form10q_093009.htm





UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
 
FORM 10-Q
________________
 
 
R
                                   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
                                                          For the quarterly period ended September 30, 2009

OR

 
£
                                   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Commission File Number: 0-25871

INFORMATICA CORPORATION
(Exact name of registrant as specified in its charter)

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

100 Cardinal Way
Redwood City, California 94063
(Address of principal executive offices, including zip code)

(650) 385-5000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) 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 R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes £ 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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer R       Accelerated filer £       Non-accelerated filer £        Smaller reporting company £


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). £ Yes R No

As of October 30, 2009, there were approximately 89,450,000 shares of the registrant’s common stock outstanding.
 
 





INFORMATICA CORPORATION
 
Table of Contents

 
Page No.
 
3
3
4
5
6
30
48
50
51
51
51
64
65
66
67
EXHIBIT 31.1  
EXHIBIT 31.2  
EXHIBIT 32.1  



PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INFORMATICA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
 
September 30,
2009
   
December 31,
2008
 
   
(Unaudited)
       
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 138,457     $ 179,874  
Short-term investments
    284,932       281,055  
Accounts receivable, net of allowances of $3,522 and $2,558, respectively
    83,625       87,492  
Deferred tax assets
    24,273       22,336  
Prepaid expenses and other current assets
    13,560       12,498  
Total current assets
    544,847       583,255  
                 
Property and equipment, net
    8,042       9,063  
Goodwill
    287,569       219,063  
Other intangible assets, net
    68,808       35,529  
Long-term deferred tax assets
    2,481       7,294  
Other assets
    8,324       8,908  
Total assets
  $ 920,071     $ 863,112  
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable
  $ 5,172     $ 7,376  
Accrued liabilities
    33,261       34,541  
Accrued compensation and related expenses
    29,058       29,365  
Income taxes payable and deferred tax liability
    12,956        
Accrued facilities restructuring charges
    20,567       19,529  
Deferred revenues
    126,040       120,892  
Total current liabilities
    227,054       211,703  
                 
Convertible senior notes
    201,000       221,000  
Accrued facilities restructuring charges, less current portion
    35,973       44,939  
Long-term deferred revenues
    6,033       8,847  
Long-term income taxes payable
    12,180       20,668  
Total liabilities
    482,240       507,157  
                 
Commitments and contingencies (Note 12)
               
                 
Stockholders’ equity:
               
Common stock
    89       87  
Additional paid-in capital
    412,073       374,091  
Accumulated other comprehensive income (loss)
    911       (3,741 )
Retained earnings (accumulated deficit)
    24,758       (14,482 )
Total stockholders’ equity
    437,831       355,955  
Total liabilities and stockholders’ equity
  $ 920,071     $ 863,112  

See accompanying notes to condensed consolidated financial statements.


INFORMATICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

 
 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
 
2009
   
2008
   
2009
   
2008
 
Revenues:
                       
License
  $ 49,981     $ 45,846     $ 142,770     $ 138,578  
Service
    73,413       67,971       207,026       192,709  
Total revenues
    123,394       113,817       349,796       331,287  
                                 
Cost of revenues:
                               
License
    648       722       2,024       2,312  
Service
    18,759       20,404       55,605       61,569  
Amortization of acquired technology
    2,081       1,283       5,497       2,854  
Total cost of revenues
    21,488       22,409       63,126       66,735  
                                 
Gross profit
    101,906       91,408       286,670       264,552  
                                 
Operating expenses:
                               
Research and development
    19,978       18,263       57,089       54,484  
Sales and marketing
    47,484       43,667       135,366       132,420  
General and administrative
    8,845       9,412       30,646       26,927  
Amortization of intangible assets
    2,754       1,502       7,239       2,857  
Facilities restructuring charges
    557       896       1,961       2,764  
Purchased in-process research and development
                      390  
Total operating expenses
    79,618       73,740       232,301       219,842  
                                 
Income from operations
    22,288       17,668       54,369       44,710  
                                 
Interest income
    1,295       3,191       4,651       11,698  
Interest expense
    (1,611 )     (1,830 )     (4,863 )     (5,431 )
Other income, net
    189       139       964       556  
Income before provision for income taxes
    22,161       19,168       55,121       51,533  
Provision for income taxes
    5,969       5,787       15,881       15,425  
Net income
  $ 16,192     $ 13,381     $ 39,240     $ 36,108  
Basic net income per common share
  $ 0.18     $ 0.15     $ 0.45     $ 0.41  
Diluted net income per common share
  $ 0.17     $ 0.14     $ 0.41     $ 0.38  
Shares used in computing basic net income per common share
    88,283       88,570       87,837       88,422  
Shares used in computing diluted net income per common share
    103,516       103,740       102,507       103,735  
 


See accompanying notes to condensed consolidated financial statements.


INFORMATICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
 
 
Nine Months Ended
September 30,
 
 
 
2009
   
2008
 
Operating activities:
           
Net income
  $ 39,240     $ 36,108  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    4,063       4,199  
Allowance for doubtful accounts
    221       742  
Gain on early extinguishment of debt
    (337 )      
Share-based payments
    13,132       11,984  
Deferred income taxes
    (3,421 )     (5,637 )
Tax benefits from share-based payments
    2,631       7,067  
Excess tax benefits from share-based payments
    (2,812 )     (5,237 )
Amortization of intangible assets and acquired technology
    12,736       5,711  
Non-cash facilities restructuring charges
    1,961       2,764  
Other non-cash items
    (44 )     636  
Changes in operating assets and liabilities:
               
Accounts receivable
    7,425       16,143  
Prepaid expenses and other assets
    (300 )     (10,022 )
Accounts payable and other current liabilities
    (20,085 )     (7,363 )
Income taxes payable
    5,709       2,788  
Accrued facilities restructuring charges
    (9,766 )     (9,222 )
Deferred revenues
    (2,825 )     1,460  
Net cash provided by operating activities
    47,528       52,121  
Investing activities:
               
Purchases of property and equipment
    (2,037 )     (3,162 )
Purchases of marketable securities and other investments
    (306,577 )     (201,302 )
Purchase of patent
    (2,420 )      
Maturities of investments
    284,495       254,935  
Sales of investments
    18,097       54,351  
Business acquisitions, net of cash acquired
    (86,024 )     (79,844 )
Transfer from restricted cash
          12,016  
Net cash provided by (used in) investing  activities
    (94,466 )     36,994  
Financing activities:
               
Net proceeds from issuance of common stock
    28,832       26,089  
Repurchases and retirement of common stock
    (9,021 )     (37,260 )
Repurchases of convertible senior notes
    (19,200 )      
Excess tax benefits from share-based payments
    2,812       5,237  
Net cash provided by (used in) financing activities
    3,423       (5,934 )
Effect of foreign exchange rate changes on cash and cash equivalents
    2,098       (5,222 )
Net increase (decrease) in cash and cash equivalents
    (41,417 )     77,959  
Cash and cash equivalents at beginning of period
    179,874       203,661  
Cash and cash equivalents at end of period
  $ 138,457     $ 281,620  


See accompanying notes to condensed consolidated financial statements.


5

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements of Informatica Corporation (“Informatica,” or the “Company”) have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States of America. However, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the financial statements include all adjustments necessary, which are of a normal and recurring nature for the fair presentation of the results of the interim periods presented. All of the amounts included in this Report related to the condensed consolidated financial statements and notes thereto as of and for the three and nine months ended September 30, 2009 and 2008 are unaudited. The interim results presented are not necessarily indicative of results for any subsequent interim period, the year ending December 31, 2009, or any future period.

The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments, and assumptions. The Company believes that the estimates, judgments, and assumptions upon which it relies are reasonable based on information available at the time that these estimates, judgments, and assumptions were made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates and actual results, Informatica’s financial statements would be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also instances that management’s judgment in selecting an available alternative would not produce a materially different result.

These unaudited, condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2008 included in the Company’s Annual Report on Form 10-K filed with the SEC. The condensed consolidated balance sheet as of December 31, 2008 has been derived from the audited consolidated financial statements of the Company.

 Informatica, in accordance with Financial Accounting Standards Board (“FASB”) Subsequent Events (Accounting Standards Codification (“ASC”) 855-10-50-1), has evaluated its subsequent events through the date and time that the financial statements were issued on November 5, 2009.

Revenue Recognition

The Company derives its revenues from software license fees, maintenance fees, and professional services, which consist of consulting and education services. The Company recognizes revenue in accordance with FASB Software Revenue Recognition (ASC 985-605-25), FASB Revenue Recognition for Construction-Type and Production-Type Contracts (ASC 605-35), and the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 (“SAB No. 104”), Revenue Recognition, and other authoritative accounting literature.

Under ASC 985-605-25, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable.

Persuasive evidence of an arrangement exists. The Company determines that persuasive evidence of an arrangement exists when it has a written contract, signed by both the customer and the Company, and written purchase authorization.

Delivery has occurred. Software is considered delivered when title to the physical software media passes to the customer or, in the case of electronic delivery, when the customer has been provided with the access codes to download and operate the software.

Fee is fixed or determinable. The Company considers arrangements with extended payment terms not to be fixed or determinable. If the license fee in an arrangement is not fixed or determinable, revenue is recognized as payments become due. Revenue arrangements with resellers and distributors require evidence of sell-through, that is, persuasive evidence that the products have been sold to an identified end user. The Company’s standard agreements do not contain product return rights.

6

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Collection is probable. The Company assesses first the credit-worthiness and collectibility at a country level based on the country’s overall economic climate and general business risk. Then, for the customers in the countries that are deemed credit-worthy, it assesses credit and collectibility based on their payment history and credit profile. When a customer is not deemed credit-worthy, revenue is recognized at the time that payment is received.

The Company also enters into Original Equipment Manufacturer (“OEM”) arrangements that provide for license fees based on inclusion of technology and/or products in the OEM’s products. These arrangements provide for fixed and irrevocable royalty payments. The Company recognizes royalty payments as revenues based on the royalty report that it receives from the OEMs. In the case of OEMs with fixed royalty payments, revenue is recognized upon execution of the agreement, delivery of the software, and when all other criteria for revenue recognition have been met.

Multiple contracts with a single counterparty executed within close proximity of each other are evaluated to determine if the contracts should be combined and accounted for as a single arrangement. The Company recognizes revenues net of applicable sales taxes, financing charges absorbed by Informatica, and amounts retained by our resellers and distributors, if any.

The Company’s software license arrangements include the following multiple elements: license fees from our core software products and/or product upgrades that are not part of post-contract services, maintenance fees, consulting, and/or education services. The Company uses the residual method to recognize license revenue when the license arrangement includes elements to be delivered at a future date and vendor-specific objective evidence (“VSOE”) of fair value exists to allocate the fee to the undelivered elements of the arrangement. VSOE is based on the price charged when an element is sold separately. If VSOE does not exist for any undelivered software product element of the arrangement, all revenue is deferred until all elements have been delivered, or VSOE is established. If VSOE does not exist for any undelivered services elements of the arrangement, all revenue is recognized ratably over the period that the services are expected to be performed. If the software arrangement includes significant modification or customization of the software, software license revenue is recognized as the consulting services revenue is recognized.

The Company recognizes maintenance revenues, which consist of fees for ongoing support and product updates, ratably over the term of the contract, typically one year.

Consulting revenues are primarily related to implementation services and product configurations performed on a time-and-materials basis and, occasionally, on a fixed fee basis. Education services revenues are generated from classes offered at both Company and customer locations. Revenues from consulting and education services are recognized as the services are performed.

Deferred revenues include deferred license, maintenance, consulting, and education services revenues. For customers not deemed credit-worthy, the Company’s practice is to net unpaid deferred revenue for that customer against the related receivable balance.

Investments

Investments are comprised of marketable securities, which consist primarily of commercial paper, Federal agency and U.S. government notes and bonds, corporate bonds and municipal securities with original maturities beyond 90 days. All marketable securities are held in the Company’s name and managed by four major financial institutions. The Company’s marketable securities are classified as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax, recorded in stockholders’ equity. Informatica has classified its debt securities as available-for-sale since they would be available-for-sale due to any changes in market conditions or needs for liquidity. Further, the Company has classified all available-for-sale marketable securities, including those with original maturity dates greater than one year, as short-term investments.

Informatica applies the provisions of Recognition and Presentation of Other-Than-Temporary Impairments (ASC 320-10-35) to its debt securities classified as available-for-sale and evaluates them for other-than-temporary impairment based on the following three criteria: (i) Informatica has decided to sell the debt security, (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, and (iii) the Company does not expect to recover the security’s entire amortized cost basis from the present value of cash flows expected to be collected from the debt security (“credit loss”). In determining the amount of credit loss, the Company compares its best estimate of the present value of the cash flows expected to be collected from the security with the amortized cost basis of the security. Any shortfall resulted from this comparison (credit loss) is reflected as other income or expense in the condensed consolidated statement of income. Further, Informatica also considers other factors such as

7

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



industry analysts’ reports and credit ratings, in addition to the above three criteria to determine the other-than-temporary impairment status of its investments.

If Informatica intends to sell an impaired debt security and is more likely than not that it will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the impairment is considered other-than-temporary and should be recognized in current earnings in an amount equal to the entire difference between fair value and amortized cost.

If a credit loss exists, but Informatica does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into (i) the estimated amount relating to credit loss and (ii) the amount relating to all other factors. Only the estimated credit loss amount is recognized currently in earnings, with the remainder of the loss amount recognized in other comprehensive income.

Realized gains or losses and other-than-temporary impairments, if any, on available-for-sale securities will be reported in other income or expense as incurred. The Company recognizes realized gains and losses upon sales of investment and reclassifies unrealized gains and losses out of accumulated other comprehensive income into earnings using the specific identification method.

Fair Value Measurement of Financial Assets and Liabilities

 
FASB Fair Value Measurements and Disclosures (ASC 820-10-35) establishes a three-tier fair 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 the reporting entity to develop its own assumptions.

Further, FASB Fair Value Measurements and Disclosures (ASC 820-10-35) allows the Company to measure the fair value of its financial assets and liabilities based on one or more of the three following valuation techniques:
 
 
Market approach. Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities;
 
 
 
Cost approach. Amount that would be required to replace the service capacity of an asset (replacement cost); and

 
Income approach. Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing, and excess earnings models).


8

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The following table summarizes the fair value measurement classification of Informatica as of September 30, 2009 (in thousands):

 
 
 
 
 
 
 
 
Total
   
Quoted
Prices in
Active
Markets for
Identical
Assets
 (Level 1)
   
 
Significant
Other
Observable
Inputs
(Level 2)
   
 
 
 Significant
Unobservable
Inputs
(Level 3)
 
Assets:
                       
Money market funds (1)
  $ 26,613     $ 26,613     $     $  
Marketable securities (2)
    290,460             290,460        
Total money market funds and marketable securities
    317,073       26,613       290,460        
Investment in equity interest (3)
    3,000                   3,000  
Foreign currency derivatives (4)
    126             126        
Total
  $ 320,199     $ 26,613     $ 290,586     $ 3,000  
Liabilities:
                               
Convertible senior notes
  $ 251,853     $ 251,853     $     $  
Total
  $ 251,853     $ 251,853     $     $  

The following table summarizes the fair value measurement classification of Informatica as of December 31, 2008 (in thousands):

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
   
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
   
 
Significant
Other
Observable
Inputs
(Level 2)
   
 
 
Significant
Unobservable
Inputs
(Level 3)
 
Assets:
                       
Money market funds (1)
  $ 25,542     $ 25,542     $     $  
Marketable securities (2)
    322,796             322,796        
Total money market funds and marketable securities
    348,338       25,542       322,796        
Investment in equity interest (3)
    3,000                   3,000  
Foreign currency derivatives (4)
    155             155        
Total
  $ 351,493     $ 25,542     $ 322,951     $ 3,000  
Liabilities:
                               
Convertible senior notes
  $ 204,259     $ 204,259     $     $  
Total
  $ 204,259     $ 204,259     $     $  
____________

 
 
(1)
Included in cash and cash equivalents on the condensed consolidated balance sheets.
     
 
(2)
Included in either cash and cash equivalents or short-term investments on the condensed consolidated balance sheets.
     
 
(3)
Included in other non-current assets on the condensed consolidated balance sheets.
     
 
(4)
Included in prepaid expenses and other current assets on the condensed consolidated balance sheets.
     


9

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Marketable Securities and Convertible Senior Notes

Informatica uses a market approach for determining the fair value of all its Level 1 and Level 2 marketable securities financial assets and Convertible Senior Notes liabilities.

Foreign Currency Derivatives and Hedging Instruments

Informatica uses the income approach to value the derivatives, using observable Level 2 market expectations at measurement date and standard valuation techniques to convert future amounts to a single discounted present amount, assuming that participants are motivated but not compelled to transact. Level 2 inputs are limited to quoted prices that are observable for the asset and liabilities, which include interest rates and credit risk. The Company has used mid-market pricing as a practical expedient for fair value measurements. Key inputs for currency derivatives are the spot rates, forward rates, interest rates, and credit derivative markets. The spot rate for each currency is the same spot rate used for all balance sheet translations at the measurement date and is sourced from the Federal Reserve Bulletin. The following values are interpolated from commonly quoted intervals available from Bloomberg: forward points and the London Interbank Offered Rate (LIBOR) used to discount and fair value assets and liabilities. One-year credit default swap spreads identified per counterparty at month end in Bloomberg are used to discount derivative assets for counterparty non-performance risk, all of which have terms of less than 12 months. The Company discounts derivative liabilities to reflect the Company’s own potential non-performance risk to lenders and has used the spread over LIBOR on its most recent corporate borrowing rate.

The counterparty associated with Informatica’s foreign currency forward contracts is a large credit worthy financial institution- and the derivatives transacted with this entity are relatively short in duration; therefore, the Company does not consider counterparty concentration and non-performance material risks at this time. Both the Company and the counterparty are expected to perform under the contractual terms of the instruments.

See Note 5. Other Comprehensive Income, Note 6. Derivative Financial Instruments, and Note 12. Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements for a further discussion.

Investment in Equity Securities

The Company also held a $3 million investment in the preferred stock of a privately-held company at September 30, 2009, which was classified as Level 3 for value measurement purposes. In determining the fair value of this investment, the Company uses the cash flow of the entity against its own cash flow assumptions at the time that investment was made for the determination of the fair value of this investment.


Note 2.  Cash, Cash Equivalents, and Short-Term Investments

The Company’s marketable securities are classified as available-for-sale as of the balance sheet date and are reported at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income in the stockholders’ equity, net of tax. Realized gains and losses and other-than-temporary impairments, if any, on available-for-sale securities are reported in other income or expense as incurred.

For the three and nine months ended September 30, 2009 and 2008, the realized gains recognized were not material. The realized gains are included in other income of the condensed consolidated statements of income for the respective periods. The cost of securities sold was determined based on the specific identification method.


10

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The following is a summary of the Company’s investments as of September 30, 2009 and December 31, 2008 (in thousands):

   
September 30, 2009
 
 
 
 
 
Amortized
Cost Basis
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
 
Cash
  $ 106,316     $     $     $ 106,316  
Cash equivalents:
                               
Money market funds
    26,613                   26,613  
Municipal notes and bonds
    5,535             (7 )     5,528  
Total cash equivalents
    32,148             (7 )     32,141  
Total cash and cash equivalents
    138,464             (7 )     138,457  
Short-term investments:
                               
Commercial paper
    12,960                   12,960  
Certificates of deposits
    5,280                   5,280  
Corporate notes and bonds
    69,386       552       (11 )     69,927  
Federal agency notes and bonds
    121,105       561       (3 )     121,663  
U.S. government notes and bonds
    25,547       73             25,620  
Municipal notes and bonds
    49,324       167       (9 )     49,482  
Total short-term investments *
    283,602       1,353       (23 )     284,932  
Total cash, cash equivalents, and short-term investments **
  $ 422,066     $ 1,353     $ (30 )   $ 423,389  
___________

*
 
There are a total of 16 investments for a total amortized cost basis of $33 million which are in the gross unrealized loss position at September 30, 2009.
 
**
 
Total estimated fair value above included $317 million comprised of cash equivalents and short-term investments at September 30, 2009.

In determining whether a credit loss exists, FASB Investments – Debt and Equity Securities (ASC 320-10-65) requires that an entity compares its best estimate of the present value of the cash flows expected to be collected from the security with the amortized cost basis of the security. Any shortfall in that comparison represents a credit loss. Informatica has determined that no credit loss has occurred with respect to its investments in debt securities for the three months ended September 30, 2009 since it neither intended to sell nor it was more likely than not that it would have been required to sell such securities.

   
December 31, 2008
 
 
 
 
 
 Amortized
Cost  Basis
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
 
Cash
  $ 112,591     $     $     $ 112,591  
Cash equivalents:
                               
Money market funds
    25,542                   25,542  
Commercial paper
    9,741                   9,741  
Federal agency notes and bonds
    17,996       4             18,000  
U.S. government notes and bonds
    14,000                   14,000  
Total cash equivalents
    67,279       4             67,283  
Total cash and cash equivalents
    179,870       4             179,874  
Short-term investments:
                               
Commercial paper
    43,125                   43,125  
Corporate notes and bonds
    38,569       174       (18 )     38,725  
Federal agency notes and bonds
    133,220       1,015       (1 )     134,234  
U.S. government notes and bonds
    61,569       266             61,835  
Municipal notes and bonds
    3,134       3       (1 )     3,136  
Total short-term investments *
    279,617       1,458       (20 )     281,055  
Total cash, cash equivalents, and short-term investments **
  $ 459,487     $ 1,462     $ (20 )   $ 460,929  
___________

11

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



*
 
There are a total of 9 investments for a total amortized cost basis of $20 million which are in the gross unrealized loss position at December 31, 2008.
 
**
 
Total estimated fair value above included $348 million comprised of cash equivalents and short-term investments at December 31, 2008.

The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2009 (in thousands):

   
Less Than 12 Months
   
More Than 12 Months
   
Total
 
 
 
 
 
 
Fair Value
   
Gross
Unrealized
Losses
   
 
Fair Value
   
Gross
Unrealized
Losses
   
 
Fair Value
   
Gross
Unrealized
Losses
 
Corporate notes and bonds
  $ 7,985     $ (11 )   $     $     $ 7,985     $ (11 )
Federal agency notes and bonds
    10,997       (3 )                 10,997       (3 )
Municipal notes and bonds
    13,189       (16 )                 13,189       (16 )
Total
  $ 32,171     $ (30 )   $     $     $ 32,171     $ (30 )

Informatica uses a market approach for determining the fair value of all its marketable securities and money market funds, which it has classified as Level 2 and Level 1, respectively. The declines in value of these investments are primarily related to changes in interest rates and are considered to be temporary in nature.

The following table summarizes the cost and estimated fair value of the Company’s cash equivalents and short-term investments by contractual maturity at September 30, 2009 (in thousands):

   
Cost
   
Fair Value
 
Due within one year
  $ 247,715     $ 248,506  
Due in one year to two years
    68,035       68,567  
Total
  $ 315,750     $ 317,073  


Note 3. Goodwill and Intangible Assets

The carrying amounts of intangible assets other than goodwill as of September 30, 2009 and December 31, 2008 are as follows (in thousands):

   
September 30, 2009
   
December 31, 2008
 
 
 
 
 
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Amount
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Amount
 
Developed and core technology
  $ 55,366     $ (19,627 )   $ 35,739     $ 32,583     $ (14,216 )   $ 18,367  
Customer relationships
    31,450       (11,934 )     19,516       20,257       (5,870 )     14,387  
Vendor relationships
    7,827       (576 )     7,251                    
Other:
                                               
Trade names
    2,492       (695 )     1,797       700       (408 )     292  
Covenants not to compete
    2,000       (1,117 )     883       2,000       (817 )     1,183  
Patents
    3,720       (98 )     3,622       1,300             1,300  
    $ 102,855     $ (34,047 )   $ 68,808     $ 56,840     $ (21,311 )   $ 35,529  


12

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Amortization expense of intangible assets was approximately $4.8 million and $2.8 million for the three months ended September 30, 2009 and 2008, respectively, and $12.7 million and $5.7 million for the nine months ended September 30, 2009 and 2008, respectively. The weighted-average amortization period of the Company’s developed and core technology, customer relationships, vendor relationships, trade names, covenants not to compete, and patents are five years, five years, five years, five years, five years, and ten years, respectively.

As of September 30, 2009, the amortization expense related to identifiable intangible assets in future periods is expected to be as follows (in thousands):

 
 
 
 
Acquired
Technology
   
Other
Intangible
Assets
   
Total
Intangible
Assets
 
Remaining 2009
  $ 2,451     $ 2,807     $ 5,258  
2010
    8,630       9,591       18,221  
2011
    8,423       7,691       16,114  
2012
    7,747       5,547       13,294  
2013
    6,858       3,835       10,693  
Thereafter
    1,815       3,413       5,228  
Total expected amortization expense
  $ 35,924     $ 32,884     $ 68,808  

The increase of $22.8 million in the gross carrying amount of developed and core technology was due to the intangibles of $10.7 million, $1.0 million, and $11.0 million acquired from Applimation, AddressDoctor, and Agent Logic, respectively. The increase of $11.2 million in the gross carrying amount of customer relationships was primarily due to the intangibles of $8.3 million, $1.3 million, and $1.4 million acquired from Applimation, AddressDoctor, and Agent Logic, respectively. The increase of $7.8 million of vendor relationships was primarily attributable to the acquisition of AddressDoctor. See Note 15. Acquisitions, of Notes to Condensed Consolidated Financial Statements for a further discussion. In addition, $3.3 million of developed and core technology, $5.0 million of customer relationships, $7.2 million of vendor relationships, and $0.2 million of trade names at September 30, 2009, related to the Identity Systems, Inc., PowerData, and AddressDoctor acquisitions, were recorded in European local currencies, and, therefore, the gross carrying amount and accumulated amortization are subject to periodic translation adjustments.

The customer relationships are intangible assets that Informatica has acquired through several past acquisitions and consist of renewable 12-month revenue maintenance programs. Informatica’s accounting policy is to expense the costs incurred to renew or extend the terms of these revenue maintenance programs.

The change in the carrying amount of goodwill for the nine months ended September 30, 2009 is as follows (in thousands):

 
 
 
September 30,
2009
 
Beginning balance as of December 31, 2008
  $ 219,063  
Goodwill recorded in acquiring Applimation
    19,740  
Goodwill recorded in acquiring AddressDoctor
    23,019  
Goodwill recorded in acquiring Agent Logic
    24,403  
Subsequent goodwill adjustments:
       
Earn-out for PowerData
    796  
Tax adjustments for Applimation
    (1,402 )
Local currency translation adjustments
    1,955  
Other adjustments
    (5 )
Ending balance as of September 30, 2009
  $ 287,569  

The Company is obligated to pay certain variable and deferred earn-out payments based on the percentage of license revenues recognized subsequent to the acquisition of PowerData. The Company recorded $796,000 earn-out as additional goodwill during the three months ended June 30, 2009. The Company considers these earn-outs as additional contingent consideration and will record them in goodwill as they occur.



13

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 4. Convertible Senior Notes

On March 8, 2006, the Company issued and sold Convertible Senior Notes (“Notes”) with an aggregate principal amount of $230 million due 2026. The Company pays interest at 3.0% per annum to holders of the Notes, payable semi-annually on March 15 and September 15 of each year, commencing September 15, 2006. Each $1,000 principal amount of Notes is initially convertible, at the option of the holders, into 50 shares of common stock prior to the earlier of the maturity date (March 15, 2026) or the redemption or repurchase of the Notes. The initial conversion price represented a premium of 29.28% relative to the last reported sale price of common stock of the Company on the NASDAQ Stock Market (Global Select) of $15.47 on March 7, 2006. The conversion rate is subject to certain adjustments. The conversion rate initially represents a conversion price of $20.00 per share. After March 15, 2011, the Company may from time to time redeem the Notes, in whole or in part, for cash, at a redemption price equal to the full principal amount of the Notes, plus any accrued and unpaid interest. Holders of the Notes may require the Company to repurchase all or a portion of their Notes at a purchase price in cash equal to the full outstanding principle amount of the Notes plus any accrued and unpaid interest on March 15, 2011, March 15, 2016, and March 15, 2021, or upon the occurrence of certain events including a change in control.

Pursuant to a Purchase Agreement (the “Purchase Agreement”), the Notes were sold for cash consideration in a private placement to an initial purchaser, UBS Securities LLC, an “accredited investor,” within the meaning of Rule 501 under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the private placement exemption afforded by Section 4(2) of the Securities Act. The initial purchaser reoffered and resold the Notes to “qualified institutional buyers” under Rule 144A of the Securities Act without being registered under the Securities Act, in reliance on applicable exemptions from the registration requirements of the Securities Act. In connection with the issuance of the Notes, the Company filed a shelf registration statement with the SEC for the resale of the Notes and the common stock issuable upon conversion of the Notes. The Company also agreed to periodically update the shelf registration and to keep it effective until the earlier of the date the Notes or the common stock issuable upon conversion of the Notes is eligible to be sold to the public pursuant to Rule 144(k) of the Securities Act or the date on which there are no outstanding registrable securities. The Company has evaluated the terms of the call feature, redemption feature, and the conversion feature under applicable accounting literature, including FASB Derivatives and Hedging  (ASC 815) and FASB Debt With Conversion and Other Options (ASC 470-20) and concluded that none of these features should be separately accounted for as derivatives.

In connection with the issuance of the Notes, the Company incurred $6.2 million of issuance costs, which primarily consisted of investment banker fees and legal and other professional fees. These costs are classified within Other Assets and are being amortized as a component of interest expense using the effective interest method over the life of the Notes from issuance through March 15, 2026. If the holders require repurchase of some or all of the Notes on the first repurchase date, which is March 15, 2011, the Company would accelerate amortization of the pro rata share of the unamortized balance of the issuance costs on such date. Also if the Company repurchases some of the outstanding balance of the Notes, it would accelerate amortization of the pro rata share of the unamortized balance of the issuance costs at the time of such repurchases. If the holders require conversion of some or all of the Notes when the conversion requirements are met, the Company would accelerate amortization of the pro rata share of the unamortized balance of the issuance cost to additional paid-in capital on such date. Amortization expenses related to the issuance costs were $68,000 and $78,000 for the three-month periods ended September 30, 2009 and 2008, respectively, and $671,000 and $234,000 for the nine-month periods ended September 30, 2009 and 2008, respectively. Interest expenses on the Notes were $1.5 million and $1.7 million for the three-month periods ended September 30, 2009 and 2008, respectively. Interest expenses on the Notes were $4.6 and $5.2 million for the nine-month periods ended September 30, 2009 and 2008, respectively. Interest payments of $6.3 million and $6.9 million were made in the nine-month periods ended September 30, 2009 and 2008, respectively.

In October 2008, Informatica’s Board of Directors authorized the repurchase of a portion of its outstanding Notes due in 2026 in privately negotiated transactions with the holders of the Notes. During the three-month period ended December 31, 2008, Informatica repurchased $9.0 million of its outstanding Notes at a discounted cost of $7.8 million. As a result, $1.0 million, net of $0.2 million of prorated deferred expenses, is reflected in other income for the three months ended December 31, 2008. During the three-month period ended March 31, 2009, Informatica repurchased an additional $20.0 million of its outstanding Notes, net of $0.3 million gain due to early retirement of the Notes and $0.5 million due to recapture of prorated deferred expenses, at a discounted cost of $19.2 million. There was no repurchase of the Notes during the second and third quarters of 2009.

14

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The following table sets forth the ending balance of the Convertible Senior Notes as of September 30, 2009 and December 31, 2008 resulting from the repurchase activities in the respective periods (in thousands):

Balance at January 1, 2008
  $ 230,000  
Face amount of Notes repurchased during the fourth quarter of 2008
    (9,000 )
Balance at December 31, 2008
    221,000  
Face amount of Notes repurchased during the first three quarters of 2009
    (20,000 )
Balance at September 30, 2009
  $ 201,000  

The Company has classified its convertible debt as Level I, according to FASB Fair Value Measurements and Disclosures (ASC 820-10-35) since it has quoted prices available in active markets for identical assets. The estimated fair value of the Company’s Convertible Senior Notes as of September 30, 2009, based on the closing price as of September 30, 2009 (the last trading day of the respective period) at the Over-the-Counter market, was $251.9 million.

 
Note 5. Other Comprehensive Income

Other comprehensive income refers to gains and losses that, under GAAP, are recorded as an element of stockholders’ equity and are excluded from net income, net of tax. Other comprehensive income activity consisted of the following items (in thousands):
 
 
 
 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
 
2009
   
2008
   
2009
   
2008
 
Net income, as reported
  $ 16,192     $ 13,381     $ 39,240     $ 36,108  
Other comprehensive income:
                               
Unrealized gain (loss) on investments (1)
    111       (293 )     (72 )     (335 )
Cumulative translation adjustments (2)
    1,934       (7,266 )     4,765       (5,978 )
Derivative gain (loss) (3)
    17             (41 )      
Comprehensive income
  $ 18,254     $ 5,822     $ 43,892     $ 29,795  
_________

 
(1)
The tax effects on unrealized gain (loss) on investments were $(71,000) and $187,000 for the three-month periods ended September 30, 2009 and 2008, respectively, and $46,000 and $214,000 for the nine-month periods ended September 30, 2009 and 2008, respectively.
     
 
(2)
The tax effects on cumulative translation adjustments were $(73,000) and $182,000 for the three-month periods ended September 30, 2009 and 2008, respectively, and $(106,000) and $29,000 for the nine-month periods ended September 30, 2009 and 2008, respectively.
     
 
(3)
The tax effects on cash flow hedging gain (loss) for the three-month and nine-month periods ended September 30, 2009 were $11,000 and $(26,000), respectively.

Ending balance of accumulated other comprehensive income (loss) as of September 30, 2009 and December 31, 2008 consisted of the following (in thousands):

 
 
 
September 30,
2009
   
December 31,
2008
 
Net unrealized gain on available-for-sale investments
  $ 807     $ 879  
Cumulative translation adjustments
    94       (4,671 )
Derivatives gain
    10       51  
Accumulated other comprehensive income (loss)
  $ 911     $ (3,741 )
 
Informatica did not have any other-than-temporary gain or loss reflected in accumulated other comprehensive income (loss) as of September 30, 2009 and December 31, 2008.
 
Informatica determines the basis of the cost of a security sold and the amount reclassified out of other comprehensive income into statement of income based on specific identification.
 

15

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The following table reflects the change in accumulated investment unrealized gain (loss) included in other comprehensive income for the nine months ended September 30, 2009 (in thousands):

 
 
 
September 30,
2009
 
Net unrealized investment gain balance, net of tax effects at December 31, 2008
  $ 879  
Investment unrealized loss, net of tax effects
    (72 )
Net unrealized investment gain balance, net of tax effects at September 30, 2009
  $ 807  

The following table reflects the change in accumulated derivatives gain (loss) included in other comprehensive income for the nine months ended September 30, 2009 (in thousands):

 
 
 
September 30,
2009
 
Net unrealized derivatives gain balance, net of tax effects at December 31, 2008
  $ 50  
Reclassified to the statements of income, net of tax effects
    108  
Derivatives loss for hedging transactions, net of tax effects
    (148 )
Net unrealized derivatives gain balance, net of tax effects at September 30, 2009
  $ 10  

See Note 1. Summary of Significant Accounting Policies, Note 6. Derivative Financial Instruments, and Note 12. Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements for a further discussion.


Note 6. Derivative Financial Instruments

The functional currency of Informatica’s foreign subsidiaries is their local currencies, except for Informatica Cayman Ltd., which is in euros. The Company translates all assets and liabilities of its foreign subsidiaries into U.S. dollars at current exchange rates as of the applicable balance sheet date. Revenues and expenses are translated at the average exchange rate prevailing during the period, and the gains and losses resulting from the translation of the foreign subsidiaries’ financial statements are reported in accumulated other comprehensive income (loss), as a separate component of stockholders’ equity. Net gains and losses resulting from foreign exchange transactions are included in other income or expense, net in the condensed consolidated statements of income.
 
Informatica’s results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Indian rupee, Israeli shekel, euro, British pound sterling, Canadian dollar, Japanese yen, Brazilian real, and Australian dollar. In the fourth quarter of 2008, the Company initiated certain cash flow hedge programs in an attempt to reduce the impact of certain foreign currency fluctuations. The purpose of these programs is to reduce the volatility of identified cash flow and expenses caused by movement in certain foreign currency exchange rates, in particular, the Indian rupee and Israeli shekel.Informatica is currently using foreign exchange forward contracts to hedge certain non-functional currency anticipated expenses which result in intercompany transactions between Informatica U.S. and its two subsidiaries in India and Israel. Exposures resulting from fluctuations in the foreign currency exchange rates applicable to these foreign denominated expenses are covered through the Company’s cash flow hedge programs. The Company releases the amounts accumulated in other comprehensive income into income when the anticipated expenses are incurred.
 
Informatica has forecasted the amount of its anticipated foreign currency expenses based on its historical performance and its 2009 financial plan. As of September 30, 2009, these foreign exchange contracts, carried at fair value, have a maturity of less than two months. The Company enters into approximately two forward exchange contracts ranging between $352,000 and $641,000 per month. The Company closes out approximately two foreign exchange contracts per month when the foreign currency denominated expenses are paid and any gain or loss is offset against income.
 
Informatica and its subsidiaries do not enter into derivative contracts for speculative purposes.
 

16

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



As of September 30, 2009, a derivative gain of $10,000 was included in accumulated other comprehensive income, net of applicable taxes. The Company expects to reflect this amount in its condensed consolidated statements of income during the remaining duration of its foreign exchange forward contracts that expire on November 16, 2009.
 
Informatica evaluates the effectiveness of its hedge programs using statistical analysis at the inception of the hedge prospectively as well as retrospectively. Informatica excludes the time value of derivative instruments for hedge accounting purposes.  
 
The effect of derivative instruments designated as cash flow hedges on the accumulated other comprehensive income and condensed consolidated statements of income for the three and nine months ended September 30, 2009 is as follows (in thousands):

   
Three Months Ended September 30, 2009
   
Nine Months Ended September 30, 2009
 
 
 
 
 
(Gain) Loss Recognized
 (1)
   
(Gain) Loss
Reclassified 
(2)
   
Gain
Recognized
(3)
   
Loss
Recognized
(1)
   
Loss
Reclassified
 (2)
   
Gain
Recognized
(3)
 
Indian rupee
  $ 4     $ (5 )   $ 32     $ 109     $ 61     $ 210  
Israeli shekel
    (35 )     2       3       133       115       17  
Total
  $ (31 )   $ (3 )   $ 35     $ 242     $ 176     $ 227  


 
(1)
Amount of gain and loss recognized in accumulated other comprehensive income (effective portion).
     
 
(2)
Amount of gain and loss reclassified from accumulated other comprehensive income into the operating expenses of condensed consolidated statements of income (effective portion).

 
(3)
Amount of gain recognized in income on derivative for the amount excluded from effectiveness testing located in operating expenses (mostly impacted the research and development expenses) of condensed consolidated statements of income. The Company did not have any ineffective portion of the derivative recorded in condensed consolidated statements of income.

See Note 1. Summary of Significant Accounting Policies, Note 5. Other Comprehensive Income, and Note 12. Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements for a further discussion.

The following tables reflect the amounts of derivative assets for designated and not designated hedging instruments at September 30, 2009 and the gain recognized in other income, net for non designated foreign currency forward contracts for the three and nine months ended September 30, 2009 (in thousands):

 
 
 
Derivatives Designated as Hedging Instruments under SFAS No. 133:
 
Derivative
Assets at
September 30,
2009 (1)
 
Indian rupee
  $ 56  
Israeli shekel
    8  
Total
  $ 64  


 
 
 
Derivatives Not Designated as Hedging Instruments:
 
Derivative
Assets at
September 30,
2009 (1)
 
Indian rupee
  $ 54  
Israeli shekel
    8  
Total
  $ 62  

 
(1)
Included in prepaid expenses and other current assets on the condensed consolidated balance sheets.

There was no derivative liabilities for designated and not designated hedging instruments at September 30, 2009.

17

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



 
 
 
Gain Recognized in Other income, Net for Derivatives Not Designated as Hedging Instruments:
 
Three Months
Ended
September 30,
2009
   
Nine Months
Ended
September 30,
2009
 
Indian rupee
  $ 19     $ 73  
Israeli shekel
    14       116  
Total
  $ 33     $ 189  


Note 7. Stock Repurchases and Retirement of Convertible Senior Notes

The purpose of Informatica’s stock repurchase program is, among other things, to help offset the dilution caused by the issuance of stock under its employee stock option and employee stock purchase plans. The number of shares acquired and the timing of the repurchases are based on several factors, including general market conditions and the trading price of the Company’s common stock. These repurchased shares are retired and reclassified as authorized and unissued shares of common stock. These purchases can be made from time to time in the open market and are funded from available working capital.

In April 2007, Informatica’s Board of Directors authorized a stock repurchase program for up to an additional $50 million of its common stock. Under this program, the Company repurchased 1,869,000 of its common stocks for $27.6 million in 2007. In April 2008, Informatica’s Board of Directors authorized an additional $75 million of its common stock for the stock repurchase program. In October 2008, Informatica’s Board of Directors authorized the repurchase of a portion of its outstanding Convertible Senior Notes (“Notes”) due in 2026 in privately negotiated transactions with holders of the Notes. During the year ended December 31, 2008, the Company repurchased 3,797,000 shares of its common stock at a cost of $57.0 million and $9.0 million of its outstanding Notes at a cost of $7.8 million.

During the first quarter ended March 31, 2009, the Company repurchased 457,000 shares of its common stock at a cost of $5.9 million and an additional $20.0 million of its outstanding Notes at a cost of $19.4 million, including $0.2 million accrued interest. During the second quarter ended June 30, 2009, the Company repurchased an additional 203,000 shares of its common stock at a cost of $3.1 million. During the third quarter ended September 30, 2009, there was no repurchase of shares. There was no repurchase of the Notes during the second and third quarters of 2009.

The Company has approximately $4.1 million available to repurchase additional shares and Notes under this program as of September 30, 2009. This repurchase program does not have an expiration date.

The repurchased shares are retired and reclassified as authorized and unissued shares of common stock. The Company may continue to repurchase shares from time to time, as determined by management under programs approved by the Board of Directors.


Note 8. Share-Based Payments

The Company’s stockholders approved the 2009 Equity Incentive Plan (the “2009 Incentive Plan”) in April 2009 under which 9,000,000 shares have been reserved for issuance. Under the 2009 Incentive Plan, eligible employees, officers, and directors may be granted stock options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units. The exercise price for incentive stock options and non-qualified options may not be less than 100% and 85%, respectively, of the fair value of the Company’s common stock at the option grant date.

Options granted are exercisable over a maximum term of seven to ten years from the date of the grant and generally vest ratably over a period of four years, with options for new employees generally including a 1-year cliff period. The options granted to the directors of the Company generally vest between one and three years. The Company also issues Restricted Stock Units (“RSUs”) to its employees. The RSUs granted to employees generally vest over four years with four annual vesting dates. The RSUs granted to the directors of the Company vest in one year. These awards are valued at the time of grant using the existing current market prices.

18

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



It is the current practice of the Board to limit option grants under this plan to 7-year terms and to issue only non-qualified stock options and RSUs. As of September 30, 2009, the Company had approximately 8,289,000 authorized shares available for grant and 503,000 options and RSUs outstanding under the 2009 Incentive Plan. Informatica granted 510,000 RSUs under its 1999 Stock Incentive Plan to its executives and certain key employees of the Company and an additional 400,000 RSUs to certain employees and directors of the Company under its 2009 Stock Incentive Plan during the nine months ended September 30, 2009. Informatica granted 204,000 options under its 1999 Stock Incentive Plan and 103,000 options under its 2009 Incentive Plan during the nine months ended September 30, 2009.

Informatica uses the Black-Scholes-Merton option pricing model to determine the fair value of option awards granted. The Company is using a blend of average historical and market-based implied volatilities for calculating the expected volatilities for employee stock options and market-based implied volatilities for its Employee Stock Purchase Plan (“ESPP”). The expected term of employee stock options granted is derived from historical exercise patterns of the options while the expected term of the ESPP is based on the contractual terms. The risk-free interest rate for the expected term of the option and ESPP is based on the U.S. Treasury yield curve in effect at the time of grant. The Company records share-based payments for RSUs and options granted net of estimated forfeiture rates.

FASB Share-Based Payment (ASC 718) also requires the Company to estimate forfeiture rates at the time of grant and record share-based payments net of estimated forfeiture rates. Further, the Company is also required to revise and true-up those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company is using an average of the past four quarters of actual forfeited options for new employees to determine its forfeiture rate for stock options granted. Further, Informatica uses an average of the past four quarters of actual forfeited option awards to determine its forfeiture rate for RSUs grants.

The Company estimated the fair value of its share-based payment awards related to stock options granted with no expected dividends using the following assumptions:

 
 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
 
2009
   
2008
   
2009
   
2008
 
Option Grants:
                       
Expected volatility
    37 %     39 %     37 – 48 %     38 – 41 %
Weighted-average volatility
    37 %     39 %     44 %     38 %
Expected dividends
                       
Expected term of options (in years)
    3.6       3.3       3.6       3.3  
Risk-free interest rate
    2.2 %     3.0 %     1.7 %     2.7 %
ESPP:*
                               
Expected volatility
    34 %     42 %     34 – 51 %     38 – 42 %
Weighted-average volatility
    34 %     42 %     44 %     40 %
Expected dividends
                       
Expected term of ESPP (in years)
    0.5       0.5       0.5       0.5  
Risk-free interest rate — ESPP
    0.3 %     1.9 %     0.3 %     1.9 – 2.2 %
____________

*
ESPP purchases are made on the last day of January and July of each year.

The allocations of share-based payments for the three and nine months ended September 30, 2009 and 2008 are as follows (in thousands):
 
 
 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
 
2009
   
2008
   
2009
   
2008
 
Cost of service revenues
  $ 510     $ 495     $ 1,624     $ 1,534  
Research and development
    1,177       1,013       3,468       3,043  
Sales and marketing
    1,452       1,332       4,397       3,935  
General and administrative
    1,230       1,198       3,643       3,472  
Total share-based payments
  $ 4,369     $ 4,038     $ 13,132     $ 11,984  
Tax benefit of share-based payments
    (940 )     (748 )     (2,787 )     (2,244 )
Total share-based payments, net of tax benefit
  $ 3,429     $ 3,290     $ 10,345     $ 9,740  


19

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 9. Facilities Restructuring Charges

2004 Restructuring Plan

In October 2004, the Company announced a restructuring plan (“2004 Restructuring Plan”) related to the December 2004 relocation of the Company’s corporate headquarters within Redwood City, California. In 2005, the Company subleased the available space at the Pacific Shores Center under the 2004 Restructuring Plan. The Company recorded restructuring charges of approximately $103.6 million, consisting of $21.6 million in leasehold improvement and asset write-offs and $82.0 million related to estimated facility lease losses, which consist of the present value of lease payment obligations for the remaining four-year lease term of the previous corporate headquarters, net of actual and estimated sublease income. The Company has actual and estimated sublease income, including the reimbursement of certain property costs such as common area maintenance, insurance, and property tax, net of estimated broker commissions of $1.9 million for the remainder of 2009, $5.2 million in 2010, $5.4 million in 2011, $5.5 million in 2012, and $0.9 million in 2013.

Subsequent to 2004, the Company continued to record accretion on the cash obligations related to its 2004 Restructuring Plan. Accretion represents imputed interest, which is the difference between the Company’s non-discounted future cash obligations and the discounted present values of these cash obligations. As of September 30, 2009, the Company will recognize approximately $5.9 million of accretion as a restructuring charge over the remaining term of the lease, or approximately four years, as follows: $0.6 million for the remainder of 2009, $2.3 million in 2010, $1.7 million in 2011, $1.0 million in 2012, and $0.3 million in 2013.

2001 Restructuring Plan

During 2001, the Company announced a restructuring plan (“2001 Restructuring Plan”) and recorded restructuring charges of approximately $12.1 million, consisting of $1.5 million in leasehold improvement and asset write-offs and $10.6 million related to the consolidation of excess leased facilities in the San Francisco Bay Area and Texas.

During 2002, the Company recorded additional restructuring charges of approximately $17.0 million, consisting of $15.1 million related to estimated facility lease losses and $1.9 million in leasehold improvement and asset write-offs. The Company calculated the estimated costs for the additional restructuring charges based on current market information and trend analysis of the real estate market in the respective area.

In December 2004, the Company recorded additional restructuring charges of $9.0 million related to estimated facility lease losses. The restructuring accrual adjustments recorded in the third and fourth quarters of 2004 were the result of the relocation of its corporate headquarters within Redwood City, California in December 2004, an executed sublease for the Company’s excess facilities in Palo Alto, California during the third quarter of 2004, and an adjustment to management’s estimate of occupancy of available vacant facilities. In 2005, the Company subleased the available space at the Pacific Shores Center under the 2001 Restructuring Plan through May 2013, which was subsequently subleased until July 2013 under a December 2007 sublease agreement.

A summary of the activity of the accrued restructuring charges for the nine months ended September 30, 2009 is as follows (in thousands):

 
 
 
 
 
Accrued
Restructuring
Charges at
December 31,
   
 
 
Restructuring
   
 
 
Net Cash
   
 
 
Non-cash
   
Accrued
Restructuring
Charges at
September 30,
 
 
 
2008
   
Charges
   
Adjustments
   
Payment
   
Reclassification
   
2009
 
2004 Restructuring Plan
                                   
Excess lease facilities
  $ 56,356     $ 2,161     $ 89     $ (8,627 )   $ (123 )   $ 49,856  
2001 Restructuring Plan
                                               
Excess lease facilities
    8,112             (289 )     (1,139 )           6,684  
    $ 64,468     $ 2,161     $ (200 )   $ (9,766 )   $ (123 )   $ 56,540  

For the nine months ended September 30, 2009, the Company recorded $2.2 million of restructuring charges from accretion charges related to the 2004 Restructuring Plan. Actual future cash requirements may differ from the restructuring liability balances as of September 30, 2009 if the Company is unable to sublease the excess leased facilities after the expiration of the subleases, there are changes to the time period that facilities are vacant, or the actual sublease income is different from current estimates. If the subtenants

20

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



do not extend their subleases and the Company is unable to sublease any of the related Pacific Shores facilities during the remaining lease terms through 2013, restructuring charges could increase by approximately $3.9 million.

Inherent in the estimation of the costs related to the restructuring efforts are assessments related to the most likely expected outcome of the significant actions to accomplish the restructuring. The estimates of sublease income may vary significantly depending, in part, on factors that may be beyond the Company’s control, such as the time periods required to locate and contract with suitable sublessees when the Company’s existing sublessees vacate as well as the market rates at the time of entering into new sublease agreements.


Note 10. Income Taxes

The Company’s effective tax rates were 27% and 30% for the three-month periods ended September 30, 2009 and 2008, respectively, and 29% and 30% for the nine-month periods ended September 30, 2009 and 2008, respectively. The effective tax rates differed from the federal statutory rate of 35% primarily due to benefits of certain earnings from operations in lower-tax jurisdictions throughout the world, the recognition of current year research and development credits and previously unrealized foreign tax credits and a prior year tax return true-up offset by compensation expense related to non-deductible share-based payments, and agreed upon audit assessments with the Internal Revenue Service, as well as the accrual of reserves related to uncertain tax positions. The Company has not provided for residual U.S. taxes in any of these lower-tax jurisdictions since it intends to indefinitely reinvest these earnings offshore.

In assessing the need for any additional valuation allowance in the quarter ended September 30, 2009, the Company considered all available evidence both positive and negative, including historical levels of income, legislative developments, expectations and risks associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies.

As a result of this analysis for the quarter ended September 30, 2009, consistent with prior quarters it was considered more likely than not that the Company’s non share-based payments related deferred tax assets would be realized. As a result, the remaining valuation allowance is primarily related to the share-based payments deferred tax assets. The benefit of these deferred tax assets will be recorded in the stockholders’ equity as realized, and as such, they will not impact the Company’s effective tax rate.

The unrecognized tax benefits related to FASB Income Taxes (ASC 740), if recognized, would impact the income tax provision by $9.3 million and $7.1 million as of September 30, 2009 and 2008, respectively. The unrecognized tax benefits were $10.6 million and $20.2 million as of September 30, 2009 and December 31, 2008, respectively. The change was primarily due to the agreement with the Internal Revenue Service on certain audit issues, the expiration of certain statute of limitations and the accrual for uncertain tax positions. The Company has elected to include interest and penalties as a component of tax expense. Accrued interest and penalties as of September 30, 2009 and 2008 were approximately $2.2 million and $0.6 million, respectively.

The Company files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. Informatica was under examination by the Internal Revenue Service for fiscal years 2005 and 2006. Due to net operating loss carry-forwards, substantially all of our tax years remained open for tax examination. During the three months ended June 30, 2009, the Company reached an agreement with the Internal Revenue Service to settle certain matters, including cost sharing and buy-in amounts for tax years ended December 31, 2001 through 2006. The tax provision impact as a result of the settlement was $7.0 million of which $6.1 million was accrued for previously.

The Company has been informed by certain state and foreign taxing authorities that it was selected for examination. Most state and foreign jurisdictions have three or four open tax years at any point in time. The field work for certain state audits has commenced and is at various stages of completion as of September 30, 2009.

Although the outcome of any tax audit is uncertain, the Company believes that it has adequately provided in its financial statements for any additional taxes that it may be required to pay as a result of such examinations. The Company regularly assesses the likelihood of outcomes resulting from these examinations to determine the adequacy of its provision for income taxes, and believes its current reserve to be reasonable. If tax payments ultimately prove to be unnecessary, the reversal of these tax liabilities would result in tax benefits in the period that the Company determined such liabilities were no longer necessary. However, if an ultimate tax assessment exceeds its estimate of tax liabilities, an additional tax provision might be required.

21

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 11. Net Income per Common Share

Under the provisions of FASB Earnings per Share (ASC 260), basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share reflects the potential dilution of securities by adding other common stock equivalents, primarily stock options and common shares potentially issuable under the terms of the Convertible Senior Notes, to the weighted-average number of common shares outstanding during the period, if dilutive. Potentially dilutive securities have been excluded from the computation of diluted net income per share if their inclusion is anti-dilutive.

The calculation of basic and diluted net income per common share is as follows (in thousands, except per share amounts):


 
 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
 
2009
   
2008
   
2009
   
2008
 
Net income
  $ 16,192     $ 13,381     $ 39,240     $ 36,108  
Effect of convertible senior notes, net of related tax effects
    961       1,100       3,061       3,300  
Net income adjusted
  $ 17,153     $ 14,481     $ 42,301     $ 39,408  
Weighted-average shares of common stock used to compute basic net income per share (excluding unvested restricted stock)
    88,283       88,570       87,837       88,422  
Effect of dilutive common stock equivalents:
                               
Dilutive effect of unvested restricted stock units
    232             105        
Dilutive effect of employee stock options
    4,951       3,670       4,328       3,813  
Dilutive effect of convertible senior notes
    10,050       11,500       10,237       11,500  
Shares used in computing diluted net income per common share
    103,516       103,740       102,507       103,735  
Basic net income per common share
  $ 0.18     $ 0.15     $ 0.45     $ 0.41  
Diluted net income per common share
  $ 0.17     $ 0.14     $ 0.41     $ 0.38  

Diluted net income per common share is calculated according to Earnings per Share (ASC 260), which requires the dilutive effect of convertible securities to be reflected in the diluted net income per share by application of the “if-converted” method. This method assumes an add-back of interest and amortization of issuance cost, net of income taxes, to net income if the securities are converted. The Company determined that for the three and nine months ended September 30, 2009 and 2008, the Convertible Senior Notes had a dilutive effect on diluted net income per share, and as such, it had an add-back of $1.0 million and $3.1 million for the three and nine months ended September 30, 2009, respectively, and $1.1 million and $3.3 million for the same periods in 2008 in interest and issuance cost amortization, net of income taxes, to net income for the diluted net income per share calculation.

In calculating its diluted net income per common share, the Company excluded 1.4 million and 5.4 million of its options for the three months ended September 30, 2009 and 2008, respectively, and 4.4 million and 4.5 million of its options for the nine months ended September 30, 2009 and 2008, respectively since the inclusion of these options would have been anti-dilutive.


Note 12. Commitments and Contingencies

Lease Obligations

In December 2004, the Company relocated its corporate headquarters within Redwood City, California and entered into a new lease agreement. The initial lease term was from December 15, 2004 to December 31, 2007 with a three-year option to renew to December 31, 2010 at fair market value. In May 2007, the Company exercised its renewal option to extend the office lease term to December 31, 2010. In May 2009, the Company executed the lease amendment to further extend the lease term for another 3 years to December 31, 2013. The future minimum contractual lease payments are $1.0 million for the remainder of 2009, $2.6 million, $3.4 million, $3.5 million and $3.6 million for the years ending December 31, 2010, 2011, 2012, and 2013, respectively.

The Company entered into two lease agreements in February 2000 for two office buildings at the Pacific Shores Center in Redwood City, California, which were used as its former corporate headquarters from August 2001 through December 2004. The leases expire in July 2013.

The Company leases certain office facilities under various non-cancelable operating leases, including those described above, which expire at various dates through 2013 and require the Company to pay operating costs, including property taxes, insurance, and

22

INFORMATICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



maintenance. Operating lease payments in the table below include approximately $64.6 million for operating lease commitments for facilities that are included in restructuring charges. See Note 9. Facilities Restructuring Charges, above, for a further discussion.

Future minimum lease payments as of September 30, 2009 under non-cancelable operating leases with original terms in excess of one year are summarized as follows (in thousands):

<
 
 
 
Operating
Leases
   
Sublease
Income
   
Net
 
Remaining 2009
  $ 6,699     $ 581     $ 6,118  
2010
    24,531       2,380       22,151  
2011
    23,819       2,422       21,397  
2012
    23,814       2,468       21,346  
2013