make any claims for monetary relief against us.

The Company is also a party to various legal proceedings and claims, either asserted or unasserted, arising from the normal course of business activities. In management’s opinion, resolution of these matters is not expected to have a material adverse impact on the Company’s results of operations, cash flows or its financial position. However, depending on the amount and timing, an unfavorable resolution of the matter could materially affect the Company’s future results of operations, cash flows or financial position in a particular period.

Pursuant to the requirements of the Securities Exchange Act of 1934, Informatica Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	By:	/s/ EARL E. FRY



	Earl E. Fry
	Chief Financial Officer
	(Duly Authorized Officer and
	Principal Financial and Accounting Officer)


	1. I have reviewed this quarterly report on Form 10-Q of Informatica Corporation;

	2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


	/s/ GAURAV S. DHILLON

	Gaurav S. Dhillon
	President and Chief Executive Officer


	1. I have reviewed this quarterly report on Form 10-Q of Informatica Corporation;

	2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


	/s/ EARL E. FRY

	Earl E. Fry
	Senior Vice President and Chief Financial Officer


(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-25871


Delaware		77-0333710
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

2100 Seaport Blvd, Redwood City, California		94063
(Address of principal executive offices)		(Zip Code)


PART I. FINANCIAL INFORMATION
	Item 1. Condensed Consolidated Financial Statements
	INFORMATICA CORPORATION
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosure About Market Risk
	Item 4. Controls and Disclosures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATIONS
EXHIBIT INDEX
EXHIBIT 10.17
EXHIBIT 10.18
EXHIBIT 10.19
EXHIBIT 10.20
EXHIBIT 99.1


		Page

PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements		2
	Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001.		2
	Condensed Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2002 and 2001.		3
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2002 and 2001		4
	Notes to Condensed Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		34
Item 4.	Controls and Disclosures		35
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		35
Item 6.	Exhibits and Reports on Form 8-K		36
Signature			37
Certifications			38


			September 30,		December 31,
			2002		2001

			(Unaudited)

			(In thousands)
ASSETS
Current assets:
	Cash and cash equivalents		$	82,002	$	131,264
	Short-term investments			143,687		77,955
	Accounts receivable, net of allowances of $1,659 and $2,295, respectively			30,173		29,131
	Prepaid expenses and other current assets			6,342		7,061

		Total current assets		262,204		245,411
Restricted cash				12,166		12,166
Property and equipment, net				49,036		53,180
Goodwill				29,564		29,564
Intangible assets, net				802		1,657
Other assets				379		925

		Total assets	$	354,151	$	342,903

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	1,543	$	2,934
	Accrued liabilities			21,646		14,953
	Accrued compensation and related expenses			11,771		15,848
	Income taxes payable			2,477		2,874
	Restructuring charges			4,980		4,136
	Deferred revenue			43,791		36,554

		Total current liabilities		86,208		77,299
Restructuring charges, less current portion				16,104		5,196
Stockholders’ equity				251,839		260,408

		Total liabilities and stockholders’ equity	$	354,151	$	342,903



			Three Months						Nine Months
			Ended						Ended
			September 30,						September 30,

			2002			2001			2002			2001


			(Unaudited)

			(In thousands, except per share data)
Revenues:
	License		$	22,270		$	27,171		$	75,176		$	90,755
	Service			25,375			19,922			70,142			59,060

		Total revenues		47,645			47,093			145,318			149,815
Cost of revenues:
	License			1,377			1,412			4,483			2,636
	Service			9,764			10,713			29,362			32,341

		Total cost of revenues		11,141			12,125			33,845			34,977

Gross profit				36,504			34,968			111,473			114,838
Operating expenses:
	Research and development			11,278			13,224			34,884			35,099
	Sales and marketing			20,981			26,191			64,851			74,247
	General and administrative			5,270			5,507			15,093			14,453
	Amortization of stock-based compensation			52			277			190			949
	Amortization of goodwill and intangible assets			285			6,994			855			20,383
	Restructuring charges			17,030			12,096			17,030			12,096

		Total operating expenses		54,896			64,289			132,903			157,227

Loss from operations				(18,392	)		(29,321	)		(21,430	)		(42,389	)
Interest income and other, net				1,176			2,338			4,655			7,255

Loss before income taxes				(17,216	)		(26,983	)		(16,775	)		(35,134	)
Income tax provision				64			—			325			1,304

Net loss			$	(17,280	)	$	(26,983	)	$	(17,100	)	$	(36,438	)

Net loss per share:
	Basic and diluted		$	(0.22	)	$	(0.35	)	$	(0.21	)	$	(0.47	)

Weighted average shares used in calculation of net loss per share:
	Basic and diluted			79,999			78,038			79,659			77,330



	September 30, 2002							December 31, 2001

	Gross					Net		Gross					Net
	Carrying		Accumulated			Intangible		Carrying		Accumulated			Intangible
	Amount		Amortization			Assets		Amount		Amortization			Assets

Core technology	$	3,122	$	(2,411	)	$	711	$	3,122	$	(1,630	)	$	1,492
Patents		297		(206	)		91		297		(132	)		165

Total intangible assets	$	3,419	$	(2,617	)	$	802	$	3,419	$	(1,762	)	$	1,657



			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2002			2001			2002			2001

Reported net loss			$	(17,280	)	$	(26,983	)	$	(17,100	)	$	(36,438	)
Add:
	Goodwill and assembled workforce amortization, net of tax			—			6,021			—			17,466

Adjusted net loss			$	(17,280	)	$	(20,962	)	$	(17,100	)	$	(18,972	)

Basic and diluted net loss per share:
	Reported net loss per share		$	(0.22	)	$	(0.35	)	$	(0.21	)	$	(0.47	)
	Add:
		Goodwill and assembled workforce amortization, net of tax		—			0.08			—			0.22

	Adjusted basic and diluted net loss per share		$	(0.22	)	$	(0.27	)	$	(0.21	)	$	(0.25	)


	Restructuring										Restructuring
	Liabilities at										Liabilities at
	December 31,				Cash			Non-Cash			September 30,
	2001		Adjustments		Payments			Charges			2002

Property and equipment write-offs	$	—	$	1,887	$	—		$	(1,887	)	$	—
Excess leased facilities		9,332		15,143		(3,391	)		—			21,084

	$	9,332	$	17,030	$	(3,391	)	$	(1,887	)	$	21,084


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


	*If we do not maintain and strengthen our relationships with our strategic partners, our ability to generate revenue and control implementation costs will be adversely affected.*


Exhibit 10.17		Severance Agreement and Mutual Release, dated July 29, 2002, by and among the Company and Diaz H. Nesamoney.
Exhibit 10.18		Severance Agreement and Mutual Release, dated July 31, 2002, by and among the Company and Kyle L. Bowker.
Exhibit 10.19		Offer Letter, dated August 6, 2002, by and among the Company and Clive A. Harrison.
Exhibit 10.20		Description of management arrangement with Earl E. Fry.
Exhibit 99.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	*Cost of License Revenues*


	*Cost of Service Revenues*


	*Research and Development*


	*Sales and Marketing*