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TIBCO Software 10-Q 2009 Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q
(Mark One)
For the quarterly period ended March 1, 2009 OR
For the transition period from to Commission File Number: 000-26579 TIBCO SOFTWARE INC. (Exact name of registrant as specified in its charter)
3303 Hillview Avenue Palo Alto, California 94304-1213 (Address of principal executive offices) (Zip code) Registrant’s telephone number, including area code: (650) 846-1000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x The number of shares outstanding of the registrant’s Common Stock, $0.001 par value, as of April 3, 2009 was 175,522,136 shares.
Table of ContentsTIBCO SOFTWARE INC. Table of Contents
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Table of ContentsTIBCO SOFTWARE INC. PART I—FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except par value per share)
See accompanying Notes to Condensed Consolidated Financial Statements.
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Table of ContentsCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data)
See accompanying Notes to Condensed Consolidated Financial Statements.
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Table of ContentsCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
See accompanying Notes to Condensed Consolidated Financial Statements.
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Table of ContentsNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by TIBCO Software Inc. (“TIBCO,” the “Company,” “we” or “us”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in Consolidated Financial Statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted in accordance with such rules and regulations. The condensed consolidated balance sheet data as of November 30, 2008, was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial position of the Company, and its results of operations and cash flows. These Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto for the fiscal year ended November 30, 2008, included in the Company’s Annual Report on Form 10-K filed with the SEC on January 28, 2009. Our fiscal year ends on November 30th of each year. For purposes of presentation, we have indicated the first quarter of fiscal years 2009 and 2008 as ended on February 28, 2009 and February 29, 2008, respectively; whereas in fact, the first quarter of fiscal years 2009 and 2008 actually ended on March 1, 2009 and March 2, 2008, respectively. There were 91 days and 93 days in the first quarter of fiscal years 2009 and 2008, respectively. The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. For majority owned subsidiaries, we reflect the minority interest of the portion we do not own on our Condensed Consolidated Balance Sheets between Total Liabilities and Stockholders’ Equity. The results of operations for the three months ended February 28, 2009, are not necessarily indicative of the results that may be expected for the year ending November 30, 2009, or any other future period, and we make no representations related thereto.
Our significant accounting policies were described in Note 2 to our audited Consolidated Financial Statements for the fiscal year ended November 30, 2008, included in our Annual Report on Form 10-K. These accounting policies have not significantly changed. Recent Accounting Pronouncements In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008, and will be adopted by us in the first quarter of fiscal 2010. We are currently evaluating the potential impact of the adoption of SFAS No. 141(R) on our consolidated results of operations and financial condition. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS No. 160”). SFAS No. 160 amends Accounting Research Bulletin No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary. SFAS No. 160 also establishes accounting and reporting standards for the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, and will be adopted by us in the first quarter of fiscal 2010. We are currently evaluating the potential impact of the adoption of SFAS No. 160 on our consolidated results of operations and financial condition.
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Table of ContentsTIBCO SOFTWARE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
In April 2008, the FASB issued FASB Staff Position No. 142-3 (“FSP No. 142-3”), Determination of the Useful Life of Intangible Assets. FSP No. 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP No. 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. We are currently evaluating the effect that the adoption of FSP No. 142-3 will have on our consolidated results of operations and financial condition. In November 2008, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 08-7, Accounting for Defensive Intangible Assets (“EITF No. 08-7”). EITF No. 08-7 applies to defensive intangible assets, which are acquired intangible assets that the acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. As these assets are separately identifiable, EITF No. 08-7 requires an acquiring entity to account for defensive intangible assets as a separate unit of accounting. Defensive intangible assets must be recognized at fair value in accordance with SFAS No. 141(R) and SFAS No. 157. EITF No. 08-7 is effective for defensive intangible assets acquired in fiscal years beginning on or after December 15, 2008 and will be adopted by us in the first quarter of fiscal 2010. We are currently evaluating the potential impact, if any, of the adoption of EITF No. 08-7 on our consolidated results of operations and financial condition. In June 2008, the FASB issued FSP EITF No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF No. 03-6-1”). FSP EITF No. 03-6-1 clarifies that share-based payment awards that entitle their holders to receive nonforfeitable dividends or dividend equivalents before vesting should be considered participating securities. FSP EITF No. 03-6-1 is effective for fiscal years beginning after December 15, 2008 on a retrospective basis and will be adopted by us in the first quarter of fiscal 2010. We are currently evaluating the potential impact, if any, the adoption of FSP EITF No. 03-6-1 will have on our calculation of EPS. On December 1, 2008, we adopted FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (“FSP SFAS No. 157-2”), which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis to fiscal years beginning after November 15, 2008. The adoption of FSP SFAS No. 157-2, has not had a material impact on our consolidated results of operations and financial condition. On December 1, 2008, we adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 applies to all derivative instruments and related hedged items accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The adoption of SFAS No. 161 has not had a material impact on our consolidated results of operations and financial condition. See Note 5 to our Condensed Consolidated Financial Statements for further detail. On December 1, 2008, we adopted EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (“EITF No. 07-3”). EITF No. 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. EITF No. 07-3 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007. The adoption of EITF No. 07-3 has not had a material impact on our consolidated results of operations and financial condition.
Insightful Corporation On September 3, 2008, we acquired Insightful Corporation (“Insightful”), a provider of statistical data analysis and data mining solutions software. Pursuant to the Agreement and Plan of Merger (the “Insightful Merger Agreement”) entered into on June 19, 2008, we acquired all the outstanding equity of Insightful. We paid $25.5 million, consisting of $24.7 million of cash and the assumption of certain stock options with a fair value of $0.8 million, to acquire the outstanding common stock and certain stock options of Insightful. In connection with the acquisition, we also incurred transaction costs of $0.9 million. The total purchase price of Insightful, including transaction costs, was $26.4 million.
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Table of ContentsTIBCO SOFTWARE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
The results of Insightful’s operations have been included in our Condensed Consolidated Financial Statements since the acquisition date. The following unaudited pro forma adjusted summary reflects our condensed results of operations for the three months ended February 29, 2008, assuming Insightful had been acquired at the beginning of the fiscal year 2008 (in thousands, except per share data):
The unaudited pro forma adjusted summary is not intended to be indicative of future results.
Marketable securities, which are classified as available-for-sale, are summarized below as of February 28, 2009 and November 30, 2008 (in thousands):
Fixed income securities included in short-term investments above are summarized by their contractual maturities as follows (in thousands):
The maturities of asset-backed and mortgage-backed securities are primarily based upon assumed payment forecasts utilizing interest rate scenarios and mortgage loan characteristics.
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Table of ContentsTIBCO SOFTWARE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
The following table summarizes the net realized gains (losses) on short-term investments for the periods presented (in thousands):
We periodically assess whether significant facts and circumstances have arisen to indicate an adverse effect on the fair value of the underlying investment that might indicate material deterioration in the creditworthiness of our issuers. During our quarter-end assessments, we determined the decline in value of investments associated with mortgage-backed securities to be other-than-temporary. Accordingly, we recorded an impairment of approximately $0.2 million for the three months ended February 28, 2009. We included this impairment in Other Income (Expense) in our Condensed Consolidated Statements of Operations. Depending on market conditions, we may record additional impairments on our investment portfolio in the future. The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position, as of February 28, 2009 (in thousands):
The unrealized losses on our investments were primarily due to changes in interest rates and market and credit conditions of the underlying securities. As of February 28, 2009, we do not consider these investments to be other-than-temporarily impaired because we have the ability and intent to hold these investments until a recovery of fair value, which may be at maturity. We have an investment in a venture capital fund which invests in privately held companies. This investment is carried at cost basis and is included in Other Assets on the Balance Sheets. If we believe that an other-than-temporary decline exists, we would record the related write-down as a loss on investments in our Consolidated Statements of Operations. The carrying value of our minority equity investments is $0.8 million as of February 28, 2009 and November 30, 2008, respectively.
Fair Value Measurements SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS No. 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require us to develop our own assumptions. This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, we measure certain financial assets and liabilities at fair value, including our cash equivalent, marketable securities and foreign currency contracts. Our cash equivalents and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, sovereign government obligations, and money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.
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Table of ContentsTIBCO SOFTWARE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
The types of instruments valued based on other observable inputs include investment-grade corporate bonds, mortgage-backed and asset-backed products and state, municipal and provincial obligations. Such instruments are generally classified within Level 2 of the fair value hierarchy. We execute our foreign currency forward contracts primarily in the retail market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large multi-national and regional banks. Our foreign currency forward contracts valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy. Fair value hierarchy of our cash equivalents, marketable securities and foreign currency contracts at fair value (in thousands):
Derivative Financial Instruments We transact business in approximately 20 foreign currencies worldwide. Our foreign subsidiaries, with a few exceptions, use the local currency of their respective countries as their functional currency. We enter into forward contracts with financial institutions to manage our net currency exposure related to net monetary assets and liabilities denominated in foreign currencies. Our foreign currency forward contracts are not designated as special hedge accounting under SFAS No. 133; however, they are considered hedging instruments for purposes of SFAS No. 161 reporting. We do not enter into speculative foreign exchange contracts for trading purposes. Foreign currency forward contracts are generally placed once a month for one month when exposure information is available. We had five outstanding forward contracts with a total notional value of $41.3 million as of February 28, 2009, which are summarized as follows (in thousands):
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Table of ContentsTIBCO SOFTWARE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
Currently, we do not have master netting agreements with our counterparties for our forward contracts. We mitigate the credit risk of these derivatives by transacting with highly rated counterparties. As of February 28, 2009, we have evaluated the credit and non-performance risks associated with our derivative counterparties, and we believe that the impact of the credit risk associated with our outstanding derivatives was insignificant.
The change in the carrying value of goodwill for the three months ended February 28, 2009 is as follows (in thousands):
Certain of our intangibles assets were recorded in foreign currencies, and therefore, the gross carrying amount and accumulated amortization are subject to foreign currency translation adjustments. The carrying values of our amortized acquired intangible assets as of February 28, 2009 and November 30, 2008, are as follows (in thousands):
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Table of ContentsTIBCO SOFTWARE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
Amortization of developed technologies is recorded in cost of revenue, while the amortization of other acquired intangible assets is included in operating expenses. The following summarizes the amortization expense of acquired intangible assets for the periods indicated (in thousands):
The following is a summary of activities in accrued facilities restructuring costs for the three months ended February 28, 2009 (in thousands):
The remaining accrued facilities restructuring costs represent the estimated loss on abandoned excess facilities, net of estimated sublease income, which is expected to be paid over the next two years. As of February 28, 2009, $4.2 million of the $10.7 million accrued excess facilities costs were classified as long-term liabilities.
Mortgage Note Payable In connection with the purchase of our corporate headquarters in June 2003, we recorded a $54.0 million mortgage note payable to a financial institution collateralized by the commercial real property acquired. The balance of the mortgage note payable was $44.1 and $44.6 million as of February 28, 2009 and November 30, 2008, respectively. The mortgage note payable carries a fixed annual interest rate of 5.50% and a 20-year amortization. The $34.4 million principal balance that will be remaining at the end of the ten-year term will be due as a final lump sum payment on July 1, 2013. Under the current applicable terms of the mortgage note agreements, we are prohibited from acquiring another company without prior consent from the lender unless we maintain at least $50.0 million of cash or cash equivalents and comply with other non-financial terms as defined in the agreements. As of February 28, 2009, we were in compliance with all covenants in the mortgage note agreements. Line of Credit We have a $20.0 million revolving line of credit that matures on June 18, 2009. The revolving line of credit is available for cash borrowings and for the issuance of letters of credit up to $20.0 million. As of February 28, 2009, no borrowings were outstanding under the facility and a $13.0 million irrevocable letter of credit was outstanding, leaving $7.0 million of available credit for additional letters of credit or cash borrowings. The $13.0 million irrevocable letter of credit outstanding was issued in connection with the mortgage note payable. The letter of credit automatically renews for successive one-year periods, until the mortgage note payable has been satisfied in full. The line of credit requires that we maintain a minimum of $40.0 million in unrestricted cash, cash equivalents and short-term investments, net of total current and long-term indebtedness, as well as comply with other non-financial covenants defined in the agreement. As of February 28, 2009, we were in compliance with all covenants of this revolving line of credit.
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Table of ContentsTIBCO SOFTWARE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
Letters of Credit and Bank Guarantees In connection with the mortgage note payable, we entered into an irrevocable letter of credit in the amount of $13.0 million. See Note 8 for further details. The letter of credit is collateralized by the line of credit and automatically renews for successive one-year periods until the mortgage note payable has been satisfied in full. In connection with a facility lease, we have an irrevocable letter of credit in the amount of $4.5 million. The letter of credit automatically renews annually for the duration of the lease term, which expires in December 2010. We are subject to certain financial covenants as defined in the letter of credit agreement. As of February 28, 2009, we were in compliance with all covenants in this letter of credit. As of February 28, 2009, in connection with bank guarantees issued by some of our international subsidiaries, we had $5.3 million of restricted cash, which is included in Other Assets on our Condensed Consolidated Balance Sheets. Prepaid Land Lease In June 2003, we entered into a 51-year lease of the land upon which our corporate headquarters is located. The lease was paid in advance for a total of $28.0 million, but is subject to adjustments every 10 years based upon changes in market value. Should it become necessary, we have the option to prepay any rent increases due as a result of a change in market value. This prepaid land lease is being amortized using the straight-line method over the life of the lease; the portion to be amortized over the next 12 months is included in Prepaid Expenses and Other Current Assets, and the remainder is included in Other Assets on our Condensed Consolidated Balance Sheets. Operating Commitments At various locations worldwide, we lease office space and equipment under non-cancelable operating leases with various expiration dates through April 2015. Rental expense was $2.3 and $2.5 million for the three month periods ended February 28, 2009 and February 29, 2008, respectively. As of February 28, 2009, contractual commitments associated with indebtedness, lease obligations and restructuring were as follows (in thousands):
Future minimum lease payments under restructured non-cancelable operating leases are included in Accrued Excess Facilities Costs in our Condensed Consolidated Balance Sheets. The above commitment table does not include approximately $12.2 million of long-term income tax liabilities recorded in accordance with FIN 48 due to the fact that we are unable to reasonably estimate the timing of these potential future payments.
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Table of ContentsTIBCO SOFTWARE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
Indemnification Our software license agreements typically provide for indemnification of customers for intellectual property infringement claims. To date, no such claims have been filed against us. We also warrant to customers that software products operate substantially in accordance with the software product’s specifications. Historically, we have incurred minimal costs related to product warranties, and, as such, no accruals for warranty costs have been made. In addition, we indemnify our officers and directors under the terms of indemnity agreements entered into with them, as well as pursuant to our certificate of incorporation, bylaws and applicable Delaware law. To date, we have incurred costs for the payment of legal fees in connection with the legal proceedings detailed in Note 10.
IPO Allocation Suit We, certain of our directors and officers, and certain investment bank underwriters have been named in a putative class action for violation of the federal securities laws in the United States District Court for the Southern District of New York, captioned “In re TIBCO Software Inc. Initial Public Offering Securities Litigation.” This is one of a number of cases challenging underwriting practices in the initial public offerings (each, an “IPO”) of more than 300 companies, which have been coordinated for pretrial proceedings as “In re Initial Public Offering Securities Litigation.” Plaintiffs generally allege that the underwriters engaged in undisclosed and improper underwriting activities, namely the receipt of excessive brokerage commissions and customer agreements regarding post-offering purchases of stock in exchange for allocations of IPO shares. Plaintiffs also allege that various investment bank securities analysts issued false and misleading analyst reports. The complaint against us claims that the purported improper underwriting activities were not disclosed in the registration statements for our IPO and secondary public offering and seeks unspecified damages on behalf of a purported class of persons who purchased our securities or sold put options during the time period from July 13, 1999 to December 6, 2000. A lawsuit with similar allegations of undisclosed improper underwriting practices, and part of the same coordinated proceedings, is pending against Talarian, which we acquired in 2002. That action is captioned “In re Talarian Corp. Initial Public Offering Securities Litigation.” The complaint against Talarian, certain of its underwriters and certain of its former directors and officers claims that the purported improper underwriting activities were not disclosed in the registration statement for Talarian’s IPO and seeks unspecified damages on behalf of a purported class of persons who purchased Talarian securities during the time period from July 20, 2000 to December 6, 2000. In 2004, a stipulation of Settlement (the “Settlement”) was submitted to the Court, and in 2005, the Court granted preliminary approval. Under the Settlement, we and our subsidiary Talarian would have been dismissed of all claims in exchange for a contingent payment guarantee by the insurance companies responsible for insuring us and Talarian as issuers. Class certification was a condition of the Settlement. After the Second Circuit Court of Appeals issued a ruling overturning class certification in six test cases for the coordinated proceedings, the Settlement was terminated in June 2007 by stipulation of the parties and order of the Court. On August 14, 2007, plaintiffs filed amended master allegations and amended complaints in the six test cases. On March 26, 2008, the Court denied the defendants’ motion to dismiss the amended complaints in the six test cases. It is uncertain whether there will be any revised or future settlement. If no settlement is achieved, we believe that we and Talarian have meritorious defenses and intend to defend the actions vigorously. However, the litigation results cannot be predicted at this point.
Stock Benefit Plans 2008 Equity Incentive Plan (the “2008 Plan”). As of February 28, 2009, there were 13.6 million shares available for grant and approximately 1.1 million shares underlying stock options outstanding under the 2008 Plan. 1996 Stock Option Plan (the “1996 Plan”). As of February 28, 2009, there were no shares available for grant and 33.7 million underlying stock options outstanding under the 1996 Plan.
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Table of ContentsTIBCO SOFTWARE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
As of February 28, 2009, there were 3.6 million shares of restricted stock and 1.4 million shares underlying restricted stock units outstanding under the 2008 Plan and 1996 Plan, combined. Insightful Corporation Amended and Restated 2001 Stock Option and Incentive Plan (the “Insightful Plan”). As of February 28, 2009, 0.6 million shares were available for grant and approximately 0.5 million shares underlying stock options were outstanding under the Insightful Plan. 1998 Director Option Plan (the “Director Plan”). As of February 28, 2009, no shares were available for grant and approximately 1.2 million shares underlying stock options were outstanding under the Director Plan. 2000 Extensibility Stock Option Plan. As of February 28, 2009, no shares were available for grant and approximately 23,000 shares underlying stock options were outstanding under the 2000 Extensibility Stock Option Plan. Talarian Stock Option Plans. As of February 28, 2009, no shares were available for grant and approximately 23,000 shares underlying stock options were outstanding under the Talarian Stock Option Plans. 2008 Employee Stock Purchase Plan (the “2008 ESPP”). We issued approximately 0.3 million shares under the 2008 ESPP, representing approximately $1.2 million in employee contributions for the three months ended February 28, 2009. As of February 28, 2009, approximately 9.7 million shares of our common stock were available for issuance under the 2008 ESPP. 2009 Deferred Compensation Plan (the “2009 DCP”). On February 20, 2009, we adopted the 2009 DCP. Pursuant to the 2009 DCP, eligible participants may elect to defer certain cash compensation into restricted stock units. The restricted stock units will be settled in shares of our common stock at the end of the elected deferral period. As of February 28, 2009, 1.0 million shares of our common stock were available for issuance under the 2009 DCP. Stock Options Activities The summary of stock option activity for the three months ended February 28, 2009, is presented below (in thousands, except per share data):
The intrinsic value of exercised stock options is calculated based on the difference between the exercise price and the quoted closing market price of our common stock as of the exercise date. The total intrinsic value of stock options exercised in the three months ended February 28, 2009 and February 29, 2008, was $1.6 and $3.5 million, respectively. Upon the exercise of stock options, we issue common stock from our authorized shares. As of February 28, 2009, total unamortized stock-based compensation cost related to unvested stock options was $15.5 million, with the weighted-average recognition period of 2.38 years. The total realized tax benefits attributable to stock options exercised and vesting of stock awards were $2.7 million and $3.9 million for the three months ended February 28, 2009 and February 29, 2008, respectively.
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Table of ContentsTIBCO SOFTWARE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
Stock Awards Activities Our nonvested stock awards are comprised of restricted stock and restricted stock units. A summary of the status for nonvested stock awards as of February 28, 2009, and activities in the three months ended February 28, 2009, is presented as follows (in thousands, except per share data):
We granted approximately 1.3 million shares of nonvested stock awards at no cost to recipients during the three months ended February 28, 2009. As of February 28, 2009, there was $27.4 million of total unrecognized compensation cost related to nonvested stock awards. That cost is expected to be recognized generally on a straight-line basis as the shares vest over three to four years (the weighted-average recognition period is 2.90 years). The total fair value of shares vested pursuant to stock awards during the three months ended February 28, 2009, was $0.9 million. Stock-Based Compensation Stock-based compensation cost for the three months ended February 28, 2009 and February 29, 2008, was $5.4 and $5.2 million, respectively. The stock-based compensation cost consists primarily of employee stock options recognized under SFAS No. 123(R) (revised 2004), Share-Based Payment (“SFAS No. 123(R)”). The deferred tax benefit on stock-based compensation expenses for the three months ended February 28, 2009 and February 29, 2008, was $1.6 and $1.2 million, respectively. We recognized stock-based compensation costs associated with our employee stock purchase programs on a straight-line basis over each six-month offering period. Employee stock-based compensation associated with our employee stock purchase programs for the three months ended February 28, 2009 and February 29, 2008, was approximately $0.2 and $0.3 million, respectively. We began granting restricted stock and restricted stock units to employees in fiscal year 2006. Approximately $2.5 and $1.5 million of our employee stock-based compensation cost for the three months ended February 28, 2009 and February 29, 2008, respectively, was related to grants of restricted stock and restricted stock units. Assumptions for Estimating Fair Value of Stock-Based Awards We selected the Black-Scholes option pricing model as the most appropriate model for determining the estimated fair value for stock-based awards. The following table summarizes the assumptions used to value stock options granted in the respective periods:
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Table of ContentsTIBCO SOFTWARE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
Our comprehensive income includes net income and other comprehensive income (loss), which consists of unrealized gains and losses on available-for-sale securities and cumulative translation adjustments. A summary of the comprehensive income for the periods indicated is as follows (in thousands):
The balances of each component of accumulated other comprehensive income, net of taxes, as of February 28, 2009 and November 30, 2008, consist of the following (in thousands):
In the first quarter of fiscal year 2007, we established a joint venture in South Africa, TS Innovations Limited (“Innovations”), with a local South Africa corporation, to assist with our sales efforts as well as to provide consulting services and training to our customers in the Sub-Saharan Africa region. For the three months ended February 28, 2009, Innovations had total assets of $0.6 million and total revenues of $0.3 million. As of February 28, 2009, we owned a 74.9% interest in the joint venture. Because of our majority interest in Innovations, our Condensed Consolidated Financial Statements include the balance sheets, results of operations and cash flows of Innovations, net of intercompany charges. We therefore eliminated 25.1% of the financial results that pertain to the minority interest of Innovations; this eliminated amount was reported as a separate line in our Condensed Consolidated Statements of Operations and Balance Sheets.
The effective tax rate of 42.4% for the three months ended February 28, 2009, differs from the statutory rate of 35% primarily due to the recording of deferred tax expense as a result of the re-measurement of our California deferred tax assets due to the enactment of California tax legislation, the impact of certain stock compensation charges under SFAS No. 123(R) and state income taxes which were partially offset by the benefits resulting from the reorganization of certain foreign entities, lower foreign taxes and research and development credits. The effective tax rate of 33.7% for the three months ended February 29, 2008, differs from the statutory rate of 35% primarily due to the benefits resulting from the reorganization of certain foreign entities, lower foreign taxes and research and development credits which were partially offset by the impact of certain stock compensation charges under SFAS No. 123(R) and state income taxes. In February 2009, the California 2009-2010 budget legislation was signed into law. One of the major components of this legislation is the ability to elect to apply a single sales factor apportionment for years beginning after January 1, 2011. As a result of our anticipated election of the single sales factor, we are required under SFAS 109 to re-measure our deferred taxes taking into account the reversal pattern and the expected California tax rate under the elective single sales factor. We have determined that by electing a single sales factor apportionment, our California deferred tax assets will decrease by approximately $1.1 million (net of federal benefit). The tax impact of $1.1 million has been recorded as a discrete item in the first quarter of fiscal year 2009.
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Table of ContentsTIBCO SOFTWARE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
On December 1, 2007, we adopted FIN 48. FIN 48 requires companies to determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. FIN 48 also provides guidance on de-recognition, classification, accounting in interim periods and disclosure requirements for tax contingencies. In addition, we have applied the standards in FASB Staff Position No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 (“FSP FIN 48-1”) as part of our initial adoption of FIN 48. FSP FIN 48-1 is an amendment to FIN 48. It clarifies how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. As a result of the adoption of FIN 48, we reduced the liability for net unrecognized tax benefits by $0.6 million and accounted for this as a cumulative-effect adjustment recorded as an increase to the December 1, 2007, balance of retained earnings. The total amount of gross unrecognized tax benefit as of the date of adoption was $33.8 million, of which $11.5 million would affect the effective tax rate if realized. We historically classified unrecognized tax benefits in current income taxes payable. In implementing FIN 48, we have reclassified $6.8 million from current income taxes payable to long-term income tax liabilities. We have also grossed-up our long-term income tax liabilities by $5.4 million with a corresponding increase to our deferred tax assets. During the first quarter of fiscal 2009, the amount of gross unrecognized tax benefits was increased by approximately $0.3 million. The total amount of gross unrecognized tax benefits was $35.8 million as of February 28, 2009, of which $13.5 million would affect the effective tax rate if realized. We do not expect any significant changes to the amount of unrecognized tax benefit within the next twelve months. Upon adoption of FIN 48, we have elected to include interest expense and penalties accrued on unrecognized tax benefits as a component of our income tax expense. This is consistent with our policy prior to the adoption of FIN 48. As of the date of November 30, 2008, we had accrued $1.2 million for interest and penalties. There was no material change to this amount as of February 28, 2009. We are subject to routine corporate income tax audits in the United States and foreign jurisdictions. The statute of limitations for our fiscal years 1998 through 2008 remains open for U.S. purposes. Most foreign jurisdictions have statute of limitations that range from three to six years. We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. As part of the process of preparing our Condensed Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax exposure under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Condensed Consolidated Balance Sheets. With the exception of our subsidiaries in the United Kingdom, net undistributed earnings of our foreign subsidiaries are generally considered to be indefinitely reinvested, and accordingly, no provision for U.S. income taxes has been provided thereon. Upon distribution of these earnings in the form of dividends or otherwise, we will be subject to U.S. income taxes to the extent that available net operating loss carryovers and foreign tax credits are not sufficient to eliminate the additional tax liability.
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Table of ContentsTIBCO SOFTWARE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
The following table sets forth the computation of basic and diluted net income per share for the periods indicated (in thousands, except per share data):
The following potential common stock equivalents are not included in the diluted net income per share calculation above, because their effect was anti-dilutive for the periods indicated (in thousands):
We operate our business in one operating segment: the development and marketing of a suite of infrastructure software. Our chief operating decision maker is our Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. Our revenue by geographic region, Americas; Europe, the Middle East and Africa (“EMEA”); and Asia Pacific and Japan (“APJ”), based on the location at which each sale originates, is summarized as follows (in thousands):
No customer accounted for more than 10% of total revenue for the three months ended February 28, 2009 or February 29, 2008. No customer had a balance in excess of 10% of our net accounts receivable on February 28, 2009 or November 30, 2008.
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Table of ContentsTIBCO SOFTWARE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
Our property and equipment by major country are summarized as follows (in thousands):
In April 2008, our Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $300.0 million of our outstanding common stock. As of February 28, 2009, we had $196.3 million available for purchases under the April 2008 stock repurchase program. All repurchased shares of common stock have been retired. The following table summarizes the activities under the stock repurchase programs for the periods indicated (in thousands, except per share data):
Patent Suit On March 30, 2009, Broadband Graphics, LLC (“Broadband Graphics”) filed a complaint for patent infringement against us in the United States District Court for the Western District of Washington. The complaint, which has not yet been formally served on us, alleges that our Spotfire software and other unspecified products infringe one or more of the claims of U.S. Patent Nos. 7,013,432, 7,313,765 and 7,013,431, assigned to Broadband Graphics. The complaint is seeking, among other things, injunctive relief and unspecified damages. We intend to defend the actions vigorously. We have, however, only recently received a copy of the complaint and are currently investigating the allegations contained in it. Therefore, the litigation results cannot be predicted at this point.
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Table of Contents
The following contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements relate to expectations concerning matters that are not historical facts. Words such as “projects,” “believes,” “anticipates,” “plans,” “expects,” “intends,” “strategy,” “continue,” “will,” “estimate,” “forecast,” and similar words and expressions are intended to identify forward-looking statements. 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 Part II, Item 1A. “Risk Factors.” All forward-looking statements and reasons why results may differ included in this Quarterly Report on Form 10-Q 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. EXECUTIVE OVERVIEW Our products are currently licensed by companies worldwide in diverse industries such as financial services, telecommunications, retail, healthcare, manufacturing, energy, transportation, logistics, government and insurance. We sell our products through a direct sales force and through alliances with leading software vendors and system integrators. Our revenue consists primarily of license and maintenance fees from our customers and distributors. In addition, we receive fees from our customers for providing consulting services. We also receive revenue from our strategic relationships with business partners who embed our products in their hardware and networking systems as well as from systems integrators who resell our products. Our revenue is generally derived from a diverse customer base. No single customer represented greater than 10% of total revenue for the three months ended February 28, 2009 or February 29, 2008. As of February 28, 2009 no single customer had a balance in excess of 10% of our net accounts receivable. We establish allowances for doubtful accounts based on our evaluation of collectability and an allowance for returns and discounts based on specifically identified credits and historical experience. For the first quarter of fiscal year 2009, we recorded total revenue of $132.9 million, a decrease of 9% over first quarter of fiscal year 2008. License revenue was $44.8 million, 22% lower than the previous year. In addition, we generated cash flow from operations of $29.3 million. Earnings per share was $0.03 in the first quarter of fiscal year 2009 as compared to $0.03 for the first quarter of fiscal year 2008. We ended the quarter with $293.3 million in cash, cash equivalents and short-term investments. Critical Accounting Policies, Judgments and Estimates The discussion and analysis of our financial condition and results of operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires us to make estimates, assumptions and judgments that can have significant impact on the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. We base our estimates, assumptions and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On a regular basis we evaluate our estimates, assumptions and judgments and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of our Board of Directors. We believe that the estimates, assumptions and judgments involved in revenue recognition; allowances for doubtful accounts, returns and discounts; stock-based compensation; valuation and impairment of investments; impairment of goodwill, intangible assets and long-lived assets; restructuring and integration costs; and accounting for income taxes have the greatest potential impact on our Condensed Consolidated Financial Statements, so we consider these to be our critical accounting policies. Historically, our estimates, assumptions and judgments relative to our critical accounting policies have not differed materially from actual results. The critical accounting estimates associated with these policies are described in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation” of our Annual Report on Form 10-K filed with the SEC on January 28, 2009.
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Table of ContentsRecent Accounting Pronouncements Recent accounting pronouncements are detailed in Note 2 to our Condensed Consolidated Financial Statements. Results of Operations For purposes of presentation, we have indicated the first quarter of fiscal years 2009 and 2008 as ended on February 28, 2009 and February 29, 2008, respectively; whereas in fact, the first quarter of fiscal years 2009 and 2008 actually ended on March 1, 2009 and March 2, 2008, respectively. There were 91 days and 93 days in the first quarter of fiscal years 2009 and 2008, respectively. All amounts presented in the tables in the following sections on our Results of Operations are stated in thousand of dollars, except for percentages and unless otherwise stated. The following table sets forth the components of our Results of Operations as percentages of total revenue for the periods indicated:
Total Revenue Our total revenue consisted primarily of license, consulting and maintenance fees from our customers and partners.
Total revenue for the first quarter of fiscal year 2009, compared to the same quarter last year, decreased by $13.7 million or 9%. The decrease was comprised of a $12.9 million or 22% decrease in license revenue and a $0.8 million or 1% decrease in service and maintenance revenue.
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Table of ContentsFor the three months ended February 28, 2009, we experienced a reduction in total revenue in all geographic regions, compared to the same period last year. See Note 16 to our Condensed Consolidated Financial Statements for amounts of total revenue by region. The percentages of total revenue from the geographic regions are summarized as follows:
License Revenue and Cost
License revenue decreased $12.9 million or 22% in the first quarter of fiscal year 2009, compared to the same quarter last year. The decrease was primarily due to decreased revenue in the Americas and APJ. Our license revenue in the first quarter of fiscal years 2009 and 2008 was derived from the following three product lines: service oriented architecture (“SOA”), business optimization and business process management (“BPM”). The percentages of license revenue from the three product lines are summarized as follows:
Our license revenue in any particular period is dependent upon the timing and number of license transactions and their relative size. Selected data about our license revenue transactions recognized for the respective periods is summarized as follows:
Cost of license revenue mainly consisted of royalty costs and amortization of developed technology acquired through corporate acquisitions. Cost of license revenue decreased by $0.5 million or 6% for the first quarter of fiscal year 2009, compared to the same quarter last year. The decrease in absolute dollars in cost of license revenue for the first quarter of fiscal year 2009, compared to the same quarter last year, resulted primarily from a decrease of $0.3 million in royalty costs as well as a decrease of $0.2 million in amortization expenses associated with acquired technologies.
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Table of ContentsService and Maintenance Revenue and Cost
Service and maintenance revenue decreased $0.8 million or 1% for the first quarter of fiscal year 2009, compared to the same quarter last year, due to lower professional services and training revenue. Cost of service and maintenance consists primarily of compensation for professional services, customer support personnel and third-party contractors and associated expenses related to providing consulting services. The cost of service and maintenance decreased by $4.5 million or 13% for the first quarter of fiscal year 2009, compared to the same quarter last year. The decrease in absolute dollars for the first quarter of fiscal year 2009, compared to the same quarter last year, resulted primarily from a $2.8 million decrease in employee-related expenses, a $0.6 million decrease in travel expenses, a $0.6 million decrease in facilities expenses and a $0.5 million decrease in subcontractor costs. The decrease in employee-related expenses was primarily due to a reduction in salaries. Research and Development Expenses Research and development expenses consisted primarily of employee-related expenses, including salary, bonus, benefits, stock-based compensation expenses, recruiting expense and office support, third-party contractor fees and related costs associated with the development and enhancement of our products.
Research and development expenses for the first quarter of fiscal year 2009 decreased by $0.3 million or 1%, compared to the same quarter last year, resulting primarily from a $0.4 million decrease in facilities expenses, a $0.1 million decrease in employee-related expenses and a $0.1 million decrease in travel expenses. The decreases were partially offset by a $0.3 million increase in contractor expenses. Sales and Marketing Expenses Sales and marketing expenses consisted primarily of employee-related expenses, including sales commissions, salary, bonus, benefits, stock-based compensation expenses, recruiting expense and office support, related costs of our direct sales force and marketing staff, and the costs of marketing programs, including customer conferences, promotional materials, trade shows, advertising and related travel expenses.
The $8.3 million or 15% decrease in sales and marketing expenses for the first quarter of fiscal year 2009, compared to the same quarter last year, was primarily due to a $5.3 million decrease in employee-related expenses, a $1.8 million decrease in travel expenses, a $1.3 million decrease in marketing programs and a $0.3 million decrease in facilities expenses. The decreases were partially offset by a $0.4 million increase in referral fees. The decrease in employee-related expenses was mainly due to a reduction in salaries. The decreases in travel expenses and marketing programs were due to cost management efforts.
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Table of ContentsGeneral and Administrative Expenses General and administrative expenses consisted primarily of employee-related expenses, including salary, bonus, benefits, stock-based compensation expenses, recruiting expense and office support and related costs for general corporate functions including executive, legal, finance, accounting and human resources, and also included accounting, tax and legal fees and charges.
General and administrative expenses decreased by $3.2 million or 23% for the first quarter of fiscal year 2009, compared to the same quarter last year, primarily due to a $1.7 million decrease in employee-related expenses, a $1.0 million decrease in consulting expenses and a $0.4 million decrease in travel expenses. The decreases in employee-related and consulting expenses were primarily due to a reduction in salaries and contractor costs. Amortization of Acquired Intangible Assets Intangible assets acquired through corporate acquisitions are comprised of the expected value of developed technologies, patents, trademarks, established customer bases and non-compete agreements, as well as maintenance and OEM customer royalty agreements. Amortization of developed technologies is recorded as a cost of revenue, and amortization of other acquired intangible assets is included in operating expenses.
Stock-Based Compensation The stock-based compensation cost is included in the Condensed Consolidated Statements of Operations corresponding to the same functional lines as cash compensation paid to the same employees in the respective departments are as follows:
We utilize the Black-Scholes option pricing model to value equity instruments. The Black-Scholes model was developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. As our employee stock options have certain characteristics that are significantly different from traded options, and as changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the existing valuation model may not provide an accurate measure of the fair value of our employee stock options. Although the fair value of employee stock options is determined in accordance with SFAS No. 123(R) and SAB No. 107 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
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Table of ContentsInterest Income
The decrease in interest income in the first quarter of fiscal year 2009, compared to the same quarter last year, was primarily due to lower returns from our mix of investments. Interest Expense
Interest expense was primarily related to a $54.0 million mortgage note issued in connection with the purchase of our corporate headquarters. The mortgage note payable carries a 20-year amortization and, as amended in the second quarter of fiscal year 2007, a fixed annual interest rate of 5.50%. The balance of the mortgage note as of February 28, 2009 was $44.1 million. The $34.4 million principal balance that will be remaining at the end of the 10-year term will be due as a final lump sum payment on July 1, 2013. See Note 8 to our Condensed Consolidated Financial Statements for further detail on the mortgage note payable. Other Income (Expense), Net Other income (expense) included realized gains and losses on investments, foreign exchange gain (loss) and other miscellaneous income and expense items.
The change in other income (expense) in absolute dollars for the first quarter of fiscal year 2009, compared to the same quarter last year, was primarily due to $0.3 million foreign exchange gain and $0.2 million investment impairment. Provision for Income Taxes
The effective tax rate of 42.4% for the three months ended February 28, 2009, differs from the statutory rate of 35% primarily due to the recording of deferred tax expense as a result of the re-measurement of our California deferred tax assets due to the enactment of California tax legislation, the impact of certain stock compensation charges under SFAS No. 123(R) and state income taxes which were partially offset by the benefits resulting from the reorganization of certain foreign entities, lower foreign taxes and research and development credits. The effective tax rate of 33.7% for the three months ended February 29, 2008, differs from the statutory rate of 35% primarily due to the benefits resulting from the reorganization of certain foreign entities, lower foreign taxes and research and development credits which were partially offset by the impact of certain stock compensation charges under SFAS No. 123(R) and state income taxes.
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Table of ContentsIn February 2009, the California 2009-2010 budget legislation was signed into law. One of the major components of this legislation is the ability to elect to apply a single sales factor apportionment for years beginning after January 1, 2011. As a result of our anticipated election of the single sales factor, we are required under SFAS 109 to re-measure our deferred taxes taking into account the reversal pattern and the expected California tax rate under the elective single sales factor. We have determined that by electing a single sales factor apportionment, our California deferred tax assets will decrease by approximately $1.1 million (net of federal benefit). The tax impact of $1.1 million has been recorded as a discrete item in the first quarter of fiscal year 2009. On December 1, 2007, we adopted FIN 48. FIN 48 requires companies to determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. FIN 48 also provides guidance on de-recognition, classification, accounting in interim periods and disclosure requirements for tax contingencies. In addition, we have applied the standards in FASB Staff Position No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 (“FSP FIN 48-1”) as part of our initial adoption of FIN 48. FSP FIN 48-1 is an amendment to FIN 48. It clarifies how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. As a result of the adoption of FIN 48, we reduced the liability for net unrecognized tax benefits by $0.6 million and accounted for this as a cumulative-effect adjustment recorded as an increase to the December 1, 2007, balance of retained earnings. The total amount of gross unrecognized tax benefit as of the date of adoption was $33.8 million, of which $11.5 million would affect the effective tax rate if realized. We historically classified unrecognized tax benefits in current income taxes payable. In implementing FIN 48, we have reclassified $6.8 million from current income taxes payable to long-term income tax liabilities. We have also grossed-up our long-term income tax liabilities by $5.4 million with a corresponding increase to our deferred tax assets. During the first quarter of fiscal 2009, the amount of gross unrecognized tax benefits was increased by approximately $0.3 million. The total amount of gross unrecognized tax benefits was $35.8 million as of February 28, 2009, of which $13.5 million would affect the effective tax rate if realized. We do not expect any significant changes to the amount of unrecognized tax benefit within the next twelve months. Upon adoption of FIN 48, we have elected to include interest expense and penalties accrued on unrecognized tax benefits as a component of our income tax expense. This is consistent with our policy prior to the adoption of FIN 48. As of November 30, 2008, we had accrued $1.2 million for interest and penalties. There was no material change to this amount as of February 28, 2009. We are subject to routine corporate income tax audits in the United States and foreign jurisdictions. The statute of limitations for our fiscal years 1998 through 2008 remains open for U.S. purposes. Most foreign jurisdictions have statute of limitations that range from three to six years. We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. As part of the process of preparing our Condensed Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax exposure under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Condensed Consolidated Balance Sheets.
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Table of ContentsMinority Interest, Net of Tax Minority interest represents the portion of net income belonging to minority stockholders of our consolidated subsidiaries.
Minority Interest is detailed in Note 13 to our Condensed Consolidated Financial Statements. Liquidity and Capital Resources Current Cash Flows As of February 28, 2009, we had cash, cash equivalents and short-term investments totaling $293.3 million, representing an increase of $25.9 million from November 30, 2008. Our total cash and cash equivalents balance was $285.7 million as of February 28, 2009. As of February 28, 2009, our short-term available-for-sale investments totaled $7.6 million, primarily consisting of U.S. government debt securities, high investment grade corporate debt, and asset-backed and mortgage-backed securities. Net cash provided by operating activities for the three months ended February 28, 2009, was $29.3 million, resulting from net income of $5.6 million, adjusted for $14.9 million in non-cash charges and $8.8 million net change in assets and liabilities. The non-cash charges included depreciation and amortization, stock-based compensation and tax benefits related to stock benefit plans, less deferred income tax and excess tax benefits from stock-based compensation recorded in financing activities. Net change in assets and liabilities included a decrease in accounts receivable due to significant cash collections in the first quarter of fiscal year 2009 resulting from a strong revenue quarter in the fourth quarter of fiscal year 2008, a decrease in prepaid expenses and other assets, a decrease in accounts payable and a decrease in accrued liabilities and excess facilities costs, which were partially offset by an increase in deferred revenue. To the extent that non-cash items increase or decrease our future operating results, there will be no corresponding impact on our cash flows. After excluding the effects of these non-cash charges, the primary changes in cash flows relating to operating activities resulted from changes in working capital. Our primary source of operating cash flows is the collection of accounts receivable from our customers, including maintenance which is typically billed annually in advance. Our operating cash flows are also impacted by the timing of payments to our vendors for accounts payable and other liabilities. We generally pay our vendors and service providers in accordance with the invoice terms and conditions. The timing of cash payments in future periods will be impacted by the terms of our accounts payable arrangements. Net cash provided by investing activities was $1.4 million for the three months ended February 28, 2009, resulting primarily from $5.2 million in net sales, maturities and purchase of short-term investments activities, which was partially offset by $2.3 million in restricted cash pledged as security and $1.3 million in capital expenditures. Net cash provided by financing activities was $3.9 million for the three months ended February 28, 2009, resulting primarily from $2.3 million excess tax benefits from stock-based compensation in accordance with the requirements of SFAS No. 123(R) and $2.1 million cash received from the exercise of stock options and the sale of our common stock under our ESPP, which were partially offset by $0.5 million payment of long-term debt. In April 2008, our Board of Directors approved a new stock repurchase program pursuant to which we may repurchase up to $300.0 million of our outstanding common stock from time to time in the open market or through privately negotiated transactions. In connection with the approval of the April 2008 stock repurchase program, the April 2007 stock repurchase program was terminated, and the remaining authorized amount of $69.6 million under the April 2007 stock repurchase program was canceled. As of February 28, 2009, the remaining authorized amount under the April 2008 stock repurchase program was $196.3 million. We currently anticipate that our operating expenses will grow in absolute dollars for the foreseeable future, and we intend to fund our operating expenses primarily through cash flows from operations. We believe that our current cash, cash equivalents and short-term investments together with expected cash flows from operations will be sufficient to meet our
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Table of Contentscurrently anticipated cash requirements. However, we may require or desire additional funds to support our operating expenses and capital requirements or for other purposes, such as acquisitions, and may seek to raise such additional funds through public or private equity or debt financing or from other sources. Fair Value Inputs Beginning fiscal year 2008 we adopted SFAS No. 157; see Note 5 to the Condensed Consolidated Financial Statements. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The use of fair value to measure investment instruments, with related unrealized and realized gains or losses on investment is a component to our consolidated results of operations. We value our cash equivalents and investment instruments by using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, sovereign government obligations, and money market securities. We do not adjust the quoted price for such instruments. The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include investment-grade corporate bonds, mortgage-backed and asset-backed products, state, municipal and provincial obligations. The price for each security at the measurement date is derived from various sources. Periodically, management assesses the reasonableness of these sourced prices by comparing them to the prices provided by our portfolio managers to derive the fair value of these financial instruments. Historically, we have not experienced significant deviation between the sourced prices and our portfolio managers’ prices. Management assesses the inputs of the pricing in order to categorize the financial instruments into the appropriate hierarchy levels. Commitments In June 2003, we purchased our corporate headquarters with a $54.0 million mortgage note to lower our operating costs. The mortgage note payable carries a 20-year amortization and, as amended in the second quarter of fiscal year 2007, a fixed annual interest rate of 5.50%. The principal balance of $34.4 million that will be remaining at the end of the 10-year term will be due as a final lump sum payment on July 1, 2013. Under the applicable terms of the mortgage note agreements, we are prohibited from acquiring another company without prior consent from the lender unless we maintain at least $50.0 million of cash or cash equivalents and comply with other non-financial terms as defined in the agreements. We were in compliance with all covenants as of February 28, 2009. In conjunction with the purchase of our corporate headquarters, we entered into a 51-year lease of the land upon which the property is located. The lease was paid in advance for a total of $28.0 million, but is subject to adjustments every 10 years based upon changes in fair market value of the land. Should it become necessary, we have the option to prepay any rent increases due as a result of a change in fair market value. We have a $20.0 million revolving line of credit that matures on June 18, 2009. The revolving line of credit is available for cash borrowings and for the issuance of letters of credit up to $20.0 million. As of February 28, 2009, no borrowings were outstanding under the facility and a $13.0 million irrevocable letter of credit was outstanding, leaving $7.0 million of available credit for additional letters of credit or cash borrowings. The $13.0 million irrevocable letter of credit outstanding was issued in connection with the mortgage note payable. The letter of credit automatically renews for successive one-year periods, until the mortgage note payable has been satisfied in full. The line of credit requires that we maintain a minimum of $40.0 million in unrestricted cash, cash equivalents and short-term investments, net of total current and long-term indebtedness, as well as comply with other non-financial covenants defined in the agreement. As of February 28, 2009, we were in compliance with all covenants under the revolving line of credit. As of February 28, 2009, we had $5.3 million in restricted cash in connection with bank guarantees issued by some of our international subsidiaries. The cash collateral is presented as restricted cash and included in Other Assets in our Condensed Consolidated Balance Sheets.
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Table of ContentsAs of February 28, 2009, our contractual commitments associated with indebtedness, lease obligations and restructuring were as follows (in thousands):
Future minimum lease payments under restructured non-cancelable operating leases are included in Accrued Excess Facilities Costs in our Condensed Consolidated Balance Sheets. The above commitment table does not include approximately $12.2 million of long-term income tax liabilities recorded in accordance with FIN 48 due to the fact that we are unable to reasonably estimate the timing of these potential future payments. Indemnification Our indemnification obligations are detailed in Note 9 to our Condensed Consolidated Financial Statements.
We are exposed to the impact of foreign currency fluctuations, interest rate changes and uncertainties in the credit market. Foreign Currency Risk We conduct business in the Americas, EMEA and APJ. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or changes in economic conditions in foreign markets. Because a material portion of our sales are made in U.S. dollars, a strengthening of the dollar could make our products less competitive. We enter into forward contracts with financial institutions to manage our currency exposure related to net assets and liabilities denominated in foreign currencies. These forward contracts are generally settled monthly. We do not enter into derivative financial instruments for trading purposes. As of February 28, 2009, we had five outstanding forward contracts with a total notional amount of $41.3 million that resulted in a net gain of $0.2 million. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to translation gains or losses, which are recorded net as a component of other comprehensive income. Interest Rate Risk Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We invest excess cash in marketable debt instruments of the U.S. government and its agencies, high-quality corporate debt securities, asset-backed and mortgage-backed debt securities and, by policy, limit the amount of credit exposure to any one issuer. Our investment policy is designed to protect and preserve invested funds by limiting default, market and investment risk. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if forced to sell securities which
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Table of Contentshave declined in market value due to changes in interest rates or other factors in the current unstable credit environment. As of February 28, 2009, we had an investment portfolio of fixed income securities totaling $7.6 million, excluding those classified as cash and cash equivalents. These securities are classified as available-for-sale and are recorded on the balance sheets at fair market value with unrealized gains or losses reported under Accumulated Other Comprehensive Income (Loss), a separate component of stockholders’ equity. Unrealized losses are charged against income when a decline in fair market value is determined to be other-than-temporary. The specific identification method is used to determine the cost of securities sold. As of February 28, 2009, a hypothetical 100 basis point increase in interest rates would result in an approximate $0.1 million decrease in the fair value of our available-for-sale debt securities. Credit Market Risk As of February 28, 2009, we held asset-backed securities and mortgage-backed securities totaling $1.3 and $0.7 million, respectively. These securities’ cash flows are funded by the principal and interest payments of underlying commercial, consumer or mortgage loans. Payments are typically made monthly over the lifetime of the underlying loans. The recent credit market instability may adversely impact our disposition of these securities at or near their quoted fair market value. We evaluate these investments at each balance sheet date. There is the risk that at future balance sheet dates we may record additional charges for a decline in the fair value that is considered other-than-temporary and a loss would be recognized in the income statement at that time.
Evaluation of Disclosure Controls and Procedures We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level. Changes in Internal Control over Financial Reporting There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Table of ContentsPART II—OTHER INFORMATION
Our legal proceedings are detailed in Note 10 and Note 18 to our Condensed Consolidated Financial Statements.
The following risk factors, as well as other factors of which we may be unaware or do not currently view as significant, could materially and adversely affect our future operating results and could cause actual events to differ materially from those predicted in the forward-looking statements we make about our business. Political and economic conditions are likely to materially adversely affect our revenue and results of operations. Our business has been and may continue to be affected by a number of factors that are beyond our control such as general geopolitical economic and business conditions, conditions in the financial services markets, and changes in the overall demand for enterprise software and services. Global economic conditions have deteriorated over the past few quarters. A severe and/or prolonged economic downturn could adversely affect our customers’ financial condition and the levels of business activity of our customers. Uncertainty about current global economic conditions has caused and may continue to cause businesses to postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for enterprise software and services. Reduced demand for enterprise software could result in a reduction in our future license revenue and a reduction in the rate at which our customers renew their maintenance agreements and procure consulting services. The current economic crisis affecting the banking system and financial markets and the current uncertainty in global economic conditions have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in credit, equity, currency and fixed income markets. There have been and may continue to be a number of follow-on effects from these economic developments and negative economic trends on our business, including the inability of customers to obtain credit to finance purchases of our products; customer insolvencies; decreased customer confidence to make purchasing decisions; decreased customer demand; and decreased customer ability to pay their trade obligations. If conditions in the global economy, U.S. economy or other key vertical or geographic markets remain uncertain or weaken further, such conditions could have a material adverse impact on our business, operating results and financial condition. In addition, if we are unable to successfully anticipate changing economic and political conditions, we may be unable to effectively plan for and respond to those changes, which could materially adversely affect our business and results of operations. Our future revenue is unpredictable, and we expect our quarterly operating results to fluctuate, which may cause our stock price to decline. As a result of the evolving nature of the markets in which we compete and the size of our customer agreements, we have difficulty accurately forecasting our revenue in any given period. In addition to the factors discussed elsewhere in this section, a number of factors may cause our revenue to fall short of our expectations, or those of stock market analysts and investors, or cause fluctuations in our operating results, including:
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Period-to-period comparisons of our operating results may not be a good indication of our future performance. Moreover, our operating results in some quarters have not in the past met, and may not in the future meet, the expectations of stock market analysts and investors. In addition, while we may in future years record positive net income and/or increases in net income over prior periods, we may not show period-over-period earnings per share growth or earnings per share growth that meets the expectations of stock market analysts and investors as a result of the number of our shares outstanding during such periods. In such case, our stock price may decline. Uneven growth and periods of contraction in the infrastructure software market have caused our revenue to decline in the past and could cause our revenue or results of operations to fall below expectations in the future. We earn a substantial portion of our revenue from licenses of our infrastructure software, including application integration software and sales of related services. We expect to earn substantially all of our revenue in the foreseeable future from sales of these products and services. Our future financial performance will depend on continued growth in the number of organizations demanding software and services for application integration and information delivery and companies seeking outside vendors to develop, manage and maintain this software for their critical applications. Lower spending by corporate and governmental customers around the world, which has had a disproportionate impact on information technology spending, has led to a reduction in sales in the past and may continue to do so in the future. Many of our potential customers have made significant investments in internally developed systems and would incur significant costs in switching to third-party products, which may substantially inhibit the growth of the market for infrastructure software. If the market fails to grow, or grows more slowly than we expect, our sales will be adversely affected. Also, even if corporate and governmental spending increases and companies make greater investments in information technology and infrastructure software, our revenue may not grow at the same pace. If we fail to manage our exposure to financial and securities market risk successfully, our operating results could be adversely impacted. We are exposed to financial market risks, including changes in interest rates, credit markets and prices of marketable equity and fixed-income securities. We do not use derivative financial instruments for speculative or trading purposes. The primary objective of most of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, our marketable investments are primarily investment grade, liquid, fixed-income securities and money market instruments denominated in U.S. dollars. If the carrying value of our investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to further write down the value of our investments, which could materially harm our results of operations and financial condition. Moreover, the performance of certain securities in our investment portfolio correlates with the credit condition of the United States financial sector. With the current unstable credit environment, we may incur significant realized, unrealized or impairment losses associated with these investments. Changes in foreign currency exchange rates could negatively affect our operating results. A significant portion of our net revenue and expenses are transacted in U.S. dollars. In addition, we also conduct our business in approximately 20 foreign currencies in EMEA and APJ. As a response to the risks of changes in value of foreign currency denominated transactions, we may enter into foreign currency forward contracts or other instruments, the majority of which mature within approximately one month. Our foreign currency forward contracts reduce, but do not eliminate, the impact of currency exchange rate movements. For example, we do not execute forward contracts in all currencies in which we conduct business. In addition, our hedging program may not reduce the impact of short-term or long-term volatility in foreign exchange rates. Accordingly, amounts denominated in such foreign currencies may fluctuate in value and produce significant earnings and cash flow volatility.
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Table of ContentsAny losses we incur as a result of our exposure to the credit risk of our customers and partners could harm our results of operations. We monitor individual customer payment capability in granting credit arrangements, seek to limit credit to amounts we believe the customers can pay, and maintain reserves we believe are adequate to cover exposure for doubtful accounts. As we have grown our revenue and customer base, our exposure to credit risk has increased. Any material losses to date as a result of customer defaults, could harm and have an adverse effect on our business, operating results and financial condition. Our stock price may be volatile, which could cause investors to incur significant losses. The stock market in general and the stock prices of technology companies in particular, have experienced volatility which has often been unrelated to the operating performance of any particular company or companies. In addition, uncertainty about current global economic conditions could also continue to increase the volatility of our stock price. During this fiscal quarter, our stock price has fluctuated between a high of $7.34 and a low of $4.12. If market or industry-based fluctuations continue, our stock price could decline in the future regardless of our actual operating performance and investors could incur significant losses. We may incur impairments to goodwill, intangible or long-lived assets. We review our goodwill, intangible and long-lived assets for impairment annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Significant negative industry or economic trends, including the lack of recovery in the market price of our common stock, reduced estimates of future cash flows or disruptions to our business could indicate that goodwill, intangible or long-lived assets might be impaired. If, in any period, our stock price decreases to the point where our market capitalization is less than our book value, this too could indicate a potential impairment and we may be required to record an impairment charge in that period. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance. We operate in highly competitive environments and projections of future operating results and cash flows may vary significantly from results. Additionally, if our analysis results in an impairment to our goodwill, we would be required to record a non-cash charge to earnings in our financial statements during a period in which such impairment is determined to exist. Our success depends on our ability to overcome significant competition and to offer products and enhancements that respond to emerging technological trends and customers’ needs. The market for our products and services is extremely competitive and subject to rapid change. We compete with a variety of large and small providers of infrastructure software, SOA, business optimization and BPM, including companies such as IBM, Microsoft, Oracle, Pegasystems, SAP and Software AG. We believe that of these companies, IBM has the potential to offer the most complete competitive set of products relative to our offerings. In addition, companies such as IBM, Microsoft, Oracle and SAP offer products outside our segment and routinely bundle their broader set of products with their infrastructure software products. Further, some of our competitors are expanding their competitive product offerings and market position through acquisitions and internal research and development. We expect additional competition from other established and emerging companies. We also face competition for certain aspects of our product and service offerings from major systems integrators. Further, we may face increasing competition from open source software providers such as MuleSource that provide software and intellectual property, typically without charging license fees, or from other competitors offering products through alternative business models, such as software as a service. If customers choose such alternatives over our proprietary software, our revenues and earnings could be adversely affected. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, product development and marketing resources, greater name recognition, and larger customer bases than we do. Continued consolidation in the software market may further strengthen our larger competitors. Our present or future competitors may be able to develop products comparable or superior to those we offer, adapt more quickly than we do to new technologies, evolving industry trends or customer requirements, or devote greater resources to the development, promotion and sale of their products than we do. Accordingly, we may not be able to compete effectively in our markets or competition may intensify and harm our business and operating results. If we are not successful in developing enhancements to existing products and new products in a timely manner, achieving customer acceptance for our existing and new product offerings or generating higher average selling prices, our gross margins may decline, and our business and operating results may suffer. Furthermore, any of our new product offerings
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Table of Contentsor significant enhancements to current product offerings could cause some customers to delay making new or additional purchases while they fully evaluate any new offerings we might have introduced to the market, which in turn may slow sales and adversely affect operating results for an indeterminate period of time. Also, we may not execute successfully on our product plans because of errors in product planning or timing, technical hurdles that we fail to overcome in a timely fashion or a lack of appropriate resources. This could result in competitors providing those solutions before we do and loss of market share, net sales and earnings. Our strategy contemplates future acquisitions that may result in us incurring unanticipated expenses or additional debt, difficulty in integrating our operations and dilution to our stockholders and may harm our operating results. Our success depends in part on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. We expect to acquire complementary businesses, products or technologies in the future as part of our corporate strategy. In this regard, we have made strategic acquisitions, including the acquisition of Insightful Corporation in fiscal 2008 and Spotfire Holdings, Inc. in fiscal 2007. We do not know if we will be able to complete any future acquisitions or that we will be able to successfully integrate any acquired business, operate it profitably or retain its key employees. Integrating any newly acquired business, product or technology could be expensive and time-consuming, could disrupt our ongoing business and financial performance and could distract our management. Therefore, we may not be able, either immediately post-acquisition or ever, to replicate the pre-acquisition revenues achieved by companies that we acquire or achieve the benefits of the acquisition we anticipated in valuing the businesses, products or technologies we acquire. Furthermore, the costs of integrating acquired companies in international transactions can be particularly high, due to local laws and regulations. If we are unable to integrate any newly acquired entity, products or technology effectively, our business, financial condition and operating results would suffer. In addition, any amortization or impairment of acquired intangible assets, stock-based compensation or other charges resulting from the costs of acquisitions could harm our operating results. In addition, we may face competition for acquisition targets from larger and more established companies with greater financial resources. Also, in order to finance any acquisition, we may need to raise additional funds through public or private financings or use our cash reserves. In that event, we could be forced to obtain equity or debt financing on terms that are not favorable to us or that result in dilution to our stockholders. Use of our cash reserves for acquisitions could limit our financial flexibility in the future. The terms of existing loan agreements may place limits on our ability to incur additional debt to finance acquisitions. If we are not able to acquire strategically attractive businesses, products or technologies, we may not be able to remain competitive in our industry or achieve our overall growth plans. Increases in service revenues may decrease overall margins. We may in the future realize a higher percentage of our revenue from services, which has a lower profit margin than license or maintenance revenue. As a result, if services revenue increase as a percentage of total revenue, our overall profit margin may decrease, which could impact our stock price. Because the value of our equity incentive programs has diminished as a retention and recruiting tool, we may need to change our compensation packages in order to remain competitive which in turn could negatively affect our profit margins. We have historically used equity incentive programs, such as employee stock options and stock purchase plans, as a part of overall employee compensation arrangements. We have changed our stock purchase plan, reduced the size and number of stock option grants we give to our employees, changed the form of equity compensation we give to some of our employees and may make further changes to our equity compensation programs, all of which may decrease the effectiveness of our plans as employee retention and recruiting tools. In addition, the decline in our stock price has negatively impacted, and may continue to negatively impact, the value of such equity incentives, thereby diminishing the value of such incentive programs to employees and decreasing the effectiveness of such programs as retention and recruiting tools. Given this, we may need to change our compensation packages to employees to remain competitive which could negatively affect our profit margins. If we cannot successfully recruit, retain and integrate highly skilled employees, we may not be able to execute our business strategy effectively. If we fail to retain and recruit key management, sales and other skilled employees, our business and our ability to obtain new customers, develop new products and provide acceptable levels of customer service could suffer. As we grow, we must invest significantly in building our sales, marketing and engineering groups. Competition for these people in the software industry is intense, and we may not be able to successfully recruit, train or retain qualified personnel. We are competing against companies with greater financial resources and name recognition for these employees, and as such, there is no assurance that we will be able to meet our hiring needs or hire the most qualified candidates. The success of our business is also heavily dependent on the leadership of our key management personnel, including Vivek Ranadivé, our Chairman and Chief Executive Officer. The loss of one or more key employees could adversely affect our continued operations.
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Table of ContentsIn addition, we must successfully integrate new employees into our operations and generate sufficient revenues to justify the costs associated with these employees. If we fail to successfully integrate employees or to generate the revenue necessary to offset employee-related expenses, we may be forced to reduce our headcount, which would force us to incur significant expenses and would harm our business and operating results. The inability to upsell to our current customers or the loss of any significant customer could harm our business and cause our stock price to decline. We do not have long-term sales contracts with any of our customers. Our customers may choose not to purchase our products or not to use our services in the future. As a result, a customer that generates substantial revenue for us in one period may not be a source of revenue in subsequent periods. Any inability on our part to upsell to and generate revenues from our existing customers or the loss of a significant customer could adversely affect our business and operating results. Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products. We cannot be certain that our products do not infringe issued patents or other intellectual property rights of others. In addition, our use of open source software components in our products may make us vulnerable to claims that our products infringe third-party intellectual property rights, in particular because many of the open source software components we may incorporate with our products may be developed by numerous independent parties over whom we exercise no supervision or control. “Open source software” is software that is covered by a license agreement which permits the user to liberally copy, modify and distribute the software, typically free of charge. Further, because patent applications in the United States and many other countries are not publicly disclosed at the time of filing, applications covering technology used in our software products may have been filed without our knowledge. We may be subject to legal proceedings and claims from time to time, including claims of alleged infringement of the patents, trademarks and other intellectual property rights of third parties by us or our licensees in connection with their use of our products. Our software license agreements typically provide for indemnification of our customers for intellectual property infringement claims. Intellectual property litigation is expensive and time consuming and could divert our management’s attention away from running our business and seriously harm our business. If we were to discover that our products violated the intellectual property rights of others, we would have to obtain licenses from these parties in order to continue marketing our products without substantial reengineering. We might not be able to obtain the necessary licenses on acceptable terms or at all, and if we could not obtain such licenses, we might not be able to reengineer our products successfully or in a timely fashion. If we fail to address any infringement issues successfully, we would be forced to incur significant costs, including damages and potentially satisfying indemnification obligations that we have with our customers, and we could be prevented from selling certain of our products. Our intellectual property or proprietary rights could be misappropriated, which could force us to become involved in expensive and time-consuming litigation. We regard our intellectual property as critical to our success. Accordingly, we rely upon a combination of copyrights, service marks, trademarks, trade secret rights, patents, confidentiality agreements and licensing agreements to protect our intellectual property. Despite these protections, a third party could misappropriate our intellectual property. Any misappropriation of our proprietary information by third parties could harm our business, financial condition and operating results. In addition, the laws of some countries do not provide the same level of protection of our proprietary information as do the laws of the United States. If our proprietary information or material were misappropriated, we might have to engage in litigation to protect it. We might not succeed in protecting our proprietary information if we initiate intellectual property litigation, and, in any event, such litigation would be expensive and time-consuming, could divert our management’s attention away from running our business and could seriously harm our business. The use of open source software in our products may expose us to additional risks. Certain open source software is licensed pursuant to license agreements that require a user who distributes the open source software as a component of the user’s software to disclose publicly part or all of the source code to the user’s software. This effectively renders what was previously proprietary software open source software. As competition in our markets increases, we must strive to be cost-effective in our product development activities. Many features we may wish to add to our products in the future may be available as open source software and our development team may wish to make use of this software to reduce development costs and speed up the development process. While we carefully monitor the use of all open source software and try to ensure that no open source software is used in such a way as to require us to disclose the source code to the related product, such use could inadvertently occur. Additionally, if a third party has incorporated certain
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Table of Contentstypes of open source software into its software but has failed to disclose the presence of such open source software and we embed that third party software into one or more of our products, we could, under certain circumstances, be required to disclose the source code to our product. This could have a material adverse effect on our business. Market acceptance of new platforms, standards and technologies may require us to undergo the expense of developing and maintaining compatible product lines. Our software products can be licensed for use with a variety of platforms, standards and technologies, and we are constantly evaluating the feasibility of adding new platforms, standards and technologies. There may be future or existing platforms, standards and technologies that achieve popularity in the marketplace which may not be architecturally compatible with our software products. In addition, the effort and expense of developing, testing and maintaining software products will increase as more platforms, standards and technologies achieve market acceptance within our target markets. If we are unable to achieve market acceptance of our software products or adapt to new platforms, standards and technologies, our sales and revenues will be adversely affected. Developing and maintaining different software products could place a significant strain on our resources and software product release schedules, which could harm our revenue and financial condition. If we are not able to develop software for accepted platforms, standards and technologies, our license and service revenues and our gross margins could be adversely affected. In addition, if the platforms, standards and technologies we have developed software for are not accepted, our license and service revenues and our gross margins could be adversely affected. We may have exposure to additional tax liabilities. As a multinational corporation, we are subject to income taxes in both the United States and various foreign jurisdictions. Significant judgment is required in determining our global provision for income taxes and other tax liabilities. In the ordinary course of a global business, there are many intercompany transactions and calculations where the ultimate tax determination is uncertain. Our income tax returns are routinely subject to audits by tax authorities. Although we regularly assess the likelihood of adverse outcomes resulting from these examinations to determine our tax estimates, we cannot assure you that the final determination of tax audits or tax disputes will not have an adverse effect on our results of operations and financial condition. We are also subject to non-income taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes, in both the United States and various foreign jurisdictions. We are regularly under audit by tax authorities with respect to these non-income taxes and may have exposure to additional non-income tax liabilities which could have an adverse effect on our results of operations and financial condition. In addition, our future effective tax rates could be favorably or unfavorably affected by changes in tax rates, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws or their interpretation. Such changes could have a material adverse impact on our financial results. Changes in existing financial accounting standards or practices, or taxation rules or practices may adversely affect our results of operations. Changes in existing accounting or taxation rules or practices, new accounting pronouncements or taxation rules, or varying interpretations of current accounting pronouncements or taxation practice could have a significant adverse effect on our results of operations or the manner in which we conduct our business. Further, such changes could potentially affect our reporting of transactions completed before such changes are effective. For example, on December 1, 2009, we will adopt Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), Business Combinations, (“SFAS No. 141(R)”), which requires acquisition-related costs to be expensed as incurred, restructuring costs generally to be expensed in periods subsequent to the acquisition date, in-process research and development to be capitalized as an intangible asset with an indefinite life, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period, which will impact income tax expense. The impact that SFAS No. 141(R) will have on our consolidated financial position, results of operations and cash flows will be dependent on the number and size of business combinations that we consummate subsequent to the adoption of the standard, as well as the valuation and allocation of the net assets acquired. We operate internationally and face risks attendant to those operations. We earn a significant portion of our total revenues from international sales generated through our foreign direct and indirect operations. As a result of these sales operations, we face risks arising from local political, legal and economic factors such as the general economic conditions in each country or region, varying regulatory requirements and compliance with
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Table of Contentsinternational and local trade, labor and other laws including the Foreign Corrupt Practices Act and export control laws. We may also face difficulties in managing our international operations, collecting receivables in a timely fashion and repatriating earnings. Any of these factors, either individually or in combination, could materially impact our international operations and adversely affect our business as a whole. Our software may have defects and errors that could lead to a loss of revenues or product liability claims. Our products and platforms use complex technologies and, despite extensive testing and quality control procedures, may contain defects or errors, especially when first introduced or when new versions or enhancements are released. If defects or errors are discovered after commercial release of either new versions or enhancements of our products and platforms:
If any or all of the foregoing occur, we may lose revenues, incur higher operating expenses and lose market share, any of which could severely harm our financial condition and operating results. Any unauthorized, and potentially improper, actions of our personnel could adversely affect our business, operating results and financial condition. The recognition of our revenue depends on, among other things, the terms negotiated in our contracts with our customers. Our personnel may act outside of their authority and negotiate additional terms without our knowledge. We have implemented policies to prevent and discourage such conduct, but there can be no assurance that such policies will be followed. For instance, in the event that our sales personnel have negotiated terms that do not appear in the contract and of which we are unaware, whether the additional terms are written or verbal, we could be prevented from recognizing revenue in accordance with our plans. Furthermore, depending on when we learn of unauthorized actions and the size of transactions involved, we may have to restate revenue for a previously reported period, which would seriously harm our business, operating results and financial condition. The outcome of litigation pending against us could require us to expend significant resources and could harm our business and financial resources. Note 10 and Note 18 to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q describes the litigation pending against us and our directors and officers. The uncertainty associated with substantial unresolved lawsuits could harm our business, financial condition and reputation. The defense of the lawsuits could result in the diversion of our management’s time and attention away from business operations, which could harm our business. Negative developments with respect to the lawsuits could cause our stock price to decline. In addition, although we are unable to determine the amount, if any, that we may be required to pay in connection with the resolution of the lawsuits by settlement or otherwise, any such payment could seriously harm our financial condition and liquidity. Natural or other disasters could disrupt our business and result in loss of revenue or in higher expenses. Natural disasters, terrorist activities and other business disruptions could seriously harm our revenue and financial condition and increase our costs and expenses. Our corporate headquarters and many of our operations are located in California, a seismically active region. In addition, many of our current and potential customers are concentrated in a few geographic areas. A natural disaster in one of these regions could have a material adverse impact on our U.S. and foreign operations, operating results and financial condition. Further, any unanticipated business disruption caused by Internet security threats, damage to global communication networks or otherwise could have a material adverse impact on our operating results. Any failure by us to meet the requirements of current or newly-targeted customers may have a detrimental impact on our business or operating results. We may wish to expand our customer base into markets in which we have limited experience. In some cases, customers in different markets, such as financial services or government, have specific regulatory or other requirements which we must
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Table of Contentsmeet. For example, in order to maintain contracts with the United States government, we must comply with specific rules and regulations relating to and that govern such contracts. Government contracts are generally subject to audits and investigations which could result in various civil and criminal penalties and administrative sanctions, including termination of contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions or debarment from future government business. If we fail to meet such requirements in the future, we could be subject to civil or criminal liability or a reduction of revenue which could harm our business, operating results and financial condition. Reuters has a royalty free license to our products. We license from Reuters the intellectual property that was incorporated into early versions of some of our software products. We do not own this licensed technology. Because Reuters has access to intellectual property used in our products, it could use this intellectual property to compete with us. Reuters is not restricted from using the licensed technology it has licensed to us to produce products that compete with our products, and it can grant limited licenses to the licensed technology to others who may compete with us. In addition, we must license to Reuters all of the products we own and the source code for one of our messaging products, through December 2012. This may place Reuters in a position to more easily develop products that compete with ours. Some provisions in our certificate of incorporation and bylaws, as well as a stockholder rights plan, may have anti-takeover effects. We have a stockholder rights plan providing for one right for each outstanding share of our common stock. Each right, when exercisable, entitles the registered holder to purchase certain securities at a specified purchase price. The rights plan may have the anti-takeover effect of causing substantial dilution to a person or group that attempts to acquire TIBCO on terms not approved by our Board of Directors. The existence of the rights plan could limit the price that certain investors might be willing to pay in the future for shares of our common stock and could discourage, delay or prevent a merger or acquisition that stockholders may consider favorable. In addition, provisions of our current certificate of incorporation and bylaws, as well as Delaware corporate law, could make it more difficult for a third party to acquire us without the support of our Board of Directors, even if doing so would be beneficial to our stockholders.
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Table of ContentsSIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: April 9, 2009
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