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EX-32.1 - SECTION 1350 CERTIFICATION BY CHIEF EXECUTIVE OFFICER - TIBCO SOFTWARE INCdex321.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION BY CHIEF EXECUTIVE OFFICER - TIBCO SOFTWARE INCdex311.htm
EX-32.2 - SECTION 1350 CERTIFICATION BY CHIEF FINANCIAL OFFICER - TIBCO SOFTWARE INCdex322.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION BY CHIEF FINANCIAL OFFICER - TIBCO SOFTWARE INCdex312.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 30, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 000-26579

 

 

TIBCO SOFTWARE INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   77-0449727

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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 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 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    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  ¨    No  x

The number of shares outstanding of the registrant’s Common Stock, $0.001 par value, as of July 2, 2010 was 163,932,454 shares.

 

 

 


Table of Contents

TIBCO SOFTWARE INC.

Table of Contents

 

          Page No.

PART I.

  

FINANCIAL INFORMATION

  

Item 1.

  

Condensed Consolidated Financial Statements:

  
  

Condensed Consolidated Balance Sheets as of May 31, 2010 and November 30, 2009

   3
  

Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended May  31, 2010 and 2009

   4
  

Condensed Consolidated Statements of Cash Flows for the Six Months Ended May 31, 2010 and 2009

   5
  

Notes to Condensed Consolidated Financial Statements

   6

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   28

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   40

Item 4.

  

Controls and Procedures

   41

PART II.

  

OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

   42

Item 1A.

  

Risk Factors

   42

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   51

Item 6.

  

Exhibits

   53
  

Signatures

   54

 

2


Table of Contents

TIBCO SOFTWARE INC.

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except par value per share)

 

     May 31,
2010
    November 30,
2009
 
Assets     

Current assets:

    

Cash and cash equivalents

   $ 277,058      $ 292,529   

Short-term investments

     208        307   

Accounts receivable, net of allowances of $4,704 and $4,224

     114,894        154,744   

Prepaid expenses and other current assets

     50,242        52,657   
                

Total current assets

     442,402        500,237   

Property and equipment, net

     90,645        94,631   

Goodwill

     376,475        374,285   

Acquired intangible assets, net

     97,405        83,060   

Long-term deferred income tax assets

     75,780        70,057   

Other assets

     44,800        44,069   
                

Total assets

   $ 1,127,507      $ 1,166,339   
                
Liabilities and Equity     

Current liabilities:

    

Accounts payable

   $ 14,491      $ 18,350   

Accrued liabilities

     71,294        96,595   

Accrued restructuring and excess facilities costs

     8,056        5,848   

Deferred revenue

     178,844        159,241   

Current portion of long-term debt

     2,207        2,148   
                

Total current liabilities

     274,892        282,182   

Accrued excess facilities costs, less current portion

     833        1,083   

Long-term deferred revenue

     15,311        15,353   

Long-term deferred income tax liabilities

     9,133        9,257   

Long-term income tax liabilities

     14,041        17,045   

Long-term debt, less current portion

     39,258        40,377   

Other long-term liabilities

     3,106        3,561   
                

Total liabilities

     356,574        368,858   
                

Commitments and contingencies

    

Equity:

    

Common stock, $0.001 par value; 1,200,000 shares authorized; 165,053 and 167,738 shares issued and outstanding

     165        168   

Additional paid-in capital

     787,643        774,474   

Accumulated other comprehensive loss

     (43,163     (16,413

Retained earnings

     25,439        38,520   
                

Total TIBCO Software Inc. stockholders’ equity

     770,084        796,749   

Noncontrolling interest

     849        732   
                

Total equity

     770,933        797,481   
                

Total liabilities and equity

   $ 1,127,507      $ 1,166,339   
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3


Table of Contents

TIBCO SOFTWARE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

 

     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
     2010     2009     2010     2009  

Revenue:

        

License

   $ 62,096      $ 50,457      $ 116,270      $ 95,306   

Service and maintenance

     111,174        92,213        212,044        180,260   
                                

Total revenue

     173,270        142,670        328,314        275,566   
                                

Cost of revenue:

        

License

     8,199        7,493        15,595        14,303   

Service and maintenance

     39,128        32,404        74,332        63,649   
                                

Total cost of revenue

     47,327        39,897        89,927        77,952   
                                

Gross profit

     125,943        102,773        238,387        197,614   

Operating expenses:

        

Research and development

     30,127        26,260        58,201        51,394   

Sales and marketing

     56,846        47,445        109,549        93,571   

General and administrative

     11,907        11,317        23,253        21,945   

Amortization of acquired intangible assets

     3,976        3,736        7,684        7,452   

Acquisition related and other

     589        —          1,634        —     

Restructuring charges

     6,271        —          6,271        —     
                                

Total operating expenses

     109,716        88,758        206,592        174,362   
                                

Income from operations

     16,227        14,015        31,795        23,252   

Interest income

     224        757        428        1,834   

Interest expense

     (980     (793     (1,965     (1,539

Other income (expense), net

     142        1,042        (87     1,201   
                                

Income before provision for income taxes and noncontrolling interest

     15,613        15,021        30,171        24,748   

Provision for income taxes

     2,682        4,828        6,800        8,950   
                                

Net income

     12,931        10,193        23,371        15,798   

Less: Net income attributable to noncontrolling interest

     117        116        132        95   
                                

Net income attributable to TIBCO Software Inc.

   $ 12,814      $ 10,077      $ 23,239      $ 15,703   
                                

Net income per share attributable to TIBCO Software Inc.:

        

Basic

   $ 0.08      $ 0.06      $ 0.14      $ 0.09   
                                

Diluted

   $ 0.08      $ 0.06      $ 0.14      $ 0.09   
                                

Shares used in computing net income per share attributable to TIBCO Software Inc.:

        

Basic

     160,992        171,635        161,793        171,460   
                                

Diluted

     169,975        173,134        169,861        172,614   
                                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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TIBCO SOFTWARE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

     Six Months Ended
May 31,
 
     2010     2009  

Operating activities:

    

Net income

   $ 23,371      $ 15,798   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation of property and equipment

     6,606        7,477   

Amortization of acquired intangible assets

     15,218        14,587   

Stock-based compensation

     14,224        11,180   

Deferred income tax

     (5,263     (4,216

Tax benefits related to stock benefit plans

     13,683        5,615   

Excess tax benefits from stock-based compensation

     (8,889     (3,558

Other non-cash adjustments, net

     50        942   

Changes in assets and liabilities, net of acquired assets and liabilities:

    

Accounts receivable

     40,579        33,344   

Prepaid expenses and other assets

     4,482        9,367   

Accounts payable

     (5,388     745   

Accrued liabilities and excess facilities costs

     (29,769     (21,200

Deferred revenue

     12,601        1,507   
                

Net cash provided by operating activities

     81,505        71,588   
                

Investing activities:

    

Maturities and sales of short-term investments

     157        10,586   

Acquisition of businesses, net of cash acquired

     (42,626     (163

Proceeds from private equity investments

     32        —     

Purchases of property and equipment

     (2,458     (3,255

Restricted cash pledged as security

     (1,880     (3,241
                

Net cash provided by (used in) investing activities

     (46,775     3,927   
                

Financing activities:

    

Proceeds from exercise of stock options

     19,264        2,374   

Proceeds from employee stock purchase program

     1,374        1,179   

Withholding taxes related to restricted stock net share settlement

     (4,216     (1,459

Repurchases of the Company’s common stock

     (67,482     (14,791

Excess tax benefits from stock-based compensation

     8,889        3,558   

Principal payments on long-term debt

     (2,404     (1,002
                

Net cash used in financing activities

     (44,575     (10,141
                

Effect of foreign exchange rate changes on cash and cash equivalents

     (5,626     7,717   
                

Net increase (decrease) in cash and cash equivalents

     (15,471     73,091   

Cash and cash equivalents at beginning of period

     292,529        254,400   
                

Cash and cash equivalents at end of period

   $ 277,058      $ 327,491   
                

Supplemental disclosures:

    

Income taxes paid

   $ 13,992      $ 6,361   
                

Interest paid

   $ 1,593      $ 1,214   
                

See accompanying Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

TIBCO SOFTWARE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

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, 2009 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 our financial position and our 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 included in our 2009 Annual Report on Form 10-K for the fiscal year ended November 30, 2009.

Our fiscal year ends on November 30th of each year. For purposes of presentation, we have indicated the second quarter of fiscal year 2010 as ended on May 31, 2010; whereas in fact, the second quarter of fiscal year 2010 actually ended on May 30, 2010. There were 91 days in the second quarter of both fiscal years 2010 and 2009.

The Condensed Consolidated Financial Statements include the accounts of us and our wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. For majority-owned subsidiaries, we reflect the noncontrolling interest of the portion we do not own on our Condensed Consolidated Balance Sheets in Equity.

The results of operations for the three and six months ended May 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending November 30, 2010, or any other future period, and we make no representations related thereto. Certain reclassifications have been made to the prior year consolidated financial statements to conform to the current year presentation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies were described in Note 2 to our audited Consolidated Financial Statements included in our 2009 Annual Report on Form 10-K for the fiscal year ended November 30, 2009. Other than the adoption of the Financial Accounting Standards Board (“FASB”) guidance related to accounting for business combinations, there have been no significant changes in our accounting policies for the second quarter of fiscal year 2010.

Recent Accounting Pronouncements

In January 2010, the FASB issued a new fair value accounting standard update, Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements. This update requires additional disclosures about (i) the different classes of assets and liabilities measured at fair value, (ii) the valuation techniques and inputs used, (iii) the activity in Level 3 fair value measurements, and (iv) the transfers between Levels 1, 2, and 3. This update is effective for interim and annual reporting periods beginning after December 15, 2009. We adopted this guidance in the second quarter of fiscal year 2010, and the adoption had no impact on our consolidated results of operation and financial condition.

In December 2007, the FASB issued a new accounting standard for noncontrolling interests in consolidated financial statements. The new standard establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, 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. In addition, the guidance also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. In January 2010, the FASB issued Accounting Standards Update No. 2010-02, Consolidation: Accounting and Reporting for Decreases in Ownership of a Subsidiary - a Scope Clarification. This update clarifies the scope of the decrease in ownership provisions and also requires

 

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Table of Contents

TIBCO SOFTWARE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

expanded disclosures. We adopted these standards in the first quarter of fiscal year 2010 with retrospective application of the presentation and disclosure requirements. Noncontrolling interests of $0.7 million were reclassified to Equity in the Condensed Consolidated Balance Sheets as of November 30, 2009. Net income attributable to noncontrolling interests of $116,000 and $95,000 was reclassified from Net income to Net income attributable to TIBCO Software Inc. in the Condensed Consolidated Statements of Operations for the three and six months ended May 31, 2009, respectively.

In June 2008, the FASB issued a new accounting standard that clarifies whether instruments granted in share-based payment transactions should be included in computing earnings per share. Under the new standard, we will be required to include restricted stock that contains non-forfeitable rights to dividends in our calculation of basic earnings per share (“EPS”), and will need to calculate basic EPS using the “two-class method.” The two-class method of computing EPS is an earnings allocation formula that determines EPS for each class of common stock and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. We adopted this new accounting standard on a retrospective basis in the first quarter of fiscal year 2010, and the adoption did not have an impact on EPS.

In December 2007, the FASB issued a new accounting standard related to business combinations. The new standard expands the definition of a business and a business combination; requires recognition of assets acquired, liabilities assumed, and contingent consideration at their fair value on the acquisition date with subsequent changes recognized in earnings; requires acquisition related expenses and restructuring costs to be recognized separately from the business combination and expensed as incurred; requires in-process research and development to be capitalized at fair value as an indefinite-lived intangible asset until completion or abandonment; and requires that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes. The new guidance also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. In April 2009, the FASB issued new guidance which clarified the accounting for pre-acquisition contingencies. We adopted this new business combination guidance in the first quarter of fiscal year 2010, and the adoption had no impact on previously recorded acquisitions.

Acquisition Related and Other

In connection with the adoption of guidance related to business combinations, we recorded acquisition related and other expenses in our statement of operations. Acquisition related and other expenses consisted of costs incurred after the issuance of a definitive term sheet for a particular transaction (whether or not such transaction is ultimately completed, remains in-process or is not completed) and included legal, banker, accounting and other advisory fees of third parties and severance costs for employees of the acquired company that are terminated within 90 days of the acquisition date.

As of the beginning of fiscal year 2010, acquisition related and other expenses are recorded as expenses in our statements of operations. These amounts had primarily been included as part of the total consideration and were historically capitalized as part of the acquisition pursuant to previous accounting rules. These costs were primarily direct transaction costs such as professional services fees.

 

     Three Months Ended
May  31,
   Six Months Ended
May  31,
     2010    2009(1)    2010    2009(1)

Acquisition related and other expenses:

           

Transitional and other employee related costs

   $ 147    $ —      $ 341    $ —  

Professional services fees and other

     442      —        1,293      —  
                           

Total acquisition related and other expenses

   $ 589    $ —      $ 1,634    $ —  
                           

 

(1) Prior to the adoption of new amended guidance for business combinations effective December 1, 2009, the majority of acquisition and other related expenses were capitalized.

 

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TIBCO SOFTWARE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

3. BUSINESS COMBINATION

We acquired three companies during the six months ended May 31, 2010. While we use our best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilities assumed at the business combination date, our estimates and assumptions are subject to refinement. As a result, during the preliminary purchase price allocation period, which may be up to one year from the business combination date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. We record adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period in our operating results in the period in which the adjustments were determined.

The total purchase price allocated to the tangible assets acquired was assigned based on the fair values as of the date of the acquisition. The fair value assigned to identifiable intangible assets acquired was determined using the income approach which discounts expected future cash flows to present value using estimated assumptions determined by management. We believe that these identified intangible assets will have no residual value after their estimated economic useful lives.

Kabira Technologies, Inc.

On April 20, 2010, we acquired Kabira Technologies, Inc. (“Kabira”), a private company incorporated in Delaware and a provider of high performance transaction processing software solutions for communications service providers globally. Kabira’s products and solutions support key infrastructure capabilities such as subscriber provisioning, value-based charging, and mobile payments. Its in-memory approach to supporting transactions complements our abilities in handling events and adds to our broader suite of in-memory infrastructure software products. We paid $3.9 million of cash to acquire the outstanding equity of Kabira. We have also incurred $0.1 million of acquisition related and other expenses associated with the acquisition.

The preliminary allocation of the purchase price for the Kabira acquisition, as of the date of the acquisition, is as follows (in thousands):

 

Cash

   $ 931   

Accounts receivable

     2,942   

Deferred income tax assets, net

     386   

Other assets

     1,763   

Identifiable intangible assets

     10,680   

Goodwill

     2,085   

Liabilities

     (14,917
        

Total preliminary purchase price

   $ 3,870   
        

The identifiable intangible assets are subject to amortization on a straight-line basis as this best approximates the benefit period related to these assets (in thousands, except amortization period):

 

     Gross Amount
at  Acquisition
Date
   Weighted
Average
Amortization
Period

Existing technology

   $ 2,600    4.0 years

Customer base

     1,700    4.0 years

Trademarks

     180    2.0 years

Maintenance agreements

     6,200    4.0 years
         
   $ 10,680    4.0 years
         

The excess of the purchase price over the identified tangible and intangible assets, less liabilities assumed, was recorded as goodwill. We anticipate that $1.3 million of the goodwill recorded in connection with the Kabira acquisition will be deductible for income tax purposes.

Netrics.com, Inc.

On March 8, 2010, we acquired Netrics.com, Inc. (“Netrics”), a private company incorporated in Delaware and a provider of data quality software and services. Netrics’ in-memory-based approach to pattern matching and detection complements our core integration and business optimization offerings and adds to our broader suite of in-memory infrastructure software products. We paid $10.5 million of cash to acquire the outstanding equity of Netrics. We have also incurred $0.4 million of acquisition related and other expenses associated with the acquisition.

 

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TIBCO SOFTWARE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The preliminary allocation of the purchase price for the Netrics acquisition, as of the date of the acquisition, is as follows (in thousands):

 

Cash

   $ 40   

Accounts receivable

     78   

Deferred income tax assets, net

     631   

Other assets

     259   

Identifiable intangible assets

     6,400   

Goodwill

     3,873   

Liabilities

     (781
        

Total preliminary purchase price

   $ 10,500   
        

The identifiable intangible assets are subject to amortization on a straight-line basis as this best approximates the benefit period related to these assets (in thousands, except amortization period):

 

     Gross Amount
at  Acquisition
Date
   Weighted
Average
Amortization
Period

Existing technology

   $ 4,890    6.0 years

Core technology

     1,210    6.0 years

Customer base

     100    5.0 years

Maintenance agreements

     200    8.0 years
         
   $ 6,400    6.0 years
         

The excess of the purchase price over the identified tangible and intangible assets, less liabilities assumed, was recorded as goodwill. We anticipate that none of the goodwill recorded in connection with the Netrics acquisition will be deductible for income tax purposes.

Foresight Corporation

On December 31, 2009, we acquired Foresight Corporation (“Foresight”), a private company incorporated in Delaware and a leading provider of Electronic Data Interchange (“EDI”) productivity tools and transaction automation solutions. Foresight’s products connect partners and validate transactions, reducing administrative inefficiencies, and addressing mandates. Foresight also expands our expertise in the healthcare and EDI markets, where its ability to support and validate transactions across a range of standards complements our core business-to-business abilities. We paid $30.0 million of cash to acquire the outstanding equity of Foresight. We have also incurred $0.7 million of acquisition related and other expenses associated with the acquisition.

The preliminary allocation of the purchase price for the Foresight acquisition, as of the date of the acquisition, is as follows (in thousands):

 

Cash

   $ 821   

Accounts receivable

     593   

Current assets

     92   

Identifiable intangible assets

     16,700   

Goodwill

     22,851   

Liabilities

     (4,529

Deferred income tax liabilities, net

     (6,528
        

Total preliminary purchase price

   $ 30,000   
        

 

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TIBCO SOFTWARE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The identifiable intangible assets are subject to amortization on a straight-line basis as this best approximates the benefit period related to these assets (in thousands, except amortization period):

 

     Gross Amount
at  Acquisition
Date
   Weighted
Average
Amortization
Period

Existing technology

   $ 9,800    7.3 years

Core technology

     1,300    7.0 years

Customer base

     1,500    8.2 years

Trademarks

     600    8.0 years

Non-compete agreements

     100    1.5 years

Subscription base/Service agreements

     1,000    7.6 years

Maintenance agreements

     2,400    8.0 years
         
   $ 16,700    7.3 years
         

The excess of the purchase price over the identified tangible and intangible assets, less liabilities assumed, was recorded as goodwill. We anticipate that none of the goodwill recorded in connection with the Foresight acquisition will be deductible for income tax purposes.

DataSynapse, Inc.

On August 21, 2009, we acquired DataSynapse, Inc., a Delaware corporation (“DataSynapse”) and a provider of enterprise grid and cloud computing software. DataSynapse products provision and manage applications across physical, virtual and cloud-based environments. Customer benefits include improved utilization of data center resources, lower IT capital expenditures, reduced time to deployment of enterprise applications, and increased performance of mission-critical systems. The acquisition will complement TIBCO’s strategy and products for distributed software infrastructure and cloud computing. We paid $27.7 million of cash to acquire the outstanding shares of capital stock of DataSynapse. In connection with the acquisition, we have also incurred transaction costs of approximately $0.8 million. The total purchase price of DataSynapse, including transaction costs, was $28.5 million.

The preliminary allocation of the purchase price for the DataSynapse acquisition, as of the date of the acquisition, is as follows (in thousands):

 

Cash

   $ 1,052   

Current assets

     3,245   

Deferred income tax assets, net

     4,355   

Identifiable intangible assets

     24,150   

Goodwill

     8,820   

Liabilities

     (12,933

Long-term income tax liabilities

     (152
        

Total preliminary purchase price

   $ 28,537   
        

 

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TIBCO SOFTWARE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

These identifiable intangible assets are subject to amortization on a straight-line basis as this best approximates the benefit period related to these assets (in thousands, except amortization period):

 

     Gross Amount
at  Acquisition
Date
   Weighted
Average
Amortization
Period

Existing technology

   $ 12,800    6.0 years

Customer base

     3,200    8.0 years

Patents/core technology

     2,200    5.0 years

Trademarks

     850    5.0 years

Maintenance agreements

     5,100    7.0 years
         
   $ 24,150    6.4 years
         

The excess of the purchase price over the identified tangible and intangible assets, less liabilities assumed, was recorded as goodwill. We anticipate that none of the goodwill recorded in connection with the DataSynapse acquisition will be deductible for income tax purposes.

Pro Forma Adjusted Summary

The results of Kabira, Netrics, Foresight and DataSynapse’s operations have been included in the Consolidated Financial Statements subsequent to the acquisition dates.

The following unaudited pro forma adjusted summary reflects TIBCO’s condensed results of operations for the three and six months ended May 31, 2010 and 2009 assuming Kabira and DataSynapse had been acquired at the beginning of the periods. The unaudited pro forma adjusted summary combines the historical results for TIBCO for those periods with the historical results for Kabira and DataSynapse for the same periods. The following unaudited pro forma adjusted summary is not intended to be indicative of future results (in thousands, except per share amounts):

 

     Three Months Ended
May 31,
   Six Months Ended
May 31,
     2010    2009    2010    2009

Pro forma adjusted total revenue

   $ 179,230    $ 154,041    $ 339,386    $ 298,568
                           

Pro forma adjusted net income attributable to TIBCO Software Inc.

   $ 14,092    $ 7,847    $ 24,170    $ 8,804
                           

Pro forma adjusted net income per share attributable to TIBCO Software Inc.:

           

Basic

   $ 0.09    $ 0.05    $ 0.15    $ 0.05
                           

Diluted

   $ 0.08    $ 0.05    $ 0.14    $ 0.05
                           

For pro forma adjusted summary purposes, the financial impacts of Netrics and Foresight were not included as they were not significant individually or in the aggregate.

 

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TIBCO SOFTWARE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

4. INVESTMENTS

Marketable securities, which are classified as available-for-sale, are summarized below as of May 31, 2010 and November 30, 2009 (in thousands):

 

                          Classified on Balance Sheet
     Purchased/
Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Aggregate
Fair  Value
   Cash
and Cash
Equivalents
   Short-term
Investments

As of May 31, 2010:

                

Money market funds

   $ 113,568    $ —      $ —        $ 113,568    $ 113,568    $ —  

Mortgage-backed securities

     201      7      —          208      —        208
                                          
   $ 113,769    $ 7    $ —        $ 113,776    $ 113,568    $ 208
                                          

As of November 30, 2009:

                

Money market funds

   $ 132,610    $ —      $ —        $ 132,610    $ 132,610    $ —  

Mortgage-backed securities

     334      —        (27     307      —        307
                                          
   $ 132,944    $ —      $ (27   $ 132,917    $ 132,610    $ 307
                                          

Fixed income securities included in short-term investments above are summarized by their contractual maturities. Short-term investments with contract maturities of one to three years were $0.2 million and $0.3 million as of May 31, 2010 and November 30, 2009, respectively. The maturities of mortgage-backed securities are primarily based upon assumed payment forecasts utilizing interest rate scenarios and mortgage loan characteristics. The unrealized losses on our investments were primarily due to changes in interest rates and market and credit conditions of the underlying securities.

The following table summarizes the net realized gains (losses) on short-term investments for the periods presented (in thousands):

 

     Three Months Ended
May  31,
    Six Months Ended
May  31,
 
     2010    2009     2010    2009  

Realized gains

   $ 20    $ 46      $ 54    $ 83   

Realized losses

     —        (129     —        (352
                              

Net realized gains (losses)

   $ 20    $ (83   $ 54    $ (269
                              

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 our creditworthiness, whether there has been a change in our intent to sell the security, whether it is more likely than not we will be required to sell before recovery of our amortized cost basis and whether we expect to recover the entire amortized cost basis of the security resulting as a credit loss. During our quarter-end assessments, we determined an impairment was not considered necessary as of May 31, 2010. Depending on market conditions, we may record impairments on our investment portfolio in the future.

5. FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS

Fair Value Measurements

FASB guidance for fair value measurements 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, the guidance 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 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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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 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 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):

 

          Fair Value Measurements
at Reporting Date using

Description

   May 31,
2010
   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant
other
Observable
Inputs
(Level 2)

Assets:

        

Money market fund

   $ 113,568    $ 113,568    $ —  

Mortgage-backed securities

     208      —        208

Liabilities:

        

Foreign currency forward contracts

   $ 968    $ —      $ 968

During the three months ended May 31, 2010, there were no transfers to or from Levels 1 or 2.

Derivative Instruments

The U.S. dollar is our major transaction currency. We also transact business in approximately 20 foreign currencies worldwide, of which the most significant to our operations in the second quarter of fiscal year 2010 was the EURO. We enter into forward contracts with financial institutions to manage our currency exposure related to net assets and liabilities denominated in foreign currencies, and these forward contracts are generally settled monthly. Our forward contracts reduce, but do not eliminate, the impact of currency exchange rate movements. We do not enter into derivative financial instruments for trading purposes. Gains and losses on forward contracts are included in Other Income (Expense) in our Consolidated Statements of Operations.

We had eight outstanding forward contracts with a total notional amount of $72.3 million as of May 31, 2010, which are summarized as follows (in thousands):

 

     Notional
Value
Local Currency
   Notional
Value
USD
   Fair Value
Gain (Loss)
USD
 

Forward contracts sold:

        

EURO

   38,800    $ 47,964    $ (649

Australian dollar

   4,800      4,077      (78

British pound

   8,900      12,927      (93

Brazilian real

   4,400      2,403      (50

Korean won

   970,000      804      (21

South African rand

   18,000      2,363      (63

Swiss franc

   900      781      (5

New Taiwan dollar

   30,000      939      (9
                  
      $ 72,258    $ (968
                  

 

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TIBCO SOFTWARE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

     Derivatives not Designated
as Hedging Instruments
     May 31,
2010
  November  30,
2009

Foreign currency forward contracts, fair value included in:

    

Other Current Assets

   $ —     $ 367

Accrued Liabilities

     968     14

 

          Amount of Gain or (Loss)  Recognized
In Income on Derivative
 

Derivatives not Designated

as Hedging Instruments

        Three Months Ended
May  31,
    Six Months Ended
May  31,
 
  

Location

   2010    2009     2010    2009  

Foreign Currency Contracts

   Other income/(exp.)    $ 6,245    $ (8,453   $ 14,803    $ (8,383

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 May 31, 2010, 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.

6. GOODWILL AND ACQUIRED INTANGIBLE ASSETS

The change in the carrying value of goodwill for the six months ended May 31, 2010 is as follows (in thousands):

 

Balance as of November 30, 2009

   $ 374,285   

Goodwill recorded for the Foresight acquisition

     22,851   

Goodwill recorded for the Netrics acquisition

     3,873   

Goodwill recorded for the Kabira acquisition

     2,085   

Foreign currency translation

     (26,619
        

Balance as of May 31, 2010

   $ 376,475   
        

Certain of our intangible 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 May 31, 2010 and November 30, 2009 are as follows (in thousands):

 

     May 31, 2010    November 30, 2009
     Gross
Carrying
Amount
   Accumulated
Amortization
    Net
Carrying
Amount
   Gross
Carrying
Amount
   Accumulated
Amortization
    Net
Carrying
Amount

Developed technologies

   $ 114,126    $ (73,069   $ 41,057    $ 102,805    $ (70,409   $ 32,396

Customer base

     45,168      (28,325     16,843      44,193      (28,354     15,839

Patents/core technologies

     22,789      (14,236     8,553      22,311      (13,768     8,543

Trademarks

     7,515      (5,474     2,041      7,223      (5,612     1,611

Non-compete agreements

     1,580      (1,508     72      1,480      (1,480     —  

Maintenance agreements

     52,408      (23,569     28,839      46,284      (21,613     24,671
                                           
   $ 243,586    $ (146,181   $ 97,405    $ 224,296    $ (141,236   $ 83,060
                                           

 

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TIBCO 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):

 

     Three Months Ended
May  31,
   Six Months Ended
May  31,
     2010    2009    2010    2009

Amortization of acquired intangible assets:

           

In cost of revenue

   $ 3,920    $ 3,572    $ 7,534    $ 7,135

In operating expense

     3,976      3,736      7,684      7,452
                           

Total

   $ 7,896    $ 7,308    $ 15,218    $ 14,587
                           

7. ACCRUED RESTRUCTURING AND EXCESS FACILITIES COSTS

Fiscal 2010 Restructuring Plan

In order to achieve cost efficiencies and realign the company’s resources and operations, our Board of Directors approved a restructuring plan initiated by management during the second quarter of fiscal 2010. As of May 31, 2010, the total estimated restructuring costs associated with the restructuring plan were approximately $7.0 million consisting primarily of employee severance expenses and abandoned facilities obligations. The restructuring costs will be included as restructuring expenses in our consolidated statements of operations as they are recognized. We recorded $6.3 million of restructuring expenses in connection with the restructuring plan during the three and six months ended May 31, 2010 and expect to incur the majority of the estimated $0.7 million of remaining expenses pursuant to the restructuring plan through fiscal year 2011. Any changes to the estimates in executing the restructuring plan will be reflected in our future results of operations.

The following is a summary of activities in accrued restructuring and excess facilities costs for the six months ended May 31, 2010 (in thousands):

 

     Accrued Excess Facilities     Accrued Severance and Other  
     Headquarter
Facilities
    Acquisition
Integration
    Restructuring     Subtotal     Acquisition
Integration
    Restructuring     Subtotal     Total  

As of November 30, 2009

   $ 5,811      $ 400      $ —        $ 6,211      $ 720      $ —        $ 720      $ 6,931   

Restructuring charge

     —          —          1,852        1,852        —          4,317        4,317        6,169   

Acquisition integration costs

     —          —          —          —          103        —          103        103   

Cash utilized

     (2,616     (198     (346     (3,160     (605     (549     (1,154     (4,314
                                                                

As of May 31, 2010

   $ 3,195      $ 202      $ 1,506      $ 4,903      $ 218      $ 3,768      $ 3,986      $ 8,889   
                                                                

The remaining accrued excess facilities 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 May 31, 2010, $0.8 million of the $8.9 million accrued restructuring and excess facilities costs were classified as long-term liabilities.

8. LONG-TERM DEBT AND LINE OF CREDIT

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 on the mortgage note payable was $41.5 million and $42.5 million as of May 31, 2010 and November 30, 2009, respectively. Our mortgage note payable has a fair value that is not materially different from its carrying amount.

The mortgage note payable carries a 20-year amortization, and in the second quarter of fiscal year 2007, we amended the mortgage note payable such that it now carries a fixed annual interest rate of 5.50%. 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. Under the currently 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 meet other non-financial terms as defined in the agreements. In addition, we are subject to certain non-financial covenants as defined in the agreements. As of May 31, 2010, we were in compliance with all covenants.

 

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TIBCO SOFTWARE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Lines of Credit

In November 2009, we entered into a $150.0 million unsecured revolving credit facility (the “Credit Agreement”) that matures in November 2012. The revolving credit facility is available for cash borrowings up to $150.0 million, with a sublimit for the issuance of standby letters of credit in a face amount up to $25.0 million and swing line loans up to $10.0 million. As of May 31, 2010, no borrowings were outstanding under the Credit Agreement and a $4.5 million irrevocable letter of credit was outstanding, leaving $145.5 million of available credit for cash borrowings, of which $20.5 million is available for additional letters of credit. Revolving loans accrue interest at a per annum rate based on either (i) the base rate plus a margin ranging from 2.25% to 3.00%, depending on TIBCO’s consolidated leverage ratio or (ii) the LIBOR rate plus a margin ranging from 3.25% to 4.00%, depending on TIBCO’s consolidated leverage ratio, for various interest periods. The base rate is defined as the highest of (i) the administrative agent’s prime rate (ii) the federal funds rate plus a margin equal to 0.50%, and (iii) except during a period when LIBOR rates are unavailable, the LIBOR rate for a one month interest period plus a margin equal to 1.00%. Swing line loans accrue interest at a per annum rate based on the base rate plus a margin ranging from 2.25% to 3.00%. A commitment fee is applied to the un-borrowed amount at a per annum rate ranging from 0.50% to 0.75%. A $2.3 million loan origination fee and issuance costs incurred upon consummation of the Credit Agreement will be amortized through interest expense over a period of three years. Other customary fees and letter of credit fees may be charged as they are incurred. All fees would be recognized over the life of the facility as an adjustment of interest expense. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Credit Agreement at a per annum rate equal to 2.00% above the applicable interest rate. In order to make acquisitions under the Credit Agreement, the Credit Agreement requires, among other things, immediately after giving a pro forma effect to any such acquisition we maintain $120.0 million of total unrestricted cash, cash equivalents, certain short-term investments and total available borrowings, of which $80.0 million must be held by a financial institution with the account residing in the United States. Under this Credit Agreement, we must maintain a minimum consolidated interest coverage ratio of 3.5:1.0 and a maximum consolidated leverage ratio of 2.5:1.0 in addition to other customary affirmative and negative covenants. As of May 31, 2010, we were in compliance with all covenants of this facility.

We also have a $20.0 million revolving line of credit that matures on June 17, 2011. 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 May 31, 2010, no borrowings were outstanding under the facility and two irrevocable letters of credit in the amounts of $13.0 million and approximately $1.0 million were outstanding, leaving approximately $6.0 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 approximately $1.0 million irrevocable letter of credit outstanding was issued in connection with a sales transaction denominated in foreign currency and will remain outstanding until July 2012. The line of credit, as amended, contains financial covenants identical to those of the Credit Agreement, as well as other customary affirmative and negative covenants. As of May 31, 2010, we were in compliance with all covenants under the revolving line of credit.

9. COMMITMENTS AND CONTINGENCIES

Letters of Credit and Bank Guarantees

In connection with the mortgage note payable described in Note 8 above, we entered into an irrevocable letter of credit in the amount of $13.0 million; additionally, in connection with a sale transaction denominated in foreign currency we entered into an irrevocable letter of credit in the amount of approximately $1.0 million; see Note 8 for further details. The letter of credit is collateralized by the $20.0 million revolving line of credit described above in Note 8 and automatically renews for successive one-year periods until the mortgage note payable has been satisfied in full. As of May 31, 2010, we were in compliance with all covenants under the revolving line of credit.

In connection with a facility lease, we have an irrevocable letter of credit outstanding under the Credit Agreement 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. As of May 31, 2010, we were in compliance with all covenants under the Credit Agreement as described in Note 8.

As of May 31, 2010, in connection with bank guarantees issued by some of our international subsidiaries, we had $6.4 million of restricted cash which is included in Other Assets on our Consolidated Balance Sheets.

 

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TIBCO SOFTWARE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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 ten years based upon changes in market condition. Should it become necessary, we have the option to prepay any rent increases due as a result of a change in fair 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 twelve months is included in Prepaid Expenses and Other Current Assets, and the remainder is included in Other Assets on our 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 $2.6 million and $2.3 million for the three month periods ended May 31, 2010 and 2009, respectively, and $5.2 million and $4.6 million for the six month periods ended May 31, 2010 and 2009, respectively.

As of May 31, 2010, contractual commitments associated with indebtedness, lease obligations and restructuring were as follows (in thousands):

 

     Total     Remainder
of 2010
    2011     2012    2013    2014    Thereafter

Operating commitments:

                 

Debt principal

   $ 41,466      $ 1,089      $ 2,269      $ 2,397    $ 35,711    $ —      $ —  

Debt interest

     6,611        1,128        2,164        2,036      1,283      —        —  

Operating leases

     31,245        5,125        9,576        6,352      4,567      3,168      2,457
                                                   

Total operating commitments

     79,322        7,342        14,009        10,785      41,561      3,168      2,457
                                                   

Restructuring-related commitments:

                 

Gross lease obligations

     5,669        3,545        1,376        643      105      —        —  

Committed sublease income

     (1,567     (1,328     (239     —        —        —        —  
                                                   

Net restructuring-related commitment

     4,102        2,217        1,137        643      105      —        —  
                                                   

Total commitments

   $ 83,424      $ 9,559      $ 15,146      $ 11,428    $ 41,666    $ 3,168    $ 2,457
                                                   

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 $14.0 million of long-term income tax liabilities recorded in accounting for uncertainty in income taxes due to the fact that we are unable to reasonably estimate the timing of these potential future payments.

Indemnification

Our software license agreements typically provide for indemnification of customers for intellectual property infringement claims. 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.

 

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TIBCO SOFTWARE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

10. LEGAL PROCEEDINGS

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.

The parties have reached a global settlement of the litigation, including the actions against us and Talarian. Under the settlement, the insurers will pay the full amount of settlement share allocated to us (our financial liability will be limited to paying the remaining balance of the applicable retention under Talarian’s directors and officers liability insurance policy). In addition, we, as well as the officer and director defendants who were previously dismissed from the action pursuant to tolling agreements, will receive complete dismissals from the case. On October 5, 2009, the Court granted final approval of the settlement. Certain objectors have filed appeals.

Proginet Merger Litigation

We, as well as our subsidiary created for the purpose of effectuating the acquisition of Proginet Corporation (“Proginet”) as described in Note 18 Subsequent Event below, were named as an alleged aider and abettor of the breach of fiduciary duty by the board of directors of Proginet in agreeing to the transaction in the Supreme Court of New York, County of Nassau captioned “Schecter v. Weil et al.” The complaint seeks an injunction to prevent the consummation of the proposed transaction, unspecified damages, and attorney’s fees. The case is in its earliest stages and there has been no response to the complaint.

JuxtaComm v. TIBCO, et al.

On January 21, 2010, JuxtaComm-Texas Software, LLC (“JuxtaComm”) filed a complaint for patent infringement against us and other defendants in the United States District Court for the Eastern District of Texas, Case No. 6:10-CV-00011-LED. On April 22, 2010, JuxtaComm filed an amended complaint in which it alleges that TIBCO ActiveMatrix Business Works, iProcess Suite, Business Studio and ActiveMatrix Service Bus infringe U.S. Patent No. 6,195,662.

 

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JuxtaComm seeks injunctive relief and unspecified damages. On May 6, 2010, we filed an answer and counterclaims in which we denied JuxtaComm’s claims and asserted counterclaims for declaratory relief that the asserted patent is invalid and not infringed. Trial is scheduled for January 3, 2012. We intend to defend the action vigorously. While we believe that we have valid defenses to JuxtaComm’s claims, litigation is inherently unpredictable and we cannot make any predictions as to the outcome of this litigation. It is possible that our business, financial position, or results of operations could be negatively affected by an unfavorable resolution of this action.

11. STOCK BENEFIT PLANS AND STOCK-BASED COMPENSATION

Stock Benefit Plans

2008 Equity Incentive Plan (the “2008 Plan”). As of May 31, 2010, there were 4.6 million shares available for grant and approximately 2.8 million shares underlying stock options outstanding under the 2008 Plan. At our Annual Meeting of Stockholders on April 22, 2010, our stockholders approved an amendment and restatement of the 2008 Plan which: (i) increased the number of shares of our common stock reserved for issuance under the 2008 Plan by 7.5 million and (ii) replaced the restriction in the 2008 Plan which limited the number of restricted stock, restricted stock units or other-stock based awards to fifty percent of the 2008 Plan’s available share reserve with a flexible share counting mechanism. As a result, beginning on April 22, 2010, each award granted as restricted stock and restricted stock units under the 2008 Plan will count against the 2008 Plan’s share reserve as 1.81 shares for every one share subject to these awards and shares acquired pursuant to such awards granted on or after April 22, 2010, that are forfeited to or repurchased by us and that otherwise would return to the share reserve, would do so in an amount equal to 1.81 times the number of shares forfeited or repurchased. During the six months ended May 31, 2010, certain of our employees, including our Chief Executive Officer, Chief Financial Officer and other named executive officers, received performance-based restricted stock units (“PRSU”). These PRSU are subject to the terms and conditions set forth in the PRSU Agreement and granted under our 2008 Plan as recently amended and restated. As of May 31, 2010, approximately 4.1 million shares of PRSU were outstanding.

These PRSU will be eligible to start vesting as of the end of our fiscal year 2012 if we achieve non-GAAP EPS of $1.00 or greater for our fiscal year 2012 and a cumulative non-GAAP EPS of $2.40 or greater over the three fiscal years 2010, 2011 and 2012. If the performance goals are not met as measured at the end of Fiscal Year 2012, then the PRSU still may become eligible to vest if, in fiscal year 2013, we achieve a non-GAAP EPS of $1.00 or greater and a cumulative non-GAAP EPS of $3.00 or greater over the four fiscal years 2010, 2011, 2012 and 2013. Upon attainment of the requisite performance goals, the PRSU will be scheduled to vest in two equal installments over the subsequent two years, subject to the award recipient’s continued employment. Further, even if the performance and time-based vesting requirements are met, 20% of the awards will be forfeited if, in the first fiscal year following achievement of the applicable performance goals, our non-GAAP EPS falls by 10% or more as compared to the non-GAAP EPS achieved for the year that the performance goals were achieved. Also, all or a certain portion of these PRSU generally will become eligible to vest upon a change of control occurring in 2011, 2012 or 2013, provided that the Company achieves a certain minimum cumulative non-GAAP EPS applicable to the year in which the change of control occurs, or the PRSU that became eligible to vest but have not yet vested will accelerate vesting as to 100% of the award upon the award holder’s involuntary termination without cause within 12 months after a change of control.

1996 Stock Option Plan (the “1996 Plan”). As of May 31, 2010, there were no shares available for grant and approximately 25.1 million underlying stock options outstanding under the 1996 Plan.

As of May 31, 2010, there were 4.1 million shares of restricted stock and 1.7 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 May 31, 2010, there were no shares available for grant and approximately 0.1 million shares underlying stock options outstanding under the Insightful Plan. In connection with our stockholders’ approval of the amendment to our 2008 Plan at our Annual Meeting of Stockholders on April 22, 2010 and pursuant to the approval of our Board of Directors, the number of shares remaining available for grant of awards under the Insightful Plan was reduced to zero and no additional awards will be granted under the Insightful Plan.

 

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1998 Director Option Plan (the “Director Plan”). As of May 31, 2010, there were no shares available for grant and approximately 1.1 million shares underlying stock options outstanding under the Director Plan.

2000 Extensibility Stock Option Plan (the “Extensibility Plan”). As of May 31, 2010, there were no shares available for grant and approximately 18,000 shares underlying stock options outstanding under the Extensibility Plan.

Talarian Stock Option Plans (the “Talarian Plans”). As of May 31, 2010, there were no shares available for grant and approximately 17,000 shares underlying stock options outstanding under the Talarian Plans.

2008 Employee Stock Purchase Plan (the “2008 ESPP”). We issued approximately 0.2 million shares under the 2008 ESPP, representing approximately $1.4 million in employee contributions for the six months ended May 31, 2010. As of May 31, 2010, approximately 9.3 million shares of our common stock were available for issuance under the 2008 ESPP.

2009 Deferred Compensation Plan (the “2009 DCP”). As of May 31, 2010, there were approximately 992,000 shares of our common stock available for issuance under the 2009 DCP.

Stock Options Activities

The summary of stock option activity for the six months ended May 31, 2010 is presented below (in thousands, except per share and term data):

 

Stock Options

   Number  of
Shares
Underlying
Stock
Options
    Weighted-
Average
Exercise
Price
   Weighted-
Average
Remaining
Contractual
Term (years)
   Aggregate
Intrinsic
Value

Outstanding at November 30, 2009

   31,641      $ 8.52    3.86    $ 34,997
                        

Granted

   338        9.80      

Exercised

   (2,688     7.15      

Forfeited or expired

   (575     21.37      
                  

Outstanding at May 31, 2010

   28,716      $ 8.40    3.40    $ 92,304
                        

Vested and expected to vest at May 31, 2010

   28,113      $ 8.42    3.36    $ 90,195
                        

Exercisable at May 31, 2010

   24,563      $ 8.49    3.09    $ 77,843
                        

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 six months ended May 31, 2010 and 2009 was $10.0 million and $2.5 million, respectively. Upon the exercise of stock options, we issue common stock from our authorized shares. As of May 31, 2010, total unamortized stock-based compensation cost related to unvested stock options was $10.3 million, with a weighted-average recognition period of 2.19 years.

The total realized tax benefits attributable to stock options exercised and vesting of stock awards were $13.7 million and $5.6 million for the six months ended May 31, 2010 and 2009, respectively.

 

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Stock Awards Activities

Our nonvested stock awards are comprised of restricted stock, restricted stock units and performance-based restricted stock units. A summary of the status of nonvested stock awards as of May 31, 2010, and activities during the six months ended May 31, 2010, is presented as follows (in thousands, except per share data):

 

Nonvested Stock Awards

   Restricted
Stock
    Restricted
Stock
Units
    Performance-
based
Restricted
Stock
Units
   Total Number
of Shares
Underlying
Stock
Awards
    Weighted-
Average
Grant Date
Fair
Value

Nonvested at November 30, 2009

   4,081      1,802      —      5,883      $ 7.41

Granted

   1,082      407      4,092    5,581        10.57

Vested

   (1,018   (415   —      (1,433     8.37

Forfeited

   (77   (48   —      (125     7.66
                         

Nonvested at May 31, 2010

   4,068      1,746      4,092    9,906      $ 9.05
                         

We granted approximately 1.5 million shares of nonvested stock awards at no cost to recipients during the six months ended May 31, 2010. As of May 31, 2010, there was $36.0 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 2.56 years). The total fair value of shares vested pursuant to stock awards during the six months ended May 31, 2010 is $12.0 million.

We granted approximately 4.1 million PRSU during the six months ended May 31, 2010. As of May 31, 2010, there was $37.0 million of total unrecognized compensation cost related to PRSU. That cost is expected to be recognized using the graded vesting attribution method over the requisite service period of four to six years (currently the weighted-average recognition period is approximately 5.17 years).

Stock-Based Compensation

Stock-based compensation cost for the three months ended May 31, 2010 and 2009 was $7.8 million and $5.8 million, respectively. Stock-based compensation cost for the six months ended May 31, 2010 and 2009 was $14.2 million and $11.2 million, respectively. The stock-based compensation cost primarily relates to expenses recognized from nonvested stock awards and employee stock options. The deferred tax benefit on stock-based compensation expenses for the three months ended May 31, 2010 and 2009 was $2.7 million and $1.6 million, respectively. The deferred tax benefit on stock-based compensation expenses for the six months ended May 31, 2010 and 2009 was $4.7 million and $3.3 million, respectively.

We recognize the fair value of service-based stock awards generally on a straight-line basis over the requisite service period of three to four years, net of estimated forfeitures. Employee stock-based compensation cost related to grants of service-based stock awards for the three months ended May 31, 2010 and 2009 was approximately $4.0 million and $2.8 million, respectively. Employee stock-based compensation cost related to grants of service-based stock awards for the six months ended May 31, 2010 and 2009 was approximately $8.0 million and $5.3 million, respectively.

We recognize the fair value of employee stock options on a straight-line basis over the requisite service period of three to four years, net of estimated forfeitures. Employee stock-based compensation cost related to employee stock options for the three months ended May 31, 2010 and 2009 was approximately $2.2 million and $2.8 million, respectively. Employee stock-based compensation cost related to employee stock options for the six months ended May 31, 2010 and 2009 was approximately $4.4 million and $5.4 million, respectively.

We recognize compensation cost related to the performance-based restricted stock units, net of estimated forfeitures, over the requisite service period of four to six years, using the graded vesting attribution method. Compensation cost related to performance-based restricted stock units for the three and six months ended May 31, 2010 was $1.3 million for each period.

We recognize the stock-based compensation costs for PRSU when we believe it is probable that we will achieve the performance criteria as defined in the PRSU agreement. We then estimate the most probable period in which the performance criteria will be met, if at all. Under the terms of the PRSU, 20% of the PRSU will be forfeited if, in the fiscal year following achievement of the applicable performance goals, our non-GAAP EPS falls by 10% or more as compared to the non-GAAP EPS achieved for the year that the performance goals were achieved. Therefore, we also assess the probability of this forfeiture when analyzing our stock-based compensation costs for PRSU. On a quarterly basis management calculates, based on these estimates, the appropriate compensation expense over the requisite service period by using the graded vesting

 

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attribution method and then book an adjustment to compensation cost in that reporting period. As of May 31, 2010, management estimates that it is probable that the performance criteria will be met in first quarter of 2013 and it is not probable that 20% of the PRSU’s will be forfeited prior to vesting.

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 six months ended May 31, 2010 and 2009 was approximately $0.5 million for each period.

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:

 

     Three Months Ended
May  31,
    Six Months Ended
May 31,
 
     2010     2009     2010     2009  

Stock Option Grants:

        

Expected term of stock options (years)

     5.1        5.1        4.8 - 5.1        4.7 - 5.1   

Risk-free interest rate

     2.40     1.90     2.40     1.70 - 1.90

Expected volatility

     42     54     42 - 44     54 - 56

Weighted-average grant date fair value (per share)

   $ 4.79      $ 3.34      $ 4.49      $ 3.27   

ESPP:

        

Expected term of ESPP (years)

     N/A        N/A        0.5        0.5   

Risk-free interest rate

     N/A        N/A        0.20     0.40

Expected volatility

     N/A        N/A        35     71

Weighted-average grant date fair value (per share)

     N/A        N/A      $ 2.30      $ 1.90   

 

12. COMPREHENSIVE INCOME (LOSS)

Our comprehensive income (loss) 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 (loss) for the periods indicated is as follows (in thousands):

 

     Three Months Ended
May 31,
   Six Months Ended
May 31,
 
     2010     2009    2010     2009  

Net income

   $ 12,931      $ 10,193    $ 23,371      $ 15,798   

Cumulative translation adjustment

     (17,924     34,935      (26,798     15,319   

Unrealized gain (loss) on available-for-sale securities

     14        85      33        (16
                               

Comprehensive income (loss)

     (4,979     45,213      (3,394     31,101   

Less: Comprehensive income attributable to noncontrolling interest

     122        226      117        201   
                               

Comprehensive income (loss) attributable to TIBCO Software Inc.

   $ (5,101   $ 44,987    $ (3,511   $ 30,900   
                               

 

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The following table summarizes the allocation of comprehensive income (loss) between stockholders of TIBCO Software Inc. and the noncontrolling interest (in thousands):

 

     Three Months Ended
May 31, 2010
    Six Months Ended
May 31, 2010
 
     Stockholders
of TIBCO
Software
Inc.
    Noncontrolling
Interest
   Total     Stockholders
of TIBCO
Software
Inc.
    Noncontrolling
Interest
    Total  

Net income

   $ 12,814      $ 117    $ 12,931      $ 23,239      $ 132      $ 23,371   

Cumulative translation adjustment

     (17,929     5      (17,924     (26,783     (15     (26,798

Unrealized gain on available-for-sale securities

     14        —        14        33        —          33   
                                               

Comprehensive income (loss)

   $ (5,101   $ 122    $ (4,979   $ (3,511   $ 117      $ (3,394
                                               

The balances of each component of accumulated other comprehensive income (loss), net of taxes, as of May 31, 2010 and November 30, 2009, consist of the following (in thousands):

 

     Unrealized Gain
(Loss) in
Available-for-Sale
Securities
    Foreign
Currency
Translation
    Accumulated
Other
Comprehensive
Income (Loss)
 

Balance as of November 30, 2009

   $ (26   $ (16,387   $ (16,413

Net change during six month period

     33        (26,783     (26,750
                        

Balance as of May 31, 2010

   $ 7      $ (43,170   $ (43,163
                        

 

13. NONCONTROLLING INTEREST

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. As of May 31, 2010 and November 30, 2009, Innovations had total assets of $4.4 million and $3.2 million, respectively. For the six months ended May 31, 2010 and 2009, Innovations had total revenues of $5.8 million and $2.1 million, respectively. As of May 31, 2010, 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 accordingly eliminated 25.1% of the financial results that pertain to the noncontrolling interest of Innovations; this eliminated amount was reported as a separate line in our Condensed Consolidated Statements of Operations and Balance Sheets.

The following table provides a reconciliation of the beginning and the ending carrying amounts of equity attributable to noncontrolling interest (in thousands):

 

Balance as of November 30, 2009

   $ 732   

Net income

     132   

Cumulative translation adjustment

     (15
        

Balance as of May 31, 2010

   $ 849   
        

 

14. PROVISION FOR INCOME TAXES

The effective tax rate of 17.2% for the three months ended May 31, 2010 differs from the statutory rate of 35.0% primarily due to the expiration of a statute of limitations in the United Kingdom, 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 and state income taxes. The effective tax rate of 32.1% for the three months ended May 31, 2009 differs from the statutory rate of 35.0% 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, state income taxes and the U.S. tax effects resulting from certain cash distributions from our foreign affiliates.

 

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The expiration of a statute of limitations in the United Kingdom resulted in a favorable tax effect of $2.3 million which has been recorded as a discrete item for the three months ended May 31, 2010.

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 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.

In connection with the acquisition of DataSynapse in fiscal year 2009, we recorded current deferred tax assets of $0.7 million and long term deferred tax assets of $3.7 million with a corresponding adjustment to goodwill. These deferred taxes were primarily related to the acquired tangible and intangible assets, deferred revenue, accounts receivable, accrued expenses and certain tax attributes of DataSynapse.

In connection with the acquisition of Foresight in the first quarter of fiscal year 2010, we have recorded current deferred tax liabilities of $1.5 million and long term deferred tax liabilities of $6.5 million with a corresponding adjustment to goodwill. These deferred taxes were primarily related to the acquired intangible assets, deferred revenue and accrued expenses.

In connection with the acquisition of Netrics in the second quarter of fiscal year 2010, we have recorded current deferred tax assets of $0.2 million and long term deferred tax assets of $0.4 million with a corresponding adjustment to goodwill. These deferred taxes were primarily related to the acquired intangible assets, deferred revenue, accounts receivable, accrued expenses and certain tax attributes of Netrics.

In connection with the acquisition of Kabira in the second quarter of fiscal year 2010, we have recorded current deferred tax assets of $1.4 million and long term deferred tax liabilities of $1.1 million with a corresponding adjustment to goodwill. These deferred taxes were primarily related to the acquired intangible assets, deferred revenue and accrued expenses.

During the second quarter of fiscal year 2010, the amount of gross unrecognized tax benefits was decreased by approximately $2.9 million due to the expiration of a statute of limitations in the United Kingdom. The total amount of gross unrecognized tax benefits was $35.8 million as of May 31, 2010, 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 the accounting for uncertainty in income taxes, 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 the accounting for uncertainty in income taxes. As of November 30, 2009, we had accrued $1.4 million for interest and penalties. During the second quarter of fiscal year 2010, we decreased the amount of accrued interest by $0.6 million due to the expiration of a statute of limitations in the United Kingdom.

We are subject to routine corporate income tax audits in the United States and foreign jurisdictions. The statute of limitations for our fiscal years 1994 through 2009 remains open for U.S. purposes. Most foreign jurisdictions have statutes 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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With the exception of our subsidiaries in the United Kingdom and Japan, 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.

 

15. NET INCOME PER SHARE

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):

 

     Three Months Ended
May 31,
   Six Months Ended
May 31,
     2010    2009    2010    2009

Net income attributable to TIBCO Software Inc.

   $ 12,814    $ 10,077    $ 23,239    $ 15,073

Weighted-average shares of common stock used to compute basic net income per share (excluding unvested restricted stock)

     160,992      171,635      161,792      171,460

Effect of dilutive common stock equivalents:

           

Stock options to purchase common stock

     6,921      951      6,080      858

Restricted common stock awards

     2,062      548      1,989      296
                           

Weighted-average shares of common stock used to compute diluted net income per share

     169,975      173,134      169,861      172,614
                           

Net income per share attributable to TIBCO Software Inc.:

           

Basic

   $ 0.08    $ 0.06    $ 0.14    $ 0.09
                           

Diluted

   $ 0.08    $ 0.06    $ 0.14    $ 0.09
                           

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):

 

     Three Months Ended
May  31,
   Six Months Ended
May  31,
     2010    2009    2010    2009

Stock options to purchase common stock

   6,911    30,112    7,880    31,708

Restricted common stock awards

   227    1,191    114    2,304
                   

Total anti-diluted common stock equivalents

   7,138    31,303    7,994    34,012
                   

Effective December 1, 2009, we adopted new accounting guidance that requires unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) to be included in the computation of net income per share using the two-class method. Our nonvested stock awards issued are not considered participating securities due to their forfeitability.

During the six months ended May 31, 2010, we granted PRSU that contains performance metrics based on the attainment and maintenance of specified non-GAAP EPS goals. If the performance criteria are achieved, these PRSU will be considered outstanding for the purpose of computing diluted EPS if the effect is dilutive. Please see Note 11 for additional details. As of May 31, 2010, 4.1 million shares of PRSU were outstanding. The dilutive impact of these awards will be deferred until the first quarter of fiscal year 2013, at the earliest, when and if the performance criteria of the awards have been met.

 

16. SEGMENT INFORMATION

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.

 

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TIBCO SOFTWARE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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):

 

     Three Months Ended
May 31,
   Six Months Ended
May 31,
     2010    2009    2010    2009

Americas:

           

United States

   $ 82,853    $ 65,711    $ 152,134    $ 131,559

Other Americas

     6,586      9,280      16,841      13,559
                           

Total Americas

     89,439      74,991      168,975      145,118
                           

EMEA:

           

United Kingdom

     18,665      17,183      35,093      28,139

Other EMEA

     45,648      38,987      89,401      80,090
                           

Total EMEA

     64,313      56,170      124,494      108,229
                           

APJ

     19,518      11,509      34,845      22,219
                           
   $ 173,270    $ 142,670    $ 328,314    $ 275,566
                           

No customer accounted for more than 10% of total revenue for the six months ended May 31, 2010 or 2009. No customer had a balance in excess of 10% of our net accounts receivable on May 31, 2010 or November 30, 2009.

Our property and equipment by major country are summarized as follows (in thousands):

 

     May 31,
2010
   November  30,
2009

Property and equipment, net:

     

United States

   $ 86,696    $ 90,254

United Kingdom

     1,748      2,224

Other

     2,201      2,153
             
   $ 90,645    $ 94,631
             

 

17. STOCK REPURCHASE PROGRAMS

In April 2010, 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. In connection with the approval of this program, our Board of Directors also terminated our previous $300.0 million stock repurchase program from April 2008, and the remaining authorized amount of $26.7 million under the April 2008 stock repurchase program was canceled. As of May 31, 2010, we had $295.7 million available for purchases under the April 2010 stock repurchase program.

All repurchased shares of common stock have been retired. The following table summarizes the activities under our stock repurchase programs for the periods indicated (in thousands, except per share data):

 

     Three Months Ended
May 31,
   Six Months Ended
May 31,
     2010    2009    2010    2009

Cash used for repurchases

   $ 37,918    $ 14,791    $ 67,482    $ 14,791
                           

Shares repurchased

     3,447      2,308      6,587      2,308
                           

Average price per share

   $ 11.00    $ 6.41    $ 10.24    $ 6.41
                           

In connection with the repurchase activities during the six months ended May 31, 2010, we classified $36.3 million of the excess purchase price over the par value of our common stock to retained earnings and $31.1 million to additional paid-in capital. From June 1, 2010 up to July 2, 2010, we have repurchased approximately 1.5 million shares of our outstanding common stock at an average price of $12.11 per share pursuant to the April 2010 stock repurchase program.

 

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TIBCO SOFTWARE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

18. SUBSEQUENT EVENT

Proposed Acquisition of Proginet Corporation

On June 22, 2010, we entered into an Agreement and Plan of Merger with Proginet Corporation (“Proginet”), a provider of managed file transfer solutions, in a transaction valued at approximately $1.15 in cash per share of Proginet common stock, which is currently estimated at approximately $21 million. Completion of this transaction is subject to customary closing conditions, including stockholder approval from the stockholders of Proginet. The transaction is expected to close during TIBCO’s fiscal third or fourth quarter. Until the transaction closes, each company will continue to operate independently. Also see Note 10 to our Condensed Consolidated Financial Statements for discussion on the Proginet Merger Litigation.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 future events or 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 these words are not the only means of identifying these 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.” This discussion should be read in conjunction with our Consolidated Financial Statements and accompanying notes and with our Annual Report on Form 10-K for the year ended November 30, 2009 and with our quarterly Condensed Consolidated Financial Statements and notes thereto which appear elsewhere in this Quarterly Report on Form 10-Q . 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 energy, financial services, government, insurance, life sciences, logistics, manufacturing, retail, telecommunications and transportation. 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 first six months of fiscal year 2010. As of May 31, 2010, 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 second quarter of fiscal year 2010, we recorded total revenue of $173.3 million, an increase of 21% from the second quarter of fiscal year 2009. License revenue was $62.1 million, an increase of 23% from the previous year. Service and maintenance revenue was $111.2 million, an increase of 21% from the previous year. In addition, we generated cash flow from operations of $41.0 million in the second quarter of fiscal year 2010. Earnings per share was $0.08 in the second quarter of fiscal year 2010 as compared to $0.06 for the second quarter of fiscal year 2009. We ended the quarter with $277.3 million in cash, cash equivalents and short-term investments.

We currently intend to grow our business by pursuing key initiatives to: broaden our product platform through internal development and acquisitions; increase our sales capacity by expanding our direct sales organization and developing our channel partnerships; expand our product offerings to new vertical markets; and employ marketing programs to increase awareness of the Company and its products among existing and prospective customers. Whether or not we are successful depends on our ability to: appropriately manage our expenses as we grow our organization; identify or acquire companies or assets at attractive valuations; enter into beneficial channel relationships; develop products for new vertical markets; and successfully execute our marketing strategies.

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,

 

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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, business combination, impairment of goodwill, intangible assets and long-lived assets 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 2009 Annual Report on Form 10-K for the fiscal year ended November 30, 2009.

Business Combination

In the first quarter of fiscal year 2010, we adopted the new accounting standard related to business combinations. Under the new accounting standard, accounting for deferred tax asset valuation allowances, integration costs and uncertain tax position liabilities and costs incurred to effect an acquisition generally results in the recording of expense to our operations as these costs are incurred. This contrasts with how we accounted for these items in prior periods according to the previous accounting standard and related guidance in, which generally required that these items be included as a part of the purchase price allocation for the business combination and generally did not impact our results of operations. As a result of the adoption of the new standard, we expect that we will record additional restructuring, income tax and acquisition related and other expenses for any prospective acquisitions that we consummate in our results of operations. The amount, timing and frequency of such expenses are difficult to predict and could materially affect our results of operations and financial position.

Stock-Based Compensation

During the six months ended May 31, 2010, we granted certain of our employees, including our Chief Executive Officer, Chief Financial Officer and other named executive officers, performance-based restricted stock units (“PRSU”). We recognize the stock-based compensation expense for our PRSU based on the probability of achieving certain performance criteria, as defined in the PRSU agreement. We then estimate the most probable period in which the performance criteria will be met, if at all. Under the terms of the PRSU, 20% of the PRSU will be forfeited if, in the fiscal year following achievement of the applicable performance goals, our non-GAAP EPS falls by 10% or more as compared to the non-GAAP EPS achieved for the year that the performance goals were achieved. Therefore, we also assess the probability of this forfeiture when analyzing our stock-based compensation costs for the PRSU. On a quarterly basis management calculates, based on these estimates, the appropriate compensation cost over the requisite service period using the graded vesting attribution method and then book an adjustment to compensation expense in that reporting period. Due to the long-term nature of the performance goals, assessing the probability of achieving these goals is a highly subjective process that requires judgment. A deferred tax asset is recorded over the vesting period as stock compensation cost is recorded. Our ability to realize the deferred tax asset is ultimately based on the actual value of the stock-based awards upon exercise or release of the restricted stock unit. If the actual value is lower than the fair value determined on the date of grant, it would result in an increase to our income tax expense for the portion of the deferred tax asset that cannot be realized. This could have a material adverse effect on our financial results.

Recent Accounting Pronouncements

Recent accounting pronouncements are detailed in Note 2 to our Condensed Consolidated Financial Statements.

 

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Results of Operations

For purposes of presentation, we have indicated the second quarter of fiscal year 2010 as ended on May 31, 2010; whereas in fact, the second quarter of fiscal year 2010 actually ended on May 30, 2010. There were 91 days in the second quarter of both fiscal years 2010 and 2009. All amounts presented in the tables in the following sections on our Results of Operations are stated in thousands 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:

 

     Three Months Ended
May  31,
    Six Months Ended
May  31,
 
     2010     2009     2010     2009  

Revenue:

        

License

   36   35   35   35

Service and maintenance

   64      65      65      65   
                        

Total revenue

   100      100      100      100   
                        

Cost of revenue:

        

License

   5      5      5      5   

Service and maintenance

   22      23      22      23   
                        

Total cost of revenue

   27      28      27      28   
                        

Gross profit

   73      72      73      72   

Operating expenses:

        

Research and development

   17      18      18      19   

Sales and marketing

   33      33      33      34   

General and administrative

   7      8      7      8   

Amortization of acquired intangible assets

   2      3      2      3   

Acquisition related and other

   —        —        1      —     

Restructuring charges

   4      —        2      —     
                        

Total operating expenses

   63      62      63      64   
                        

Income from operations

   10      10      10      8   

Interest income

   —        1      —        1   

Interest expense

   (1   (1   (1   —     

Other income (expense), net

   —        —        —        —     
                        

Income before provision for income taxes and noncontrolling interest

   9      10      9      9   

Provision for income taxes

   2      3      2      3   

Net income

   7      7      7      6   

Less: Net income (loss) attributable to noncontrolling interest

   —        —        —        —     
                        

Net income attributable to TIBCO Software Inc.

   7   7   7   6
                        

Total Revenue

Our total revenue consisted primarily of license, service and maintenance fees from our customers and partners.

 

     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
     2010    2009    Change     2010    2009    Change  

Total revenue

   $ 173,270    $ 142,670    21   $ 328,314    $ 275,566    19

Total revenue in the second quarter of fiscal year 2010 increased by $30.6 million, or 21%, compared to the same quarter last year. The increase was primarily comprised of an $11.6 million, or 23%, increase in license revenue and a $19.0 million, or 21%, increase in service and maintenance revenue. Total revenue in the first six months of fiscal year 2010 increased by $52.7 million, or 19%, compared to the same period last year.

 

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For the six months ended May 31, 2010, we experienced an increase in total revenue in all geographic regions compared to the same period last year. See Note 16 to our Condensed Consolidated Financial Statements for total revenue by region. The percentages of total revenue from the geographic regions are summarized as follows:

 

     Three Months Ended
May  31,
    Six Months Ended
May  31,
 
     2010     2009     2010     2009  

Americas

   52   53   51   53

EMEA

   37      39      38      39   

APJ

   11      8      11      8   
                        
   100   100   100   100
                        

License Revenue

 

     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
     2010     2009     Change     2010     2009     Change  

License revenue

   $ 62,096      $ 50,457      23   $ 116,270      $ 95,306      22

As percent of total revenue

     36     35       35     35  

License revenue in the second quarter of fiscal year 2010 increased by $11.6 million, or 23%, compared to the same quarter last year. License revenue in the first six months of fiscal year 2010 increased by $21.0 million, or 22%, compared to the same period last year.

Our license revenue in the first six months of fiscal years 2010 and 2009 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:

 

     Three Months Ended
May  31,
    Six Months Ended
May  31,
 
     2010     2009     2010     2009  

SOA

   62   58   66   60

Business optimization

   27      30      25      26   

BPM

   11      12      9      14   
                        
   100   100   100   100
                        

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:

 

     Three Months Ended
May  31,
   Six Months Ended
May  31,
     2010    2009    2010    2009

Number of license deals of $1.0 million or more

     12      11      22      22

Number of license deals over $0.1 million

     85      88      182      154

Average size of license deals over $0.1 million (in millions)

   $ 0.6    $ 0.5    $ 0.6    $ 0.5

Cost of License Revenue

 

     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
     2010     2009     Change     2010     2009     Change  

Cost of license revenue

   $ 8,199      $ 7,493      9   $ 15,595      $ 14,303      9

As percent of total revenue

     5     5       5     5  

As percent of license revenue

     13     15       13     15  

 

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Cost of license revenue mainly consisted of amortization of developed technology acquired through corporate acquisitions and royalty costs. Cost of license revenue in the second quarter of fiscal year 2010 increased by $0.7 million, or 9%, compared to the same quarter last year. The increase was primarily due to a $0.4 million increase in cost of goods sold and a $0.3 million increase in amortization expenses associated with acquired technologies, while royalty costs remained consistent compared to the same period last year.

Cost of license revenue in the first six months of fiscal year 2010 increased by $1.3 million, or 9%, compared to the same period last year. The increase was primarily due to a $0.7 million increase in cost of goods sold, a $0.3 million increase in amortization expenses associated with acquired technologies and a $0.3 million increase in royalty costs.

Service and Maintenance Revenue and Cost

 

     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
     2010     2009     Change     2010     2009     Change  

Service and maintenance revenue

   $ 111,174      $ 92,213      21   $ 212,044      $ 180,260      18

As percent of total revenue

     64     65       65     65  

Cost of service and maintenance

   $ 39,128      $ 32,404      21   $ 74,332      $ 63,649      17

As percent of total revenue

     22     23       22     23  

As percent of service and maintenance revenue

     35     35       35     35  

Service and maintenance revenue in the second quarter of fiscal year 2010 increased by $19.0 million, or 21%, compared to the same quarter last year. Service and maintenance revenue in the first six months of fiscal year 2010 increased by $31.8 million, or 18%, compared to the same period last year.

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.

Cost of service and maintenance in the second quarter of fiscal year 2010 increased by $6.7 million, or 21%, compared to the same quarter last year. The increase in absolute dollars was primarily due to a $4.3 million increase in employee-related expenses, a $1.1 million increase in subcontractor costs, a $1.1 million increase in travel expenses and a $0.2 million increase in facilities expenses. The increase in employee-related expenses was primarily due to an increase in professional services and customer support staff and was also directly related to increased service revenue in the second quarter of fiscal year 2010.

Cost of service and maintenance in the first six months of fiscal year 2010 increased by $10.7 million, or 17%, compared to the same period last year. The increase was primarily due to a $8.5 million increase in employee-related expenses, a $1.3 million increase in travel expenses, a $0.7 million increase in subcontractor costs and a $0.2 million increase in facilities expenses. The increase in employee-related expenses was primarily due to an increase in professional services and customer support staff and was also directly related to increased service revenue in the first six months of fiscal year 2010.

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.

 

     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
     2010     2009     Change     2010     2009     Change  

Research and development expenses

   $ 30,127      $ 26,260      15   $ 58,201      $ 51,394      13

As percent of total revenue

     17     18       18     19  

Research and development expenses in the second quarter of fiscal year 2010 increased by $3.9 million, or 15%, compared to the same quarter last year. The increase was primarily due to a $3.1 million increase in employee-related expenses, a $0.5 million increase in facilities expenses, a $0.1 million increase in contractor expenses, a $0.1 million increase in travel expenses and a $0.1 million increase in information technology-related expenses. The increase in employee-related expenses was primarily due to increased headcount.

 

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Research and development expenses in the first six months of fiscal year 2010 increased by $6.8 million, or 13%, compared to the same period last year. The increase was primarily due to a $5.6 million increase in employee-related expenses, a $0.8 million increase in facilities expenses, a $0.2 million increase in travel expenses, a $0.1 million increase in contractor expenses and a $0.1 million increase in information technology-related expenses. The increase in employee-related expenses was primarily due to increased headcount.

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.

 

     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
     2010     2009     Change     2010     2009     Change  

Sales and marketing expenses

   $ 56,846      $ 47,445      20   $ 109,549      $ 93,571      17

As percent of total revenue

     33     33       33     34  

Sales and marketing expenses in the second quarter of fiscal year 2010 increased by $9.4 million, or 20%, compared to the same quarter last year. The increase was primarily due to a $7.1 million increase in employee-related expenses, a $1.7 million increase in marketing programs and a $0.9 million increase in travel expenses, which were partially offset by a $0.3 million decrease in referral fees. The increase in employee-related expenses was primarily due to increased headcount as well as an increase in variable compensation. The increase in travel expenses and marketing programs was due to increased travel related to sales activities.

Sales and marketing expenses in the first six months of fiscal year 2010 increased by $16.0 million, or 17%, compared to the same period last year. The increase was primarily due to a $12.8 million increase in employee-related expenses, a $2.1 million increase in travel expenses, a $1.7 million increase in marketing programs, a $0.1 million increase in information technology-related expenses and a $0.1 million increase in facilities expenses, which were partially offset by a $0.8 million decrease in referral fees. The increase in employee-related expenses was primarily due to increased headcount as well as an increase in variable compensation. The increase in travel expenses and marketing programs was due to increased travel related to sales activities.

General 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.

 

     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
     2010     2009     Change     2010     2009     Change  

General and administrative expenses

   $ 11,907      $ 11,317      5   $ 23,253      $ 21,945      6

As percent of total revenue

     7     8       7     8  

General and administrative expenses in the second quarter of fiscal year 2010 increased by $0.6 million, or 5%, compared to the same quarter last year. The increase was primarily due to a $1.3 million increase in employee-related expenses, a $0.2 million increase in consulting expenses and a $0.2 million increase in travel expenses, which were partially offset by a $1.1 million decrease in fees and charges. The increase in employee-related expenses was primarily due to increased headcount.

General and administrative expenses in the first six months of fiscal year 2010 increased by $1.3 million, or 6%, compared to the same period last year. The increase was primarily due to a $2.0 million increase in employee-related expenses and a $0.4 million increase in travel expenses, which were partially offset by a $1.1 million decrease in fees and charges. The increase in employee-related expenses was primarily due to increased headcount.

 

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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.

 

     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
     2010     2009     Change     2010     2009     Change  

Amortization of acquired intangible assets:

            

Cost of revenue

   $ 3,920      $ 3,572        $ 7,534      $ 7,135     

Operating expenses

     3,976        3,736          7,684        7,452     
                                    

Total amortization of acquired intangible assets

   $ 7,896      $ 7,308      8   $ 15,218      $ 14,587      4
                                    

As percent of total revenue

     5     5       5     5  

Acquisition Related and Other Expenses

Acquisition related and other expenses consisted of costs incurred after the issuance of a definitive term sheet for a particular transaction (whether or not such transaction is ultimately completed, remains in-process or is not completed) and included legal, banker, accounting and other advisory fees of third parties and severance costs for employees of the acquired company that are terminated within 90 days of the acquisition date.

As a result of adoption of new amended guidance for business combination, as of the beginning of fiscal year 2010, certain acquisition related and other expenses are now recorded as expenses in our statements of operations that had been historically included as a part of the consideration transferred and capitalized as a part of accounting for acquisitions pursuant to previous accounting rules, primarily direct transaction costs such as professional services fees.

 

     Three Months Ended
May 31,
   Six Months Ended
May 31,
     2010     2009(1)     Change    2010     2009(1)     Change

Acquisition related and other expenses:

             

Transitional and other employee related costs

   $ 147      $ —           $ 341      $ —       

Professional services fees and other

     442        —             1,293        —       
                                     

Total acquisition related and other expenses

   $ 589      $ —        n/a    $ 1,634      $ —        n/a
                                     

As percent of total revenue

     —       —          1     —    

 

(1) Prior to the adoption of new amended guidance for business combinations effective December 1, 2009, the majority of acquisition related and other expenses were capitalized.

Restructuring Charges

 

     Three Months Ended
May 31,
   Six Months Ended
May 31,
     2010     2009     Change    2010     2009     Change

Restructuring charges

   $ 6,271      $ —        n/a    $ 6,271      $ —        n/a

As percent of total revenue

     4     —          2     —    

In the second quarter of fiscal year 2010, we recorded a $6.3 million restructuring charge primarily related to our desire to achieve cost efficiencies and realign the company’s resources and operations. Also see Note 7 to our Condensed Consolidated Financial Statements for further discussion on restructuring charges.

 

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Stock-Based Compensation Cost

Stock-based compensation cost is included in our Condensed Consolidated Statements of Operations corresponding to the same functional lines as cash compensation paid to the same employees in the respective departments as follows:

 

     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
     2010     2009     Change     2010     2009     Change  

Stock-based compensation:

            

Cost of license

   $ (4   $ 12        $ 7      $ 23     

Cost of service and maintenance

     685        620          1,316        1,219     
                                    

Total in cost of revenue

     681        632          1,323        1,242     
                                    

Research and development

     2,020        1,531          3,540        2,654     

Sales and marketing

     2,571        1,706          4,826        3,412     

General and administrative

     2,516        1,949          4,535        3,872     
                                    

Total in operating expenses

     7,107        5,186          12,901        9,938     
                                    

Total stock-based compensation

   $ 7,788      $ 5,818      34   $ 14,224      $ 11,180      27
                                    

As percent of total revenue

     4     4       4     4  

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. Because our employee stock options have certain characteristics that are significantly different from traded options, and because 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 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

Our determination of fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. In the future, as empirical evidence regarding these input estimates is available to provide more directionally predictive results, we may change or refine our approach of deriving these input estimates. These changes could impact our fair value of stock options granted in the future. Changes in the fair value of the stock options could materially impact our operating results and financial position.

Interest Income

 

     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
     2010     2009     Change     2010     2009     Change  

Interest income

   $ 224      $ 757      (70 )%    $ 428      $ 1,834      (77 )% 

As percent of total revenue

     —       1       —       1  

Interest income decreased in the second quarter of fiscal year 2010 compared to the same quarter last year by $0.5 million or 70%. Interest income decreased in the first six months of fiscal year 2010 compared to the same period last year by $1.4 million or 77%. The decrease was primarily due to significantly lower returns from investments.

Interest Expense

 

     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
     2010     2009     Change     2010     2009     Change  

Interest expense

   $ 980      $ 793      24   $ 1,965      $ 1,539      28

As percent of total revenue

     1     1       1     —    

Interest expense was primarily related to a $54.0 million mortgage note issued in connection with the purchase of our corporate headquarters in June 2003. The mortgage note payable carries a 20-year amortization, and a fixed annual interest rate of 5.50% as a result of the amendment to the mortgage note payable in the second quarter of fiscal year 2007. The balance of the mortgage note as of May 31, 2010 was $41.5 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.

 

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Interest expense increased in the second quarter of fiscal year 2010 compared to the same quarter last year by $0.2 million or 24%. Interest expense increased in the first six months of fiscal year 2010 compared to the same period last year by $0.4 million or 28%. The increase was primarily due to a commitment fee on the $145.5 million of un-borrowed available credit. See Note 8 to our Condensed Consolidated Financial Statements for further detail on the Credit Agreement.

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.

 

     Three Months Ended
May 31,
   Six Months Ended
May 31,
     2010     2009     Change    2010     2009     Change

Other income (expense), net:

             

Foreign exchange gain (loss)

   $ 159      $ 1,053         $ (72   $ 1,399     

Realized gain (loss) on short-term investments

     (16     (83        18        (269  

Other income (expense), net

     (1     72           (33     71     
                                     

Total other income (expense), net

   $ 142      $ 1,042      *    $ (87   $ 1,201      *
                                     

As percent of total revenue

     —       —          —       —    

 

* Percentage change has been excluded as it is not meaningful for comparison purposes.

Other income (expense) in absolute dollars decreased in the second quarter of fiscal year 2010 compared to the same quarter last year. The decrease was primarily due to a $0.9 million decrease in foreign exchange gain (loss) for the second quarter of fiscal year 2010. Other income (expense) in absolute dollars decreased in the first six months of fiscal year 2010 compared to the same period last year. The decrease was primarily due to a $1.5 million decrease in foreign exchange gain (loss) for the first six months of fiscal year 2010.

Provision for Income Taxes

 

     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
     2010     2009     Change     2010     2009     Change  

Provision for income taxes

   $ 2,682      $ 4,828      (44 )%    $ 6,800      $ 8,950      (24 )% 

Effective tax rate

     17     32       23     36  

The effective tax rate of 17.2% for the three months ended May 31, 2010 differs from the statutory rate of 35% primarily due to the expiration of a statute of limitations in the United Kingdom, 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 and state income taxes. The effective tax rate of 32.1% for the three months ended May 31, 2009 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, state income taxes and the U.S. tax effects resulting from certain cash distributions from our foreign affiliates.

The expiration of a statute of limitations in the United Kingdom resulted in a favorable tax effect of $2.3 million which has been recorded as a discrete item for the three months ended May 31, 2010.

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 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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In connection with the acquisition of DataSynapse in fiscal 2009, we have recorded current deferred tax assets of $0.7 million and long term deferred tax assets of $3.7 million with a corresponding adjustment to goodwill. These deferred taxes were primarily related to the acquired tangible and intangible assets, deferred revenue, accounts receivable, accrued expenses and certain tax attributes of DataSynapse.

In connection with the acquisition of Foresight in the first quarter of fiscal year 2010, we have recorded current deferred tax liabilities of $1.5 million and long term deferred tax liabilities of $6.5 million with a corresponding adjustment to goodwill. These deferred taxes were primarily related to the acquired intangible assets, deferred revenue and accrued expenses.

In connection with the acquisition of Netrics in the second quarter of fiscal year 2010, we have recorded current deferred tax assets of $0.2 million and long term deferred tax assets of $0.4 million with a corresponding adjustment to goodwill. These deferred taxes were primarily related to the acquired intangible assets, deferred revenue, accounts receivable, accrued expenses and certain tax attributes of Netrics.

In connection with the acquisition of Kabira in the second quarter of fiscal year 2010, we have recorded current deferred tax assets of $1.4 million and long term deferred tax liabilities of $1.1 million with a corresponding adjustment to goodwill. These deferred taxes were primarily related to the acquired intangible assets, deferred revenue and accrued expenses.

During the second quarter of fiscal year 2010, the amount of gross unrecognized tax benefits was decreased by approximately $2.9 million due to the expiration of a statute of limitations in the United Kingdom. The total amount of gross unrecognized tax benefits was $35.8 million as of May 31, 2010, 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 the accounting for uncertainty in income taxes, 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 the accounting for uncertainty in income taxes. As of November 30, 2009, we had accrued $1.4 million for interest and penalties. During the second quarter of fiscal year 2010, we decreased the amount of accrued interest by $0.6 million due to the expiration of a statute of limitations in the United Kingdom.

We are subject to routine corporate income tax audits in the United States and foreign jurisdictions. The statute of limitations for our fiscal years 1994 through 2009 remains open for U.S. purposes. Most foreign jurisdictions have statutes 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 and Japan, 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.

Net Income Attributable to Noncontrolling Interest

Noncontrolling interest represents the portion of net income belonging to minority stockholders of our consolidated subsidiaries.

 

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     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
     2010     2009     Change     2010     2009     Change  

Net income attributable to noncontrolling interest

   $ 117      $  116        $  132      $ 95      39 

As percent of total revenue

     —       —         —       —    

Noncontrolling interest is detailed in Note 13 to our Condensed Consolidated Financial Statements.

Liquidity and Capital Resources

Current Cash Flows

As of May 31, 2010, we had cash, cash equivalents and short-term investments totaling $277.3 million, representing a decrease of $15.6 million from November 30, 2009. Our total cash and cash equivalents balance was $277.1 million as of May 31, 2010. As of May 31, 2010, our short-term available-for-sale investments totaled $0.2 million, consisting of mortgage-backed securities.

Net cash provided by operating activities in the six months ended May 31, 2010 was $81.5 million, resulting from net income of $23.4 million, $35.6 million in non-cash charges and $22.5 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 six months of fiscal year 2010, a decrease in prepaid expenses and other assets, a decrease in accounts payable, a decrease in accrued liabilities and excess facilities costs and 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 used in investing activities was $46.8 million for the six months ended May 31, 2010, resulting primarily from cash used, net of cash acquired, of $42.6 million for the Foresight, Netrics and Kabira acquisitions, $2.5 million in capital expenditures and $1.9 million in restricted cash pledged as security, which were partially offset by $0.2 million in net sales, maturities and purchase of short-term investments activities.

Net cash used in financing activities was $44.6 million for the six months ended May 31, 2010, resulting primarily from a $67.5 million repurchase of shares of our common stock in the open market and a $2.4 million payment of long-term debt, less $16.4 million in cash received from the exercise of stock options and the sale of our common stock under our ESPP and $8.9 million in excess tax benefits from stock-based compensation.

In April 2010, 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 this program, our Board of Directors also terminated our previous $300.0 million stock repurchase program from April 2008, and the remaining authorized amount of approximately $26.7 million under the April 2008 stock repurchase program was canceled. In the second quarter of fiscal year 2010, we repurchased approximately 3.4 million shares of our outstanding common stock at an average price of $11.00 per share pursuant to these programs. As of May 31, 2010, the remaining authorized amount under the April 2010 stock repurchase program was $295.7 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 and amounts available under our line of credit together with expected cash flows from operations will be sufficient to meet our anticipated cash requirements for working capital, capital expenditures, and currently approved stock repurchases for at least the next twelve months. Should demand for our products and services significantly decline over the next twelve months, the available cash provided by operations could be adversely impacted.

 

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Lines of Credit

In November 2009, we entered into a $150.0 million unsecured revolving credit facility (the “Credit Agreement”) that matures in November 2012. The revolving credit facility is available for cash borrowings up to $150.0 million, with a sublimit for the issuance of standby letters of credit in a face amount up to $25.0 million and swing line loans up to $10.0 million. As of May 31, 2010, no borrowings were outstanding under the Credit Agreement and a $4.5 million irrevocable letter of credit was outstanding, leaving $145.5 million of available credit for cash borrowings, of which $20.5 million is available for additional letters of credit. Revolving loans accrue interest at a per annum rate based on either (i) the base rate plus a margin ranging from 2.25% to 3.00%, depending on TIBCO’s consolidated leverage ratio or (ii) the LIBOR rate plus a margin ranging from 3.25% to 4.00%, depending on TIBCO’s consolidated leverage ratio, for various interest periods. The base rate is defined as the highest of (i) the administrative agent’s prime rate (ii) the federal funds rate plus a margin equal to 0.50%, and (iii) except during a period when LIBOR rates are unavailable, the LIBOR rate for a one month interest period plus a margin equal to 1.00%. Swing line loans accrue interest at a per annum rate based on the base rate plus a margin ranging from 2.25% to 3.00%. A commitment fee is applied to the un-borrowed amount at a per annum rate ranging from 0.50% to 0.75%. Under this Credit Agreement, we must maintain a minimum consolidated interest coverage ratio of 3.5:1.0 and a maximum consolidated leverage ratio of 2.5:1.0 in addition to other customary affirmative and negative covenants.

We have a $20.0 million revolving line of credit that matures on June 17, 2011. 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 May 31, 2010, no borrowings were outstanding under the facility and two irrevocable letters of credit in the amounts of $13.0 million and approximately $1.0 million were outstanding, leaving approximately $6.0 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 approximately $1.0 million irrevocable letter of credit outstanding was issued in connection with a sales transaction denominated in foreign currency and will remain outstanding until July 2012. The line of credit, as amended, contains financial covenants identical to those of the Credit Agreement, as well as other customary affirmative and negative covenants. As of May 31, 2010, we were in compliance with all covenants under the revolving line of credit.

Fair Value Inputs

Beginning in fiscal year 2008 we adopted guidance for fair value measurements. See Note 5 to our 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, 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; and 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 May 31, 2010.

 

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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.

As of May 31, 2010, we had $6.4 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.

As of May 31, 2010, our contractual commitments associated with indebtedness, lease obligations and restructuring were as follows (in thousands):

 

     Total     Remainder
of 2010
    2011     2012    2013    2014    Thereafter

Operating commitments:

                 

Debt principal

   $ 41,466      $ 1,089      $ 2,269      $ 2,397    $ 35,711    $ —      $ —  

Debt interest

     6,611        1,128        2,164        2,036      1,283      —        —  

Operating leases

     31,245        5,125        9,576        6,352      4,567      3,168      2,457
                                                   

Total operating commitments

     79,322        7,342        14,009        10,785      41,561      3,168      2,457
                                                   

Restructuring-related commitments:

                 

Gross lease obligations

     5,669        3,545        1,376        643      105      —        —  

Committed sublease income

     (1,567     (1,328     (239     —        —        —        —  
                                                   

Net restructuring-related commitment

     4,102        2,217        1,137        643      105      —        —  
                                                   

Total commitments

   $ 83,424      $ 9,559      $ 15,146      $ 11,428    $ 41,666    $ 3,168    $ 2,457
                                                   

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 $14.0 million of long-term income tax liabilities recorded in accounting for uncertainty in income taxes due to the fact that we are unable to reasonably estimate the timing of these potential future payments.

Indemnification

Our indemnification obligations are summarized in Note 9 to our Condensed Consolidated Financial Statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of foreign currency fluctuations and interest rate changes.

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. The majority of our transactions are currently made in U.S. dollars. In addition, we transact business in approximately 20 foreign currencies worldwide, of which the most significant to our operations in the second quarter of fiscal year 2010 was the EURO. We enter into forward contracts with financial institutions to manage our currency exposure related to net assets and liabilities denominated in foreign currencies, and these forward contracts are generally settled monthly. We do not enter into derivative financial instruments for trading purposes. As of May 31, 2010, we had eight outstanding forward contracts with a total notional amount of $72.3 million that resulted in a net loss of $1.0 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.

 

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Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. Our investment policy is designed to protect and preserve invested funds by limiting default, market and investment risk. As of May 31, 2010, we had an investment portfolio of fixed income securities totaling $0.2 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.

Currently, we invest our cash primarily in money market funds. In general, money market funds are not considered to be subject to interest rate risk because the interest paid on such funds fluctuates with the prevailing interest rate. As of May 31, 2010, our cash and cash equivalents consisted primarily of money market funds totaling $277.1 million.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective at the reasonable assurance level 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.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. 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, the design of a control system must reflect that there are resource constraints, thus, 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 probability of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

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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PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

Our legal proceedings are detailed in Note 10 to our Condensed Consolidated Financial Statements.

 

ITEM 1A. RISK FACTORS

In addition to the factors discussed elsewhere in this Form 10-Q, 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. These risk factors should be read in conjunction with the other information contained in our other SEC filings, including our Form 10-K for the fiscal year ended November 30, 2009.

Economic and market conditions may continue to adversely affect our operating results.

We are subject to the risks arising from adverse changes in domestic and global economies. For example, the recent domestic and global economic downturn has resulted in reduced demand for information technology, including enterprise software and services. The direction and relative strength of the global economy continues to be uncertain and makes it difficult for us to forecast operating results and to make decisions about future investments. It is unknown how long the conditions will persist or whether they will worsen. Information technology spending has historically declined as general economic and market conditions have worsened. During challenging and uncertain economic times and in tight credit markets, many customers delay or reduce technology purchases. Contract negotiations may become more protracted or difficult if customers institute additional internal approvals for technology purchases or require more negotiation of contract terms and conditions. These economic conditions could result in reductions in sales of our products, longer sales cycles, difficulties in collection of accounts receivable or delayed payments, slower adoption of new technologies and increased price competition. For example, as a result of the recent economic slowdown, we have experienced, and may continue to experience, reduced demand for enterprise software which resulted in a reduction in our license revenue and in the rate at which our customers renew their maintenance agreements and procure consulting services.

In addition, the recent economic downturn 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. These macroeconomic developments have negatively affected, and may continue to negatively affect, our business, operating results or financial conditions in various ways, including reducing the ability of customers to obtain credit to finance purchases of our products; increasing the number of customer insolvencies; decreasing customer demand; and decreasing customer ability to pay trade obligations. Financial institution difficulties and/or failures may also make it more difficult or expensive to obtain financing for our operations, investing activities (including potential acquisitions) or financing activities.

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:

 

   

the relatively long sales cycles for many of our products;

 

   

the timing of our new products or product enhancements or any delays in such introductions;

 

   

the delay or deferral of customer implementation of our products;

 

   

changes in customer budgets and decision making processes that could affect both the timing and size of any transaction;

 

   

reduced spending in the industries that license our products;

 

   

our dependence on large deals, which, if such deals do not close, can greatly impact revenues for a particular quarter;

 

   

the timing, size and mix of orders from customers;

 

   

the deferral of license revenue to future periods due to the timing of the execution of an agreement or our ability to deliver the products;

 

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the impact of our provision of services and customer-required contractual terms on our recognition of license revenue;

 

   

any unanticipated difficulty we encounter in integrating acquired businesses, products or technologies;

 

   

the tendency of some of our customers to wait until the end of a fiscal quarter or our fiscal year in the hope of obtaining more favorable terms;

 

   

the amount and timing of operating costs and capital expenditures relating to the expansion of our operations and the evaluation of strategic transactions; and

 

   

changes in accounting rules, such as recording expenses for employee stock option grants and tax accounting, including accounting for uncertain tax positions.

A substantial portion of our product license orders are usually received in the last month of each fiscal quarter, with a concentration of such orders in the final two weeks of the quarter. While we typically ship product licenses shortly after the receipt of an order, we may have license orders that have not shipped at the end of any given quarter. Because the amount of such product license orders may vary, the amount, if any, of such orders at the end of a particular quarter is not a reliable predictor of our future performance.

Because it is difficult for us to predict our quarterly operating results, period-to-period comparisons of our operating results may not be a good indication of our future performance. If, as a result of these difficulties, our revenues and operating results do not meet the expectations of our investors or securities analysts or fall below guidance we may provide to the market, the price of our common stock 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 this software and the related 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.

Our success depends on our ability to overcome significant competition.

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, Oracle, Pegasystems, Progress Software, 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, 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.

 

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We may not be able to achieve our key initiatives and grow our business as anticipated.

While we currently intend to grow our business by pursuing key initiatives to: broaden our product platform through internal development and acquisitions; increase our sales capacity by expanding our direct sales organization and developing our channel partnerships; expand our product offerings to new vertical markets; and employ marketing programs to increase awareness of our company and our products among existing and prospective customers, we cannot assure you that we will be able to achieve on these key initiatives. Our success depends on our ability to: appropriately manage our expenses as we grow our organization; identify or acquire companies or assets at attractive valuations; enter into beneficial channel relationships; develop products for new vertical markets; and successfully execute our marketing strategies. If we are not able to execute on these action, our business may not grow as we anticipated, and our operating results could be adversely affected.

We may not be able to successfully offer products and enhancements that respond to emerging technological trends and customers’ needs.

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 or 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 us and loss of market share, net sales and earnings.

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. Some of the factors that may affect our common stock price other than our operating results include:

 

   

uncertainty about current global economic or political conditions;

 

   

general volatility in the capital markets;

 

   

business developments by us or our competitors, including material acquisitions or dispositions and strategic investments;

 

   

industry developments and announcements by us or our competitors;

 

   

changes in estimates and recommendations by securities analysts;

 

   

speculation in the press or investment community; and

 

   

changes in the accounting rules.

During the first two fiscal quarters of fiscal year 2010, our stock price has fluctuated between a low of $8.23 and a high of $12.51. 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.

Changes in foreign currency exchange rates could negatively affect our operating results.

In addition to receiving revenue and incurring expenses in U.S. dollars, we also receive revenue and incur expenses in approximately twenty foreign currencies. Our revenue, expenses and net income are impacted by foreign exchange rate fluctuations against the U.S. dollar. For example, customers in foreign countries may incur higher costs due to the strengthening of the U.S. dollar, which could result in a delay of payments or a default on credit extended to them. Any material delay or default in our collection of significant accounts could have a negative result on our results of operations. Additionally, any strengthening of the U.S. dollar could require us to offer discounts, reduce pricing or offer other incentives to mitigate any negative effects on demand from such rise in the U.S. dollar.

We enter into foreign currency forward contracts, the majority of which mature within approximately one month, in an effort to manage our exposure from changes in value of certain foreign currency denominated net assets and liabilities. Our foreign currency forward contracts are intended to reduce, but do not eliminate, the impact of currency exchange rate

 

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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.

Our strategy contemplates future acquisitions that may result in our 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 Kabira Technologies, Inc. in April 2010, Netrics.com, Inc. in March 2010, Foresight Corporation in December 2009 and DataSynapse, Inc. in August 2009. We have also announced our proposed acquisition of Proginet Corporation which is expected to close during our fiscal third or fourth quarter. We do not know if we will be able to complete the Proginet acquisition or 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 or future 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.

Continued increases in consulting and training services revenue may decrease overall margins.

We have historically realized, and may continue in the future to realize, an increasingly high percentage of our revenue from services, which has a lower profit margin than license or maintenance revenue. As a result, if consulting and training services revenue increases as a percentage of total revenue, our overall profit margin may decrease, which could impact our stock price.

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

 

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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.

In 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 could force us to incur significant expenses and could 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.

Claims by others that our products may infringe their intellectual property rights may cause us to incur unexpected costs or prevent us from selling our products.

Third parties may claim that certain of our products infringe their patents or other intellectual property rights. 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, with or without merit, is expensive and time consuming, could cause product shipment delays 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, which could require the payment of royalty or licensing fees, 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 or challenged, 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

 

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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 types 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 solutions.

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 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, a decline 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.

Any of these factors could have a negative impact on our revenues and our operating results.

Any 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 we incur as a result of customer defaults could have an adverse effect on our business, operating results and financial condition.

Our debt agreements contain certain restrictions that may limit our ability to operate our business.

The agreements governing our debt agreements contain, and any other future debt agreement we enter into may contain, restrictive covenants that limit our ability to operate our business, including, in each case subject to certain exceptions, restrictions on our ability to:

 

   

incur indebtedness;

 

   

incur indebtedness at the subsidiary level;

 

   

grant liens;

 

   

enter into certain mergers or sell all or substantially all of our assets;

 

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make certain payments on our equity, including paying dividends;

 

   

make investments;

 

   

change our business;

 

   

enter into transactions with our affiliates; and

 

   

enter into certain restrictive agreements.

In addition, our debt agreements contain financial covenants and additional affirmative and negative covenants. Our ability to comply with these covenants is dependent on our future performance, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions. If we are not able to comply with all of these covenants for any reason and we have debt outstanding at the time of such failure, some or all of our outstanding debt could become immediately due and payable and the incurrence of additional debt under the credit facilities would not be allowed. If our cash is utilized to repay any outstanding debt, depending on the amount of debt outstanding, we could experience an immediate and significant reduction in working capital available to operate our business.

As a result of these covenants, our ability to respond to changes in business and economic conditions and to obtain additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that might otherwise be beneficial to us, such as strategic acquisitions or joint ventures.

We may have exposure to additional tax liabilities.

As a multinational corporation, we are subject to income taxes in 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, a final determination of tax audits or tax disputes could 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 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 adopted revised accounting guidance for business combinations 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 the guidance 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.

Accounting for our performance-based restricted stock units is subject to judgment and may lead to unpredictable expense recognition.

We have issued performance-based restricted stock unit awards to certain executives subject to the terms and conditions set forth in the performance-based restricted stock unit (“PRSU”) agreement and granted under our 2008 Equity Incentive Plan. These awards are subject to achievement of performance-based objectives and, in addition, time-based vesting subject to continued employment and a one-year mandatory deferral period before any shares of our common stock are issued in settlement of the vested awards. The performance-based goals require us to achieve certain specific non-GAAP

 

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earnings per share goals within certain periods of time. Upon achievement of the requisite performance goals, the awards will be scheduled to vest in two equal installments over the subsequent two years, subject to the award recipient’s continued employment. Also, all or a certain portion of the awards generally will become eligible to vest upon a change of control occurring in 2011, 2012 or 2013, provided that the Company achieves a certain minimum cumulative non-GAAP EPS applicable to the year in which the change of control occurs, or the PRSU that became eligible to vest but have not yet vested will accelerate vesting as to 100% of the award upon the award holder’s involuntarily termination without cause within 12 months after a change of control.

Until restricted stock unit awards are vested, they do not have the voting rights of common stock and the shares underlying the awards are not considered issued and outstanding. We recognize the stock-based compensation costs for PRSU’s when we believe it is probable that we will achieve the performance criteria as defined in the PRSU agreement. We then estimate the most probable period in which the performance criteria will be met, if at all. Under the terms of the PRSU, 20% of the PRSU will be forfeited if, in the fiscal year following achievement of the applicable performance goals, our non-GAAP EPS falls by 10% or more as compared to the non-GAAP EPS achieved for the year that the performance goals were achieved. Therefore, we also assess the probability of this forfeiture when analyzing our stock-based compensation costs for PRSU. If the performance goals are not met, no compensation expense is recognized and any previously recognized compensation expense is reversed. We are required to reassess these probabilities at each reporting date, and any change in our forecasts may result in an increase or decrease to the stock-based compensation expenses recognized in our statements of operations.

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 a variety of risks, including:

 

   

local political and economic instability;

 

   

tariffs, quotas and trade barriers and other varying regulatory or contractual requirements or limitations;

 

   

compliance with international and local trade, labor and other laws including the Foreign Corrupt Practices Act and export control laws;

 

   

restrictions on the transfer of funds;

 

   

currency exchange rate fluctuations;

 

   

managing our international operations; and

 

   

longer payment cycles, 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.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

Section 404 of the Sarbanes-Oxley Act requires that management report annually on the effectiveness of our internal control over financial reporting and identify any material weaknesses in our internal control and financial reporting environment. If management identifies any material weaknesses, their correction could require remedial measures which could be costly and time-consuming. In addition, the presence of material weaknesses could result in financial statement errors which in turn could require us to restate our operating results. Any identification by us or our independent registered public accounting firm of material weaknesses, even if quickly remedied, could damage investor confidence in the accuracy and completeness of our financial reports, which could affect our stock price and potentially subject us to litigation.

The continuous process of maintaining and adapting our internal controls and complying with Section 404 is expensive and time-consuming, and requires significant management attention. We cannot be sure that our internal control measures will continue to provide adequate control over our financial processes and reporting and ensure compliance with Section 404. Any failure by us to comply with Section 404 could subject us to a variety of administrative sanctions, which could reduce our stock price.

 

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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 help 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 negotiate 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 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 or future 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 current lawsuits or any future lawsuit by settlement or otherwise, any such payment could seriously harm our financial condition and liquidity.

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:

 

   

potential customers may delay purchases;

 

   

customers may react negatively, which could reduce future sales;

 

   

our reputation in the marketplace may be damaged;

 

   

we may have to defend against product liability claims;

 

   

we may be required to indemnify our customers, distributors, original equipment manufacturers or other resellers;

 

   

we may incur additional service and warranty costs; and

 

   

we may have to divert additional development resources to correct the defects and errors, which may result in the delay of new product releases or upgrades.

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 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 meet. 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.

Aspects of our business are subject to privacy concerns and a variety of U.S. and international laws regarding data protection.

Aspects of our business are subject to federal, state and international laws regarding privacy and protection of user data. For example, in the United States regulations such as the Gramm-Leach-Bliley Act, which protects and restricts the use of consumer credit and financial information, and the Health Insurance Portability and Accountability Act of 1996, which regulates the use and disclosure of personal health information, impose significant requirements and obligations on businesses that may affect the use and adoption of our service. The European Union has also adopted a data privacy directive that requires member states to impose restrictions on the collection and use of personal data that, in some respects, are far more stringent, and impose more significant burdens on subject businesses, than current privacy standards in the United States.

 

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We post, on our website, our privacy policies and practices concerning the use and disclosure of user data. Any failure by us to comply with our posted privacy policies or other federal, state or international privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others which could harm our business, operating results and financial condition.

It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines and penalties, a governmental order requiring that we change our data practices could result, which in turn could harm our business, operating results and financial condition. Compliance with these regulations may involve significant costs or require changes in business practices that result in reduced revenue. Noncompliance could result in penalties being imposed on us or orders that we cease conducting the noncompliant activity.

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.

Reuters has a royalty free license to some of 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 some 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 our 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.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

In April 2010, 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 this program, our Board of Directors also terminated our previous $300 million stock repurchase program from April 2008, and the remaining authorized amount of approximately $26.7 million under the April 2008 stock repurchase program was canceled. In the second quarter of fiscal year 2010, we repurchased approximately 3.4 million shares of our outstanding common stock at an average price of $11.00 per share pursuant to these programs. As of May 31, 2010, the remaining authorized amount under the April 2010 stock repurchase program was $295.7 million.

 

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The following table provides information about the repurchase of our common stock during the second quarter of fiscal year 2010.

 

(In thousands, except per share amounts)

   Total Number of
Shares  Purchased
   Average Price
Paid  per Share
   Total Number of
Shares  Purchased
as Part of Publicly
Announced Plans  or
Programs
   Approximate
Dollar  Value of
Shares that May
Yet Be  Purchased
Under the Plans
or Programs

March 1, 2010 – March 31, 2010

   —      $ —      —      $ 60,272

April 1, 2010 – April 30, 2010

   3,047    $ 11.02    3,047    $ 26,696

May 1, 2010 – May 31, 2010

   400    $ 10.86    400    $ 295,657
               

Total

   3,447    $ 11.00    3,447   
               

 

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ITEM 6. EXHIBITS

 

  3.1(1)   Amended and Restated Certificate of Incorporation of Registrant.
  3.2(2)   Amended and Restated Bylaws of Registrant.
31.1   Rule 13a-14(a) / 15d-14(a) Certification by Chief Executive Officer.
31.2   Rule 13a-14(a) / 15d-14(a) Certification by Chief Financial Officer.
32.1   Section 1350 Certification by Chief Executive Officer.
32.2   Section 1350 Certification by Chief Financial Officer.

 

(1) Incorporated by reference to Exhibit 3.1 filed with the Registrant’s Registration Statement on Form 8-A, filed with the SEC on February 23, 2004.
(2) Incorporated by reference to Exhibit 3.1 filed with the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2009, filed with the SEC on July 9, 2009.

 

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SIGNATURES

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.

 

TIBCO SOFTWARE INC.
By:  

/s/    Sydney L. Carey        

 

Sydney L. Carey

Executive Vice President, Chief Financial Officer

(Principal Financial Officer and duly authorized officer)

By:  

/s/    Troy O. Mitchell    

 

Troy O. Mitchell

Vice President, Corporate Controller

(Principal Accounting Officer and duly authorized officer)

Date: July 8, 2010

 

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