e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
January 31, 2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
001-33445
Netezza Corporation
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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04-3527320
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(State or Other Jurisdiction
of
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(I.R.S. Employer
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Incorporation or
Organization)
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Identification No.)
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26 Forest Street
Marlborough, MA
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01752
(Zip Code)
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(Address of Principal Executive
Offices)
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Registrants telephone number, including area code:
(508) 382-8200
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.001 per share
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NYSE Arca
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405) is not contained herein, and will not be
contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
As of July 31, 2008 (the last trading date of the
registrants second quarter of fiscal 2009), the aggregate
market value of common stock (the only outstanding class of
common equity of the registrant) held by nonaffiliates of the
registrant was $625.5 million based on a total of
48,565,459 shares of common stock held by nonaffiliates and
on a closing price of $12.88 per share on such date for the
common stock as reported on NYSE Arca.
As of March 20, 2009, 59,734,110 shares of common
stock were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement
pursuant to Regulation 14A within 120 days of the end
of the fiscal year ended January 31, 2009. Portions of such
proxy statement are incorporated by reference in Part III
of this
Form 10-K.
NETEZZA
CORPORATION
ANNUAL
REPORT ON
FORM 10-K
FOR FISCAL YEAR 2009
TABLE OF
CONTENTS
PART 1
FORWARD-LOOKING STATEMENTS
Forward-looking statements in our public filings or other public
statements are subject to known and unknown risks, uncertainties
and other factors that may cause our actual results, performance
or achievements to be materially different from any future
results, performance or achievements expressed or implied by
such forward-looking statements or other public statements.
These forward-looking statements are only predictions. We have
described in the Risk Factors section in this Annual
Report on
Form 10-K
the principal risks and uncertainties that we believe could
cause actual results to differ from these forward-looking
statements. All statements other than statements of historical
facts, including statements regarding our future results of
operations and financial position, business strategy and plans
and objectives of management for future operations, are
forward-looking statements. In many cases, you can identify
forward-looking statements by terms such as may,
will, should, expects,
plans, anticipates, could,
intends, target, projects,
contemplates, believes,
estimates, predicts,
potential or continue or other similar
words.
The forward-looking statements in this Annual Report on
Form 10-K
represent our views as of the date of this Annual Report on
Form 10-K.
We anticipate that subsequent events and developments will cause
our views to change. However, while we may elect to update these
forward-looking statements at some point in the future, we
specifically disclaim any obligation to do so. You should,
therefore, not rely on these forward-looking statements as
representing our views as of any date subsequent to the date of
this Annual Report on
Form 10-K.
Company
Overview
Netezza Corporation (we, us,
Netezza, or the Company) is a leading
provider of data warehouse appliances. Our product, the Netezza
Performance Server, or NPS, integrates database, server and
storage platforms in a purpose-built unit to enable detailed
queries and analyses on large volumes of stored data. The
results of these queries and analyses, often referred to as
business intelligence, provide organizations with actionable
information to improve their business operations. As more
information is recorded and communicated electronically, the
amount of data generated and the potential utility of the
business intelligence that can be extracted from this data is
increasing significantly. We designed our NPS data warehouse
appliance specifically for analysis of terabytes of data at
higher performance levels and at a lower total cost of ownership
with greater ease of use than can be achieved via traditional
data warehouse systems. Our NPS appliance performs faster,
deeper and more iterative analyses on larger amounts of detailed
data, giving our customers greater insight into trends and
anomalies in their businesses, thereby enabling better strategic
decision-making.
Unlike traditional data warehouse systems, which patch together
general-purpose database, server and storage platforms that were
not originally designed for analytical processing of large
amounts of constantly changing data, our NPS appliance is
purpose-built to deliver:
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Fast data query response times through our proprietary
Intelligent Query Streaming technology.
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Massive scalability through our proprietary Asymmetric Massively
Parallel Processing, or AMPP, architecture.
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Simplicity of installation, operation and administration.
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Cost effectiveness through the use of industry-standard server
and storage components packaged in a single unified solution.
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Our products integrate easily through open, industry-standard
interfaces with leading data access and analytics, data
integration and data protection tools to enable quick and
accurate business intelligence. Our customers have reported
faster query performance, lower costs of ownership and improved
analytic productivity as a result of using our products.
We sell our data warehouse appliances worldwide to large global
enterprises, mid-market companies and government agencies
through our direct salesforce as well as indirectly via
distribution partners. From our inception through
January 31, 2009, we have sold in excess of 475 of our data
warehouse appliances worldwide to 224 data-intensive customers.
Our customers span multiple vertical industries and include
data-intensive companies and government agencies. On May 9,
2008, we acquired NuTech Solutions, Inc, (NuTech),
an advanced analytics and optimization solutions company based
in Charlotte, North Carolina, which will give us greater
intellectual property and expertise in this rapidly growing
field. The results of NuTechs operations have been
included in our consolidated financial statements since that
date. We have 24 NuTech customers, which represented two percent
of our total revenue for the fiscal year ended January 31,
2009.
We were incorporated in Delaware on August 18, 2000 as
Intelligent Data Engines, Inc. and changed our name to Netezza
Corporation in November 2000. Our corporate headquarters are
located at 26 Forest Street, Marlborough, Massachusetts 01752,
and our telephone number is
(508) 382-8200.
Our website address is www.netezza.com. We are not,
however, including the information contained on our website, or
information that may be accessed through links on our website,
as part of, or incorporating it by reference into, this Annual
Report on
Form 10-K.
Financial information regarding our reporting segment is
contained in Selected Financial Data in Item 6 of
Part II, Managements Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 of
Part II, and Note 16 to our Consolidated Financial
Statements included in Item 8 of Part II of this
Annual Report on
Form 10-K.
Our fiscal year ends January 31. When we refer to a
particular year, we are referring to the fiscal year ended
January 31 of that year. For example, fiscal 2009 refers to the
fiscal year ended January 31, 2009.
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Industry
Background
Proliferation
of Data
Data is one of the most valued assets within an organization.
The amount of data that is being generated and kept for
availability and analysis by organizations is exploding. The
timely and comprehensive analysis of this vast amount of data is
vital to organizations in a variety of vertical industries,
including:
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Communications. The communications industry is
characterized by intense competition and customer attrition, or
churn. Targeted marketing opportunities and the
rapid response to behavior trends are paramount to the success
of communications service providers in retaining existing
customers and attracting new customers. Customer relationship
management, or CRM, analyses need to be constantly and quickly
performed, to enable service providers to market to at-risk
customers before they churn, offer new products and services to
those most likely to buy, and identify and manage key customer
relationships. Other key analytical needs of communications
service providers include call data record analysis for revenue
assurance, billing and least-cost routing, fraud detection and
network management.
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Digital Media. For online businesses, the
process of collecting, analyzing and reporting data about page
visits, otherwise known as click stream analysis, is required
for constant monitoring of website performance and customer
pattern changes. In addition to needing to address the
operational and customer relationship challenges faced by
traditional retailers, digital media businesses must also
analyze hundreds of millions or even billions of click stream
data records to track and respond to customer behavior patterns
in real time. Additionally, with online advertising becoming a
major revenue generator, many digital media businesses and their
advertisers need to understand who is looking at the
advertisements and their actions as a result of viewing the
advertisements. Fast analysis of online activity can enable
better cross-selling of products, prevent customers from
abandoning shopping carts or leaving the web site, and mitigate
click stream fraud.
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Retail. With thousands of products and
millions of customers, many retailers need sophisticated systems
to track, manage and optimize customer and supplier
relationships. Targeted marketing programs often require the
analysis of millions of customer transactions. To prevent supply
shortages large retailers must integrate and analyze customer
transaction data, vendor delivery schedules and radio frequency
identification supply chain data. Other useful analyses for
retail companies include market basket analysis of
the items customers buy in a given shopping session, customer
loyalty programs for frequent buyers, overstock/understock and
supply chain optimization.
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Financial Services. Financial services
institutions generate terabytes of data related to millions of
client purchases, banking transactions and contacts with
marketing, sales and customer service across multiple channels.
This data contains crucial business information on client
preferences and buying behavior, and can reveal insights that
enable stronger customer relationship management and increase
the lifetime value of the customer. In addition, risk management
and portfolio management applications require analysis of vast
amounts of rapidly changing data for fraud prevention and loan
analysis. With extensive compliance and regulatory requirements,
financial institutions are required to retain an ever-increasing
amount of data and need to make this data available for detailed
reporting on a periodic basis.
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Outsourced Analytics. The primary purpose of
these companies is providing business intelligence support to
enterprises on an outsourced basis. Outsourced analytic
providers serving many industries, including retail,
telecommunications, healthcare and others, provide clients with
domain expertise in database-driven marketing and customer
segmentation. Since their clients are looking for faster
turn-arounds for more sophisticated reports on continuously
increasing amounts of data, these companies require solutions
that will scale better with lower cost of ownership to meet
their clients service-level agreements, while improving
their own profitability.
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Government. As some of the largest creators
and consumers of data, government agencies around the world need
to access, analyze and share vast amounts of
up-to-date
data quickly and efficiently. These agencies face a broad range
of challenges, including identifying terrorist threats and
reducing fraud, waste and abuse. Iterative analysis on many
terabytes of data with high performance is crucial for achieving
these missions.
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Health and Life Sciences. Healthcare providers
seek to analyze terabytes of operational and patient care data
to measure drug effectiveness and interactions, improve quality
of care and streamline operations through more cost-effective
services. Pharmaceutical companies rely on data analysis to
speed new drug development and increase marketing effectiveness.
In the future, these companies plan to incorporate large amounts
of genomic data into their analyses in order to tailor drugs for
more personalized medicine.
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The significant growth of enterprise data is fueling a need for
additional storage and other information technology
infrastructure to maintain and manage it. These technology needs
are being further driven by a steady decline in data storage
prices, which makes storing large data sets more economical.
As the volume of data continues to grow, enterprises have
recognized the value in analyzing such data to significantly
improve their operations and competitive position. They have
also realized that frequent analysis of data at a more detailed
level is more meaningful than periodic analysis of sampled data.
In addition, companies are making analytic capabilities more
widely available to a broad range of users across the enterprise
for both strategic and tactical decision-making. These factors
have driven the demand for data warehouses that provide the
critical framework for data-driven enterprise decision-making by
way of business intelligence.
Growing
Role of the Data Warehouse
A data warehouse consists of three main elements
database, server, and storage and interacts with
external systems to acquire and retain raw data, receive query
instructions and provide analytical results. The data warehouse
acts as a data repository for the enterprise, aggregating
information from many departments, and more importantly, enables
analytics through the querying of the data to deliver specific
information used to monitor, measure and manage business
performance and to drive future business decisions. The goal of
a data warehouse is to enable a business to better understand
its competitive position, internal efficiency and productivity
and customers behavior patterns.
The need for more robust, yet cost-effective, data warehouse
solutions across multiple industries is being accelerated by the
following:
Growth in Users of Business Intelligence. The
need for detailed analytics is becoming more mainstream
throughout the enterprise as well as in the extended
enterprise, which includes suppliers, partners and
customers. As the number of users accessing the data warehouse
increases, and the queries being processed include a broader mix
of strategic and tactical analyses, demand for data warehouse
solutions multiplies. This is a change from prior years when
business intelligence analysis within an organization was
primarily performed by a small number of analysts and IT
professionals.
Increasing Number and Sophistication of Data
Queries. As enterprises continue to recognize the
utility of the analyses data warehouses enable, the quantity and
sophistication of data queries continue to increase. In addition
to traditional reporting and analysis on historical data for
past patterns, companies increasingly want to leverage their
data to predict future patterns and behavior. Without more
powerful data warehouse performance to meet this demand,
significant data latency problems can ensue. A data warehouse
solution can contain several billion rows of data within its
resident database causing even one sophisticated data query to
take as long as several hours to several weeks to perform using
some traditional data warehouse systems.
Need for Real-time Data Availability. As data
continues to proliferate, increasing load times are continually
shrinking the time windows for querying warehoused data. As a
growing number of users from business units across the
enterprise analyze data for tactical, operational decisions,
many organizations need to have their data warehouses available
for query and analysis at all times even as fresh data is being
constantly loaded. This creates increasing requirements for
simultaneous load and query performance.
Limitations
of Traditional Data Warehouse Systems
Many traditional data warehouse systems were initially designed
to aggregate and analyze smaller quantities of data, using
general-purpose database, server and storage platforms patched
together as a data warehouse system. Such patchwork
architectures are often used by default to store and analyze
data, despite the fact that they are not optimized to handle
terabytes of constantly growing and changing data and as a
result, they are not as effective in
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handling the in-depth analyses that large businesses are now
requiring of their data warehouse systems. The increasing number
of users accessing the data warehouse and the sophistication of
the queries employed by these users is making the strain of
using these legacy systems even more challenging for many
organizations.
We believe traditional data warehouse systems do not fully
address the key requirements of todays business
intelligence environments and the needs of customers for the
following reasons:
Inefficient Execution of Complex and Ad Hoc
Queries. Most traditional systems read data from
storage, bring it across an input/output, or I/O, interface and
load it into memory for processing. This approach is extremely
inefficient for processing millions or even billions of rows of
data in order to execute complex queries or ad hoc
queries, which are queries created to obtain information as the
need arises, often as other queries are reviewed. The result is
significant delays in data movement and query processing, which
can slow response times to many hours or even days. This delay
often eliminates any potential benefit of the query results as
conclusions are reached too late to be actionable.
Difficult and Costly Procurement Process. Most
traditional data warehouse systems require multiple product and
service contracts from several suppliers. The customer must
manage the procurement of costly servers, storage, cabling,
database and operating systems software licenses, systems
management tools, and installation and integration services.
This a la carte approach results in higher costs and
a lack of accountability from suppliers due to their tendency to
blame each other when issues arise and need to be remedied.
Additionally, these disparate products are often not easily
integrated with other business intelligence applications or
other hardware or software products that a customer may
incorporate into its data warehouse, resulting in additional
hardware, implementation, training, maintenance and support
costs.
Complex Infrastructure Installation and
Deployment. A traditional data warehouse is a
complex environment that must be assembled and configured on
site. Installation can take weeks, requiring assembly, testing,
debugging and fine-tuning of system parameters. Traditional data
warehouse systems depend on elaborate tuning and data
manipulation to generate the performance required by the user.
Data loads into the system need to be balanced, indexes created,
and disk partitions and logical volumes defined. The entire
process can take from weeks to several months, typically
requiring extensive professional services engagements.
Slow Response to Changing Business Needs. As
the data warehouse grows and queries and analyses increase in
volume and complexity, the tuning and configuration needs of the
data warehouse solution further increase, creating ongoing costs
in hardware, software and services for the user. In addition,
business requirements are constantly changing and the data
warehouse needs to evolve to meet these changing requirements.
Most traditional data warehouses have customized data models
that define the structure and relationships of the data;
therefore, when data formats or query requirements change, these
solutions require extensive reconfiguration and tuning,
resulting in delays and extra personnel costs.
Costly Ongoing Administration and
Maintenance. Managing a traditional data
warehouse system is a complex and time-intensive task. Dedicated
database administrators are required to monitor and maintain the
system. Often, separate administrative teams are dedicated to
distinct solution components such as database, server, and
storage platforms. Additionally, many traditional systems come
with separate management programs for each component, lowering
the efficacy of the management of the overall data warehouse.
Inefficient Power, Cooling and Footprint
Requirements. As data warehouses grow
dramatically with the proliferation of data, the costs of space,
power and cooling are becoming serious concerns in data center
management. Because traditional systems are often a patchwork of
general-purpose components, significant footprint size and
energy consumption issues arise, at odds with ongoing efforts of
many businesses to centralize and shrink data center square
footage and increase energy efficiency.
Limited Scalability. Most traditional systems
have a difficult time increasing capacity to meet increased user
demand and the growing amounts of stored data due to their
architectures and technology. In these instances, the I/O
limitations become particularly acute. In addition, there are
difficulties associated with procurement, installation and
integration of additional capacity with existing infrastructure.
As a result, significant time and effort must be dedicated to
retune the system to reflect the new parameters. In most cases,
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it is impossible to achieve linear scalability, which means that
performance will not scale at the same rate as data growth or
system capacity.
As a consequence of these limitations, the rapid growth of
enterprise data, and the growing need to utilize this data to
address business requirements, we believe there is a significant
market opportunity for a purpose-built data warehouse solution
that is optimized for efficiently analyzing vast amounts of
business-critical data to enable actionable business
intelligence.
Our
Solution
Our NPS appliance is designed specifically to enable
high-performance business intelligence solutions at a low total
cost of ownership. It tightly couples database, server, and
storage platforms in a compact, efficient unit that integrates
easily through open, industry-standard interfaces with leading
business intelligence, data access and analytics, data
integration and data protection tools. As a result, the NPS
appliance enables our customers to load, access and query data
faster, more easily and cost-effectively than with traditional
systems.
This approach, combined with our innovative product
architecture, provides the following significant benefits to our
customers:
Superior Performance. We believe our systems
provide industry-leading performance. With the NPS appliance,
many complex and ad hoc queries on terabytes of information are
reduced from days or hours to minutes or seconds, as disk access
speed becomes the primary limiting factor rather than I/O and
network constraints. Our customers have reported response times
for complex and ad hoc queries that are often 10 to 100 times
faster, and in some instances 500 times faster than those of
traditional data warehouse systems. This improved performance
enables our customers to analyze their data more
comprehensively, more iteratively and in a more timely way, so
they can make faster and better decisions.
Easy and Cost-Effective Procurement. Our NPS
appliance combines database, server, and storage platforms in a
single scalable device using open standards and commodity
components to deliver a significant cost advantage compared with
the products of our competitors. In addition, since our NPS
appliance provides these technologies in a single product,
customers can purchase their data warehouse appliance from one
vendor as opposed to from multiple vendors, streamlining the
procurement process.
Quick and Easy Infrastructure Installation and
Deployment. NPS appliances are factory-configured
and tested, enabling our customers to install our systems
typically in less than two days. With all processors and storage
in the same cabinet and all components integrated, configured
and tested as a purpose-built data warehouse appliance, there is
no custom installation and configuration required, unlike
traditional solutions. In addition to faster installation, the
NPS appliance enables customers to deploy large, multi-terabyte
data warehouse environments much more rapidly than with
traditional systems. Data is loaded quickly and easily from
source systems, and existing tools and software for business
intelligence, data access and analytics, data integration and
data protection all integrate in a straightforward way through
standard interfaces. This enables our customers to deploy and
launch their data warehousing initiatives faster than is
possible with traditional systems, with minimal need for
professional services or customization.
Rapid Adaptation to Changing Business
Needs. Our NPS appliance does not require the
tuning, data indexing or most of the maintenance and
configuration tasks required by traditional systems. As a
result, the NPS appliance is flexible with regard to the layout
and structure of data models, so as new data is added and models
are updated, the NPS appliance can accommodate changes easily
without requiring additional administrative effort.
Minimal Ongoing Administration and
Maintenance. As a self-regulated and
self-monitored data warehouse appliance, our systems typically
require less than a single administrator to manage. There are no
obscure Netezza-specific commands that need to be learned by
administrators, and the NPS appliance integrates a single
interface for the management and operation of the entire data
warehouse. The management and administration requirements of our
systems remain limited even as the data and system capacity grow
significantly in size.
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Small Footprint, and Low Power and Cooling
Requirements. The NPS appliance is a compact,
tightly integrated appliance that requires a significantly
smaller data center footprint than traditional
solutions. Because we build our systems specifically for data
warehousing, we are able to more effectively integrate
components in a less dense, rack-enabled solution consuming
significantly less power and generating less heat than the
solutions of our competitors.
High Degree of Scalability. Our systems scale
effectively with additional users or more sophisticated queries,
as the limiting factor becomes disk access speed rather than
shared I/O and network constraints. Because storage and
processing are tightly coupled into a modular unit, as data
scales, so does processing power without diminution of
performance. Additionally, with no need for tuning or indexing,
more users can be supported and additional capacity added very
quickly and easily. The NPS appliance is priced to allow
customers to pay as they grow, adding incremental
capacity at a low cost per terabyte.
Our
Products
The NPS family of appliances currently consists of two main
product lines:
The 10000 Series is our core performance line, with
current data capacity ranging from less than one terabyte of
data up to 400 terabytes. This is the primary product line from
which we derive the substantial majority of our revenue. The
10000 Series currently consists of six product models
(10050, 10100, 10200, 10400, 10600 and 10800). The various
models have different price points and support varying amounts
of data capacity. The prices range from several hundred thousand
dollars up to several million dollars. Our on-demand pricing
allows our customers to add capacity in terabyte increments
based on their data growth.
The 5000 Series, which currently consists of one product
model, has available data capacity of up to three terabytes,
with prices ranging from less than $200,000 to $250,000. This
product is sized and priced for our mid-market and smaller
customers and does not need to be deployed in a data center,
which offers more flexibility to these customers. Many of our
customers purchase the 5000 Series as a development system to
enable them to design and test new applications and queries
prior to deploying a 10000 Series production system.
NPS Product Performance Scalability
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Smallest
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Largest
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Configuration
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Configuration
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(NPS 5200)
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(NPS 10800)
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Snippet Processing Units (SPUs)
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28
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896
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User Data Capacity (Terabytes)
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3
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400
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Data Scan Rate (Terabytes/hour)
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6
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400
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Product Partnerships and Alliances. Through a
network of partnerships and alliances, we provide our customers
with integrated, high-quality solutions to meet their growing
business intelligence requirements. Our appliances provide
high-performance infrastructure technology as part of a larger
bundle of software and hardware used by our
customers to load and integrate data, perform analyses on their
data and protect their data. We have developed partnerships and
alliances with major software partners in the areas of business
intelligence, data access and analytics, data integration and
data protection, which have certified that our appliances
integrate easily with their software solutions. We are working
to create closer integration of our products with certain of
these partners for even simpler customer deployments and
administration.
Technology
and Architecture
The architecture of the NPS appliance is based upon two guiding
principles:
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Moving processing intelligence to a record stream adjacent to
storage significantly enhances performance and scalability. Our
approach allows us to perform database operations in a
streaming fashion. This patent-pending Netezza
innovation is called Intelligent Query Streaming technology. The
approach of traditional solutions requires data from storage to
be moved through many stages before database operations can be
performed.
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Performance and scalability goals can be met using elements of
both symmetric multi-processing, or SMP, and massively parallel
processing, or MPP, applying each method where it is best suited
to meet the specific needs of analytic applications operating on
terabytes of data. We believe our architectural approach, AMPP,
provides significant improvements in performance and scalability
as compared to traditional data warehouse systems. We have
several patents pending surrounding our AMPP architecture.
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By applying these two principles in an integrated architecture,
we believe we have achieved significant improvement in the
performance, scalability and manageability of data warehouse
systems.
Our AMPP architecture is a two-tiered system designed to quickly
handle very large queries from multiple users:
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The first tier is a high-performance Linux SMP host that
compiles data query tasks received from business intelligence
applications, and generates query execution plans. It then
divides a query into a sequence of
sub-tasks,
or snippets that can be executed in parallel, and distributes
the snippets to the second tier for execution.
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The second tier consists of dozens to many hundreds of snippet
processing units, or SPUs, operating in parallel. Each SPU is an
intelligent query processing and storage node, and consists of a
commodity processor, dedicated memory, a disk drive and a field
programmable gate array, or FPGA, acting as a disk controller
with hard-wired logic to manage data flows.
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With our approach, the pathways used by traditional
architectures to deliver data to the host are streamlined and
shortened. Because the query is initially screened at the disk
drive level in the NPS appliance, there is far less reliance on
CPUs, data modeling or bandwidth for performance. This results
in a significant competitive advantage over traditional systems,
which often require shared connections over which large amounts
of data must travel prior to any analysis, and which rely
primarily on incremental gains in general-computing processing
power that cannot overcome I/O constraints.
Customers
We sell our data warehouse appliances worldwide to large global
enterprises, mid-market companies and government agencies
through our direct salesforce as well as indirectly via
distribution partners. As of January 31, 2009, we had 224
customers and had sold in excess of 475 of our data warehouse
appliances. Our customers span multiple vertical industries and
include data-intensive companies and government agencies.
Our customers use our data warehouse appliances to analyze
terabytes of customer and operational data faster, more
comprehensively and affordably than they had been able to do
with the traditional systems that we replaced. They report
faster query performance, the ability to perform previously
impossible queries, lower costs of ownership, and improvements
in analytical productivity as a result of using our products.
In addition, we had 24 NuTech customers as of January 31,
2009.
The Nielsen Company accounted for 16% of our total revenue in
fiscal 2009, AOL accounted for 10% of our total revenue in
fiscal 2008 and no customer accounted for greater than 10% of
our total revenue in fiscal 2007.
Service
and Support
We offer our customers service and support for the deployment
and ongoing use of NPS appliances. We focus primarily on
maintenance, although we offer training and consulting services
on a limited basis as well. We believe the overall simplicity of
our appliances limits the need for extensive training,
customization and deployment services or ongoing consulting.
Unlike vendors offering traditional systems, we do not depend on
service offerings for revenue growth opportunities and, as a
result, our interests in providing easy-to-use products are
clearly aligned with those of our customers.
We provide our customers with support priced as a percentage of
license sales. Our support strategy includes highly-trained
support staff located in our Marlborough, Massachusetts
headquarters, and worldwide installation and technical account
management teams. We have invested in help desk, FAQ,
trouble-ticketing and online forum
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infrastructure to enable our customers to log product and
support issues, and to share best practices with each other. Our
on-site
hardware service is performed through hardware service
relationships that we have with Hewlett-Packard and its
affiliates and Unisys and its affiliates.
We offer training services to our customers in administration
and usage of our NPS appliances through
three-day
sessions as well as shorter sessions
on-site and
in our Marlborough, Massachusetts headquarters. In addition, we
plan to offer limited consulting services, in particular where
the customers do not have the
on-site
staff required for their data warehouse projects and the
projects are too small to justify systems integration partner
services. These bundled services are provided by our technical
account managers assigned to help customers with specific
installation, integration and administration projects.
Our customers report high levels of satisfaction with our
support and we believe our high-touch approach is an
important aspect of our growth and success, driving repeat
business through further product purchases and upgrades. We plan
to continue to invest in the growth and training of our support
staff and infrastructure as we continue to grow.
Where additional professional services are requested by the
customer for application development and customization, these
services are provided through our network of systems integration
and consulting partners worldwide. Our partners provide
expertise in business intelligence, data warehousing and related
areas to our customers. We believe the combined expertise and
technology of us and our partners provide significant value to
our joint customers, without the channel conflict that is
typical of traditional data warehouse vendors and third-party
services firms.
Sales and
Marketing
We have established a worldwide sales and distribution network
to sell data warehouse appliances to large global enterprises,
mid-market companies and government agencies, both directly
through our salesforce and indirectly via distribution partners.
Our direct salesforce consists of paired teams of account
executives and systems engineers who work closely together
throughout the sales cycle. These teams are organized vertically
and geographically and are focused on strategic account targets.
In addition to our direct selling efforts, we continue to
develop reseller partnerships, which we believe will enable us
to reach a broader range of customers worldwide. Our reseller
partners sell to global enterprises as well as to mid-market
customers. We are particularly reliant on these relationships in
the Asia-Pacific region. We plan to continue to invest in
building and supporting our reseller distribution channel in
order to increase overall sales as well as the percentage of our
revenues through this channel.
In addition to our traditional reseller partners, many of our
systems integrator partners have in certain circumstances acted
as distribution partners. We also work closely with a number of
analytic service providers who provide hosted analytic and data
warehousing services as a bundled solution to their customers.
These partners continue to be an important part of our channel
selling and we plan to expand our relationships with existing
and new partners.
We conduct a broad range of marketing activities to promote
market awareness of our products, generate product demand,
accelerate sales and demonstrate our thought leadership. These
include trade shows, field marketing events, public relations,
analyst relations, user conferences, webinars and other
activities. In addition, we are actively engaged with existing
customers in marketing activities to build a community of NPS
users worldwide who can promote the benefits of our products
from first-hand experience.
We have been recognized by industry analysts for our development
of data warehouse appliances, and our company, technology and
management team have garnered numerous industry awards and
recognition for our innovation and vision.
Research
and Development
Our research and development organization is responsible for
designing, developing and testing our products and for
integrating our appliances with partner solutions. Our product
development approach utilizes a multi-
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disciplinary team of professionals with experience in a broad
range of areas, including databases, networking, microcode,
firmware, performance measurement, application programming
interfaces, optimization techniques and user interface design.
In addition to our internal research and development staff, we
have contracted with Persistent Systems, located in Pune, India,
to employ a dedicated team of engineers focused on quality
assurance and product integration engineering. Research and
development expenses were $32.6 million, $23.9 million
and $18.0 million in fiscal 2009, 2008 and 2007,
respectively. We plan to continue to invest in all areas of
research and development to maintain our price/performance
leadership and to continue to innovate in software, hardware and
firmware design. We are also investing in an advanced
development team that is engaged in prototyping technologies
that enable new market applications for our products, leveraging
our core product advantages.
Manufacturing
Our NPS appliance integrates several commodity hardware
components including CPUs, disk drives, servers, network
switches and memory. Our manufacturing strategy is to manage the
supply chain, manufacturing process, test process, finished
goods inventory and logistics using third-party expertise and
resources, using a highly-leveraged outsourced manufacturing
model.
We work closely with several suppliers to select components
based on price/performance, reliability, and power and cooling
characteristics. Our operations and engineering personnel work
directly with these suppliers on technology roadmap and supply
chain issues. We update our hardware platform roughly every
18 months, taking advantage of our suppliers advances
and new market offerings. Our advanced manufacturing team,
located in our Marlborough, Massachusetts headquarters, works
closely with hardware engineering to review the hardware product
roadmap and to plan short- and longer-term materials acquisition
strategies, in addition to testing new components for
manufacturability and reliability. We rely on a limited number
of suppliers for several key components utilized in the assembly
of our products, including disk drives and microprocessors.
Although in many cases we use standard components for our
products, some of these components may only be purchased or may
only be available from a single supplier. In addition, we
maintain relatively low inventory and acquire components only as
needed, and neither we nor our contract manufacturer enter into
long-term supply contracts for these components and none of our
third-party suppliers is obligated to supply products to us for
any specific period or in any specific quantities, except as may
be provided in a particular purchase order.
We partner with Sanmina, a global provider of electronics
manufacturing services for the manufacture and delivery of our
systems. Under the terms of our agreement with Sanmina, we
commit to firm purchase orders based on our manufacturing
requirements for a certain rolling period. In addition, we
submit forecasts to Sanmina based on our requirements for an
additional rolling future period, for which we are only
responsible for the components purchased by Sanmina in reliance
on our forecast. Our forecasts are rolled into our firm purchase
orders as the manufacturing date approaches. Sanmina may accept
or reject any purchase order we submit.
We have implemented a formal product development life cycle
process that is based on Software Engineering Institute, or SEI,
and ISO guidelines and principles. We plan to continue to
improve our manufacturing and quality processes, and to drive
down the manufacturing costs of our appliances through scaling
and improvements in overall design, including the ongoing
evaluation of component costs.
Competition
The data warehouse industry has traditionally been dominated by
a small number of major providers. EMC, Hewlett-Packard, IBM,
Oracle, Sun Microsystems, Sybase and Teradata are our principal
competitors in the data warehouse marketplace. Each of these
companies provides several if not all elements of a data
warehouse environment as individual products, including database
software, servers, storage and professional services; however,
most do not provide an integrated solution similar to ours. Many
of our competitors have greater market presence, longer
operating histories, stronger name recognition, larger customer
bases and significantly greater financial, technical, sales and
marketing, manufacturing, distribution and other resources than
we have. Moreover, many of our competitors have more extensive
customer and partner relationships than we do, and may therefore
be in a better position to identify and respond to market
developments or changes in customer demands.
9
In addition to traditional data warehouse offerings, several new
offerings and vendors have entered the market over the past few
years. As the benefits of an appliance solution become evident
in the marketplace, many of our competitors have introduced
appliance-like offerings that combine traditional
database software integrated with lower-cost, commodity hardware
including servers and storage. In addition, several smaller
vendors have entered the market, offering open source or
proprietary database software with commodity hardware.
Furthermore, we expect additional competition in the future from
new and existing companies with whom we do not currently compete
directly. As our industry evolves, our current and potential
competitors may establish cooperative relationships among
themselves or with third parties, including software and
hardware companies with whom we have partnerships and whose
products interoperate with our own, that could acquire
significant market share, which could adversely affect our
business. We also face competition from internally developed
systems. The success of any of these sources of competition,
alone or in combination with others, could seriously harm our
business, operating results and financial condition.
Competition in the data warehouse industry is based primarily on
performance; ease of deployment and administration; acquisition
and operating costs; scalability; and power, cooling and
footprint requirements. We believe we compete effectively based
on all of these factors. Our NPS data warehouse appliance has
demonstrated a performance advantage of 10 to 100 times greater
query speed, a reduction of overall operations oversight and
linear scalability in users and system capacity, while typically
requiring less floor space, electric power and cooling capacity
than the products provided by our major competitors. However,
there can be no assurance that our products will continue to
outperform those of our competitors or that our product
advantages will always lead to customers choosing our products
over those of our competitors.
Intellectual
Property
Our success depends in part upon our ability to develop and
protect our core technology and intellectual property. We rely
primarily on a combination of trade secret, patent, copyright
and trademark laws, as well as contractual provisions with
employees and third parties, to establish and protect our
intellectual property rights. Our products are provided to
customers pursuant to agreements that impose restrictions on use
and disclosure. Our agreements with employees and contractors
who participate in the development of our core technology and
intellectual property include provisions that assign any
intellectual property rights to us. In addition to the foregoing
protections, we generally control access to our proprietary and
confidential information through the use of internal and
external controls.
As of January 31, 2009, we had 14 issued patents and 13
pending patent applications in the United States. These patents
will expire on dates ranging from 2022 to 2026. We also had two
granted foreign patents that have been activated in one or more
European Contracting States and 13 additional applications
pending with the European Patent Office. Pending patent
applications may receive unfavorable examination and are not
guaranteed allowance as issued patents. To the extent that a
patent is issued, any such future patent may be contested,
circumvented, found unenforceable or invalidated, and we may not
be able to prevent third parties from infringing this patent. We
may elect to abandon or otherwise not pursue prosecution of
certain pending patent applications due to patent examination
results, strategic concerns, economic considerations or other
factors. We will continue to assess appropriate occasions to
seek patent protection for aspects of our technology that we
believe provide us a significant competitive advantage in the
market. However, we believe that effective and timely product
innovation is more important to the success of our business than
the protection of our existing technology.
We have registered the following trademarks in the United
States: Netezza, the Netezza logo, Netezza Performance Server
and NPS. We also have trademarks registered in foreign
jurisdictions including: Argentina, Brazil, Canada, China, The
European Community, Hong Kong, India, Japan, Korea, Mexico,
Norway, Poland, Singapore, Switzerland, Taiwan, Thailand and
Turkey. We believe that our products are identified by our
trademarks and, thus, our trademarks are of significant value.
Each registered trademark has a duration of ten to
20 years, depending on the date it was registered and the
country in which it is registered, and is subject to an infinite
number of renewals for a like period upon continued use and
appropriate application. We intend to continue the use of our
trademarks and to renew our registered trademarks based upon
each trademarks continued value to us.
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Despite our efforts to protect the intellectual property rights
associated with our technology, unauthorized parties may still
attempt to copy or otherwise obtain and use our technology.
Moreover, it is difficult and expensive to monitor whether other
parties are complying with patent and copyright laws and their
confidentiality or other agreements with us, and to pursue legal
remedies against parties suspected of breaching our intellectual
property rights. In addition, we intend to expand our
international operations where the laws do not protect our
proprietary rights as fully as do the laws of the United States.
Third parties could claim that our products or technologies
infringe their proprietary rights. Our industry is characterized
by the existence of a large number of patents, trademarks and
copyrights and by frequent litigation based on allegations of
infringement or other violations of intellectual property
rights. Although we have not been involved in any litigation
related to intellectual property rights of others, we have from
time to time received letters from other parties alleging, or
inquiring about, breaches of their intellectual property rights.
We may in the future be sued for violations of other
parties intellectual property rights, and the risk of such
a lawsuit will likely increase as our size and market share
expand and as the number of products and competitors in our
market increase.
Employees
As of January 31, 2009, we had 381 employees
worldwide, including 149 employees in sales and marketing,
113 employees in research and development,
68 employees in service and support, 40 employees in
general administration and 11 employees in manufacturing.
None of our employees is represented by a labor union, and we
consider current employee relations to be good.
INFORMATION
Netezza makes available through its website, free of charge, its
Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
and Current Reports on
Form 8-K,
and all amendments to such reports, as soon as reasonably
practicable after these reports are electronically filed or
furnished to the U.S. Securities and Exchange Commission
(SEC) pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended. These reports and
other information are also available, free of charge, at
www.sec.gov. Alternatively, the public may read and copy any
materials we file with the SEC at the SECs Public
Reference Room at 100 F Street, N.E., Washington, DC
20549. Information on the operation of the Public Reference Room
may be obtained by calling the SEC at
1-800-SEC-0330.
Netezza will furnish, without charge to a security holder upon
written request, the Notice of Meeting and Proxy Statement for
the 2009 Annual Meeting of Stockholders (the 2009 Proxy
Statement), portions of which are incorporated herein by
reference. Document requests are available by calling or writing
to:
Netezza Shareholder Relations
26 Forest Street
Marlborough, MA 01752
Phone:
508-382-8200
Website: www.netezza.com
Risks
Related to Our Business and Industry
An investment in our common stock involves a high degree of
risk. You should carefully consider the risks and uncertainties
described below together with all of the other information
appearing elsewhere in this Annual Report on
Form 10-K,
including our consolidated financial statements and the related
notes, before deciding whether to purchase shares of our common
stock. Each of these risks could materially adversely affect our
business, operating results and financial condition. As a
result, the trading price of our common stock could decline and
you might lose all or part of your investment in our common
stock.
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Adverse
changes in economic conditions and reduced information
technology spending may negatively impact our
business.
Our business depends on the overall demand for information
technology and on the economic health of our current and
prospective customers and the geographic regions in which we
operate. In addition, the purchase of our products is often
discretionary and may involve a significant commitment of
capital and other resources. Recently, there has been a
significant deterioration in economic conditions in many of the
countries and regions in which we do business. If current global
economic conditions, or economic conditions in the United
States, persist or deteriorate further, our current or
prospective customers may experience serious cash flow problems,
or may otherwise reduce their information technology spending,
causing them to modify, delay or cancel plans to purchase our
products, which would have an adverse impact on our business,
operating results and financial condition.
We
have a history of losses, and we may not maintain profitability
in the future.
We were profitable in each of the last six fiscal quarters. We
had net income of $31.5 million in fiscal 2009 and
$2.0 million in fiscal 2008, but we had not been profitable
in any prior fiscal period. We experienced a net loss of
$8.0 million in fiscal 2007. Our current accumulated
deficit is $47.6 million. We expect to make significant
additional expenditures to facilitate the expansion of our
business, including expenditures in the areas of sales, research
and development, and customer service and support. Furthermore,
we may encounter unforeseen issues that require us to incur
additional costs. As a result of these increased expenditures,
we will have to generate and sustain increased revenue to
maintain profitability. Accordingly, we may not be able to
maintain profitability and we may incur significant losses in
the future.
Our
operating results may fluctuate significantly from quarter to
quarter and may fall below expectations in any particular fiscal
quarter, which could adversely affect the market price of our
common stock.
Our operating results are difficult to predict and may fluctuate
from quarter to quarter due to a variety of factors, many of
which are outside of our control. As a result, comparing our
operating results on a
period-to-period
basis may not be meaningful, and you should not rely on our past
results as an indication of our future performance. If our
revenue or operating results fall below the expectations of
investors or any securities analysts that follow our company in
any period, the price of our common stock would likely decline.
Factors that may cause our operating results to fluctuate
include:
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the impact of the recent economic downturn on customer purchases;
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the impact of new competitors or new competitive offerings;
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the typical recording of a significant portion of our quarterly
sales in the final month of the quarter, whereby small delays in
completion of sales transactions could have a significant impact
on our operating results for that quarter;
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the relatively high average selling price of our products and
our dependence on a limited number of customers for a
substantial portion of our revenue in any quarterly period,
whereby the loss of or delay in a customer order could
significantly reduce our revenue for that quarter; for instance,
one customer accounted for 16% of our total revenues during
fiscal 2009 and our ten largest customers accounted for
approximately 39% of our revenues in fiscal 2009;
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the possibility of seasonality in demand for our products;
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the addition of new customers or the loss of existing customers;
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the rates at which customers purchase additional products or
additional capacity for existing products from us;
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changes in the mix of products and services sold;
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the rates at which customers renew their maintenance and support
contracts with us;
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our ability to enhance our products with new and better
functionality that meet customer requirements;
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the timing of recognizing revenue as a result of revenue
recognition rules, including due to the timing of delivery and
receipt of our products;
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the length of our product sales cycle;
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the productivity and growth of our salesforce;
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service interruptions with any of our single source suppliers or
manufacturing partners;
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changes in pricing by us or our competitors, or the need to
provide discounts to win business;
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the timing of our product releases or upgrades or similar
announcements by us or our competitors;
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the timing of investments in research and development related to
new product releases or upgrades;
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our ability to control costs, including operating expenses and
the costs of the components used in our products;
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volatility in our stock price, which may lead to higher stock
compensation expenses pursuant to Statement of Financial
Accounting Standards No. 123(R), Share-Based
Payment, which first became effective for us in fiscal
2007 and requires that employee stock-based compensation be
measured based on fair value on grant date and treated as an
expense that is reflected in our financial statements over the
recipients service period;
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future accounting pronouncements and changes in accounting
policies;
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costs related to the acquisition and integration of companies,
assets or technologies;
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technology and intellectual property issues associated with our
products; and
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general economic trends, including changes in information
technology spending or geopolitical events such as war or
incidents of terrorism.
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Most of our operating expenses do not vary directly with revenue
and are difficult to adjust in the short term. As a result, if
revenue for a particular quarter is below our expectations, we
could not proportionately reduce operating expenses for that
quarter, and therefore this revenue shortfall would have a
disproportionate effect on our expected operating results for
that quarter.
Our
limited operating history and the emerging nature of the data
warehouse market make it difficult to evaluate our current
business and future prospects, and may increase the risk of your
investment.
Our company has only been in existence since August 2000. We
first began shipping products in February 2003 and much of our
growth has occurred in the past three fiscal years. Our limited
operating history and the nascent state of the data warehouse
market in which we operate makes it difficult to evaluate our
current business and our future prospects. As a result, we
cannot be certain that we will sustain our growth or maintain
profitability. We will encounter risks and difficulties
frequently experienced by early-stage companies in
rapidly-evolving industries. These risks include the need to:
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attract new customers and maintain current customer
relationships;
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continue to develop and upgrade our data warehouse solutions;
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respond quickly and effectively to competitive pressures;
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offer competitive pricing or provide discounts to customers in
order to win business;
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manage our expanding operations;
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maintain adequate control over our expenses;
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maintain adequate internal controls and procedures;
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maintain our reputation, build trust with our customers and
further establish our brand; and
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identify, attract, retain and motivate qualified personnel.
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If we fail to successfully address these needs, our business,
operating results and financial condition may be adversely
affected.
We
depend on a single product family, the Netezza Performance
Server family, for all of our revenue, so we are particularly
vulnerable to any factors adversely affecting the sale of that
product family.
Our revenue is derived exclusively from sales and service of the
NPS product family, and we expect that this product family will
account for substantially all of our revenue for the foreseeable
future. If the data warehouse market declines or the Netezza
Performance Server fails to maintain or achieve greater market
acceptance, we will not be able to grow our revenues
sufficiently to maintain profitability.
If we
lose key personnel, or if we are unable to attract and retain
highly-qualified personnel on a cost-effective basis, it will be
more difficult for us to manage our business and to identify and
pursue growth opportunities.
Our success depends substantially on the performance of our key
senior management, technical, and sales and marketing personnel.
Each of our employees may terminate his or her relationship with
us at any time and the loss of the services of such persons
could have an adverse effect on our business.
On November 25, 2008, Jitendra S. Saxena, our Chairman and
Chief Executive Officer, announced his resignation from the
position of Chief Executive Officer effective as of the close of
business on January 31, 2009, and our board of directors
appointed James Baum, currently our President and Chief
Operating Officer and a member of our board of directors, as
Chief Executive Officer, effective February 1, 2009. We
rely on our senior management to manage our existing business
operations and to identify and pursue new growth opportunities
and there is no guarantee that the transition from
Mr. Saxena to Mr. Baum will not result in disruptions
to our operations or adversely affect our ability to take
advantage of potential growth opportunities.
There may be additional departures of our key management
personnel from time to time and our continued success will
depend on our ability to attract or develop highly qualified
managerial personnel and fully integrate them into our business,
which may be time-consuming and may result in additional
disruptions to our operations. In addition, our success depends
in significant part on our ability to develop and enhance our
products, which requires talented hardware and software
engineers with specialized skills, and on our ability to
maintain and grow an effective sales force. We experience
intense competition for highly qualified managerial, technical,
and sales and marketing personnel and we cannot ensure that we
will be able to successfully attract, assimilate, or retain such
personnel in the future.
If we
are unable to develop and introduce new products and
enhancements to existing products, if our new products and
enhancements to existing products do not achieve market
acceptance, or if we fail to manage product transitions, we may
fail to increase, or may lose, market share.
The market for our products is characterized by rapid
technological change, frequent new product introductions and
evolving industry standards. Our future growth depends on the
successful development and introduction of new products and
enhancements to existing products that achieve acceptance in the
market. Due to the complexity of our products, which include
integrated hardware and software components, any new products
and product enhancements would be subject to significant
technical risks that could impact our ability to introduce those
products and enhancements in a timely manner. In addition, such
new products or product enhancements may not achieve market
acceptance despite our expending significant resources to
develop them. If we are unable, for technological or other
reasons, to develop, introduce and enhance our products in a
timely manner in response to changing market conditions or
evolving customer requirements, or if these new products and
product enhancements do not achieve market acceptance due to
competitive or other factors, our operating results and
financial condition could be adversely affected.
Product introductions and certain enhancements of existing
products by us in future periods may also reduce demand for our
existing products or could delay purchases by customers awaiting
arrival of our new products. As new or enhanced products are
introduced, we must successfully manage the transition from
older products in order to minimize disruption in
customers ordering patterns, avoid excessive levels of
older product inventories and ensure that sufficient supplies of
new products can be delivered in a timely manner to meet
customer demand.
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We
face intense and growing competition from leading technology
companies as well as from emerging companies. Our inability to
compete effectively with any or all of these competitors could
impact our ability to achieve our anticipated market penetration
and achieve or sustain profitability.
The data warehouse market is highly competitive and we expect
competition to intensify in the future. This competition may
make it more difficult for us to sell our products, and may
result in increased pricing pressure, reduced profit margins,
increased sales and marketing expenses and failure to increase,
or the loss of, market share, any of which would likely
seriously harm our business, operating results and financial
condition.
Currently, our most significant competition includes companies
which typically sell several if not all elements of a data
warehouse environment as individual products, including database
software, servers, storage and professional services. These
competitors are often leaders in many of these segments
including EMC, Hewlett-Packard, IBM, Oracle, Sun Microsystems,
Sybase and Teradata. In addition, a large number of fast growing
companies have recently entered the market, many of them selling
integrated appliance offerings similar to our products.
Additionally, as the benefits of an appliance solution have
become evident in the marketplace, many of our competitors have
also begun to bundle their products into appliance-like
offerings that more directly compete with our products. We also
expect additional competition in the future from new and
existing companies with whom we do not currently compete
directly. As our industry evolves, our current and potential
competitors may establish cooperative relationships among
themselves or with third parties, including software and
hardware companies with whom we have partnerships and whose
products interoperate with our own, that could acquire
significant market share, which could adversely affect our
business. We also face competition from internally developed
systems. Any of these competitive threats, alone or in
combination with others, could seriously harm our business,
operating results and financial condition.
Many of our competitors have greater market presence, longer
operating histories, stronger name recognition, larger customer
bases and significantly greater financial, technical, sales and
marketing, manufacturing, distribution and other resources than
we have. In addition, many of our competitors have broader
product and service offerings than we do. These companies may
attempt to use their greater resources to better position
themselves in the data warehouse market including by pricing
their products at a discount or bundling them with other
products and services in an attempt to rapidly gain market
share. Moreover, many of our competitors have more extensive
customer and partner relationships than we do, and may therefore
be in a better position to identify and respond to market
developments or changes in customer demands. Potential customers
may also prefer to purchase from their existing suppliers rather
than a new supplier regardless of product performance or
features. We cannot assure you that we will be able to compete
successfully against existing or new competitors.
In addition, some of our traditional competitors have introduced
their own integrated data warehousing solutions which may cause
our sales cycles to be delayed and may have an adverse impact on
our business, operating results and financial condition.
Our
success depends on the continued recognition of the need for
business intelligence in the marketplace and on the adoption by
our customers of data warehouse appliances, often as
replacements for existing systems, to enable business
intelligence. If we fail to improve our products to further
drive this market migration as well as to successfully compete
with alternative approaches and products, our business would
suffer.
Due to the innovative nature of our products and the new
approaches to business intelligence that our products enable,
purchases of our products often involve the adoption of new
methods of database access and utilization on the part of our
customers. This may entail the acknowledgement of the benefits
conferred by business intelligence and the customer-wide
adoption of business intelligence analysis that makes the
benefits of our system particularly relevant. Business
intelligence solutions are still in their early stages of growth
and their continued adoption and growth in the marketplace
remain uncertain. Additionally, our appliance approach requires
our customers to run their data warehouses in new and innovative
ways and often requires our customers to replace their existing
equipment and supplier relationships, which they may be
unwilling to do, especially in light of the often critical
nature of the components and systems involved and the
significant capital and other resources they may have previously
invested. Furthermore, purchases of our products involve
material changes to established purchasing
15
patterns and policies. Even if prospective customers recognize
the need for our products, they may not select our NPS solution
because they choose to wait for the introduction of products and
technologies that serve as a replacement or substitute for, or
represent an improvement over, our NPS solutions. Therefore, our
future success also depends on our ability to maintain our
leadership position in the data warehouse market and to
proactively address the needs of the market and our customers to
further drive the adoption of business intelligence and to
sustain our competitive advantage versus competing approaches to
business intelligence and alternate product offerings.
Claims
that we infringe or otherwise misuse the intellectual property
of others could subject us to significant liability and disrupt
our business, which could have a material adverse effect on our
business and operating results.
Our competitors protect their intellectual property rights by
means such as trade secrets, patents, copyrights and trademarks.
We have not conducted an independent review of patents issued to
third parties. Although we have not been involved in any
litigation related to intellectual property rights of others,
from time to time we receive letters from other parties
alleging, or inquiring about, breaches of their intellectual
property rights. We may in the future be sued for violations of
other parties intellectual property rights, and the risk
of such a lawsuit will likely increase as our size and the
number and scope of our products increase, as our geographic
presence and market share expand and as the number of
competitors in our market increases. Any such claims or
litigation could:
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be time-consuming and expensive to defend, whether meritorious
or not;
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cause shipment delays;
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divert the attention of our technical and managerial resources;
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require us to enter into royalty or licensing agreements with
third parties, which may not be available on terms that we deem
acceptable, if at all;
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prevent us from operating all or a portion of our business or
force us to redesign our products, which could be difficult and
expensive and may degrade the performance of our products;
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subject us to significant liability for damages or result in
significant settlement payments; and/or
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require us to indemnify our customers, distribution partners or
suppliers.
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Any of the foregoing could disrupt our business and have a
material adverse effect on our operating results and financial
condition.
Our
products must interoperate with our customers information
technology infrastructure, including customers software
applications, networks, servers and data-access protocols, and
if our products do not do so successfully, we may experience a
weakening demand for our products.
To be competitive in the market, our products must interoperate
with our customers information technology infrastructure,
including software applications, network infrastructure and
servers supplied by a variety of other vendors, many of whom are
competitors of ours. Our products currently interoperate with a
number of business intelligence and data-integration
applications provided by vendors including IBM and Oracle, among
others. When new or updated versions of these software
applications are introduced, we must sometimes develop updated
versions of our software that may require assistance from these
vendors to ensure that our products effectively interoperate
with these applications. If these vendors do not provide us with
assistance on a timely basis, or decide not to work with us for
competitive or other reasons, including due to consolidation
with our competitors, we may be unable to ensure such
interoperability. Additionally, our products interoperate with
servers, network infrastructure and software applications
predominantly through the use of data-access protocols. While
many of these protocols are created and maintained by
independent standards organizations, some of these protocols
that exist today or that may be created in the future are, or
could be, proprietary technology and therefore require licensing
the proprietary protocols specifications from a third
party or implementing the protocol without specifications. Our
development efforts to provide interoperability with our
customers information technology infrastructures require
substantial capital investment and the devotion of substantial
employee resources. We may not accomplish these development
16
efforts quickly, cost-effectively or at all. If we fail for any
reason to maintain interoperability, we may experience a
weakening in demand for our products, which would adversely
affect our business, operating results and financial condition.
If we
fail to enhance our brand, our ability to expand our customer
base will be impaired and our operating results may
suffer.
We believe that developing and maintaining awareness of the
Netezza brand is critical to achieving widespread acceptance of
our products and is an important element in attracting new
customers and shortening our sales cycle. We expect the
importance of brand recognition to increase as competition
further develops in our market. Successful promotion of our
brand will depend largely on the effectiveness of our marketing
efforts and our ability to provide customers with reliable and
technically sophisticated products at competitive prices. If
customers do not perceive our products and services to be of
high value, our brand and reputation could be harmed, which
could adversely impact our financial results. Despite our best
efforts, our brand promotion efforts may not yield increased
revenue sufficient to offset the additional expenses incurred in
our brand-building efforts.
We may
not receive significant revenues from our current research and
development efforts for several years, if at all.
Investment in product development often involves a long payback
cycle. We have made and expect to continue making significant
investments in research and development and related product
opportunities. Accelerated product introductions and short
product life cycles require high levels of expenditures for
research and development that could adversely affect our
operating results if not offset by revenue increases. We believe
that we must continue to dedicate a significant amount of
resources to our research and development efforts to maintain
our competitive position. However, we do not expect to receive
significant revenues from these investments for several years,
if at all.
Our
sales cycles can be long and unpredictable, and our sales
efforts require considerable time and expense, which contribute
to the unpredictability and variability of our financial
performance and may adversely affect our
profitability.
The timing of our revenue is difficult to predict as we
experience extended sales cycles, due in part to our need to
educate our customers about our products and participate in
extended product evaluations and the high purchase price of our
products. In addition, product purchases are often subject to a
variety of customer considerations that may extend the length of
our sales cycle, including customers acceptance of our
approach to data warehouse management and their willingness to
replace their existing solutions and supplier relationships,
timing of their budget cycles and approval processes, budget
constraints, extended negotiations, and administrative,
processing and other delays, including those due to general
economic factors. As a result, our sales cycle extends to more
than nine months in some cases and it is difficult to predict
when or if a sale to a potential customer will occur. All of
these factors can contribute to fluctuations in our quarterly
financial performance and increase the likelihood that our
operating results in a particular quarter will fall below
investor expectations. In addition, the provision of evaluation
units to customers may require significant investment in
inventory in advance of sales of these units, which sales may
not ultimately transpire. If we are unsuccessful in closing
sales after expending significant resources, or if we experience
delays for any of the reasons discussed above, our future
revenues and operating expenses may be materially adversely
affected.
Our
company has grown rapidly and we may be unable to manage our
growth effectively.
Between January 31, 2005 and January 31, 2009, the
number of our employees increased from 140 to 381 and our
installed base of customers grew from 15 to 248. In addition,
during that time period our number of office locations has
increased from 3 to 19. We anticipate that further expansion of
our organization and operations will be required to achieve our
growth targets. Our rapid growth has placed, and is expected to
continue to place, a significant strain on our management and
operational infrastructure. Our failure to continue to enhance
our management personnel and policies and our operational and
financial systems and controls in response to our growth could
result in operating inefficiencies that could impair our
competitive position and would increase our
17
costs more than we had planned. If we are unable to manage our
growth effectively, our business, our reputation and our
operating results and financial condition will be adversely
affected.
Our
ability to sell to U.S. federal government agencies is subject
to evolving laws and policies that could have a material adverse
effect on our growth prospects and operating results, and our
contracts with the U.S. federal government may impose
requirements that are unfavorable to us.
In both fiscal 2009 and fiscal 2008, we derived approximately 3%
of our revenue from U.S. federal government agencies, which
amount may increase substantially in future periods. The demand
for data warehouse products and services by federal government
agencies may be affected by laws and policies that might
restrict agencies collection, processing, and sharing of
certain categories of information. Our ability to profitably
sell products to government agencies is also subject to changes
in agency funding priorities and contracting procedures and our
ability to comply with applicable government regulations and
other requirements.
The restrictions on federal government data management include,
for example, the Privacy Act, which requires agencies to
publicize their collection and use of personal data and
implement procedures to provide individuals with access to that
information; the Federal Information Security Management Act,
which requires agencies to develop comprehensive data privacy
and security measures that may increase the cost of maintaining
certain data; and the
E-government
Act, which requires agencies to conduct privacy assessments
before acquiring certain information technology products or
services and before initiating the collection of personal
information or the aggregation of existing databases of personal
information. These restrictions, any future restrictions, and
public or political pressure to constrain the governments
collection and processing of personal information may adversely
affect the governments demand for our products and
services and could have a material adverse effect on our growth
prospects and operating results.
Federal agency funding for information technology programs is
subject to annual appropriations established by Congress and
spending plans adopted by individual agencies. Accordingly,
government purchasing commitments normally last no longer than
one year. The amounts of available funding in any year may be
reduced to reflect budgetary constraints, economic conditions,
or competing priorities for federal funding. Constraints on
federal funding for information technology could harm our
ability to sell products to government agencies, causing
fluctuations in our revenues from this segment from period to
period and resulting in a weakening of our growth prospects,
operating results and financial condition.
Our contracts with government agencies may subject us to certain
risks and give the government rights and remedies not typically
found in commercial contracts, including rights that allow the
government to, for example:
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terminate contracts for convenience at any time without cause;
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obtain detailed cost or pricing information;
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receive most favored customer pricing;
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perform routine audits;
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impose equal employment and hiring standards;
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require products to be manufactured in specified countries;
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restrict
non-U.S. ownership
or investment in our company; and
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pursue administrative, civil or criminal remedies for
contractual violations.
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Moreover, some of our contracts allow the government to use, or
permit others to use, patented inventions that we developed
under those contracts, and to place conditions on our right to
retain title to such inventions. Likewise, some of our
government contracts allow the government to use or disclose
software or technical data that we develop or deliver under the
contract without constraining subsequent uses of those data.
Third parties authorized by the government to use our patents,
software and technical data may emerge as alternative sources
for the products and services we offer to the government and may
enable the government to negotiate lower prices for our products
and services. If we fail to assert available protections for our
patents, software, and technical data, our ability to
18
control the use of our intellectual property may be compromised,
which may benefit our competitors, reduce the prices we can
obtain for our products and services, and harm our financial
condition.
Our
international operations are subject to additional risks that we
do not face in the United States, which could have an adverse
effect on our operating results.
In fiscal 2009 and fiscal 2008, we derived approximately 26% and
20%, respectively, of our revenue from customers based outside
the United States, and we currently have sales personnel in nine
different foreign countries. We expect our revenue and
operations outside the United States will continue to expand in
the future. Our international operations are subject to a
variety of risks that we do not face in the United States,
including:
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difficulties in staffing and managing our foreign offices and
the increased travel, infrastructure and legal and compliance
costs associated with multiple international locations;
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general economic conditions in the countries in which we
operate, including seasonal reductions in business activity in
the summer months in Europe, during Lunar New Year in parts of
Asia and in other periods in various individual countries;
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longer payment cycles for sales in foreign countries and
difficulties in enforcing contracts and collecting accounts
receivable;
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additional withholding taxes or other taxes on our foreign
income, and tariffs or other restrictions on foreign trade or
investment;
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imposition of, or unexpected adverse changes in, foreign laws or
regulatory requirements, many of which differ from those in the
United States;
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increased length of time for shipping and acceptance of our
products;
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difficulties in repatriating overseas earnings;
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increased exposure to foreign currency exchange rate risk;
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reduced protection for intellectual property rights in some
countries;
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costs and delays associated with developing products in multiple
languages; and
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political unrest, war, incidents of terrorism, or responses to
such events.
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Our overall success in international markets depends, in part,
on our ability to succeed in differing legal, regulatory,
economic, social and political conditions. We may not be
successful in developing and implementing policies and
strategies that will be effective in managing these risks in
each country where we do business. Our failure to manage these
risks successfully could harm our international operations,
reduce our international sales and increase our costs, thus
adversely affecting our business, operating results and
financial condition.
Our
future revenue growth will depend in part on our ability to
further develop our indirect sales channel, and our inability to
effectively do so will impair our ability to grow our
revenues.
Our future revenue growth will depend in part on the continued
development of our indirect sales channel to complement our
direct salesforce. Our indirect sales channel includes
resellers, systems integration firms and analytic service
providers. In fiscal 2009 and fiscal 2008, we derived
approximately 21% and 14%, respectively, of our revenue from our
indirect sales channel. We plan to continue to invest in our
indirect sales channel by expanding upon and developing new
relationships with resellers, systems integration firms and
analytic service providers. While the development of our
indirect sales channel is a priority for us, we cannot predict
the extent to which we will be able to attract and retain
financially stable, motivated indirect channel partners.
Additionally, due in part to the complexity and innovative
nature of our products, our channel partners may not be
successful in marketing and selling our products. Our indirect
sales channel may be adversely affected by disruptions in
relationships between our channel partners and their customers,
as well as by competition between our channel partners or
between our channel partners and our direct salesforce. In
addition our reputation could suffer as a result of the conduct
and manner of marketing and sales by our channel partners. Our
agreements with our channel partners are generally not
19
exclusive and may be terminated without cause. If we fail to
effectively develop and manage our indirect channel for any of
these reasons, we may have difficulty attaining our growth
targets.
Our
ability to sell our products and retain customers is highly
dependent on the quality of our maintenance and support services
offerings, and our failure to offer high-quality maintenance and
support could have a material adverse effect on our operating
results.
Most of our customers purchase maintenance and support services
from us, which represents a significant portion of our revenue
(approximately 24% of our revenue in fiscal 2009 and 19% of our
revenue in fiscal 2008). Customer satisfaction with our
maintenance and support services is critical for the successful
marketing and sale of our products and the success of our
business. In addition to our support staff and installation and
technical account management teams, we have developed service
relationships with third parties to provide
on-site
hardware service to our customers. Although we believe these
third parties and any other third-party service provider we
utilize in the future will offer a high level of service
consistent with our internal customer support services, we
cannot assure you that they will continue to devote the
resources necessary to provide our customers with effective
technical support. In addition, if we are unable to renew our
service agreements with these third parties we utilize in the
future or such agreements are terminated, we may be unable to
establish alternative relationships on a timely basis or on
terms acceptable to us, if at all. If we or our service partners
are unable to provide effective maintenance and support
services, it could adversely affect our ability to sell our
products and harm our reputation with current and potential
customers.
Our
products are highly technical and may contain undetected
software or hardware defects, which could cause data
unavailability, loss or corruption that might result in
liability to our customers and harm to our reputation and
business.
Our products are highly technical and complex and are often used
to store and manage data critical to our customers
business operations. Our products may contain undetected errors,
defects or security vulnerabilities that could result in data
unavailability, loss or corruption or other harm to our
customers. Some errors in our products may only be discovered
after the products have been installed and used by customers.
Any errors, defects or security vulnerabilities discovered in
our products after commercial release or that are caused by
another vendors products with which we interoperate but
are nevertheless attributed to us by our customers, as well as
any computer virus or human error on the part of our customer
support or other personnel, that result in a customers
data being misappropriated, unavailable, lost or corrupted could
have significant adverse consequences, including:
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loss of customers;
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negative publicity and damage to our reputation;
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diversion of our engineering, customer service and other
resources;
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increased service and warranty costs; and
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loss or delay in revenue or market acceptance of our products.
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Any of these events could adversely affect our business,
operating results and financial condition. In addition, there is
a possibility that we could face claims for product liability,
tort or breach of warranty, including claims from both our
customers and our distribution partners. The cost of defending
such a lawsuit, regardless of its merit, could be substantial
and could divert managements attention from ongoing
operations of the company. In addition, if our business
liability insurance coverage proves inadequate with respect to a
claim or future coverage is unavailable on acceptable terms or
at all we may be liable for payment of substantial damages. Any
or all of these potential consequences could have an adverse
impact on our operating results and financial condition.
It is
difficult to predict our future capital needs and we may be
unable to obtain additional financing that we may need, which
could have a material adverse effect on our business, operating
results and financial condition.
We believe that our current balance of cash, cash equivalents
and investments, together with cash expected to be generated
from operations, will be sufficient to fund our projected
operating requirements, including anticipated
20
capital expenditures, for at least the next twelve months.
However, we may need to raise additional funds if we are
presented with unforeseen circumstances or opportunities in
order to, among other things:
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develop or enhance our products;
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support additional capital expenditures;
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respond to competitive pressures;
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fund operating losses in future periods; or
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take advantage of acquisition or expansion opportunities.
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Any required additional financing may not be available on terms
acceptable to us, or at all. If we raise additional funds by
issuing equity securities, you may experience significant
dilution of your ownership interest, and the newly issued
securities may have rights senior to those of the holders of our
common stock. If we raise additional funds by obtaining loans
from third parties, the terms of those financing arrangements
may include negative covenants or other restrictions on our
business that could impair our operational flexibility and would
also require us to fund additional interest expense, which would
harm our profitability. Holders of debt would also have rights,
preferences or privileges senior to those of holders of our
common stock.
A
substantial portion of our long-term marketable securities is
invested in highly rated auction rate securities. Failures in
these auctions may affect our liquidity.
A substantial percentage of our marketable securities portfolio
is invested in highly rated auction rate securities
collateralized by student loans with the majority of such
collateral being guaranteed by the United States government.
Auction rate securities are securities that are structured to
allow for short-term interest rate resets but with contractual
maturities that can be well in excess of ten years. At the end
of each reset period, which typically occurs every 7 to
35 days, investors can sell or continue to hold the
securities at par. Beginning in late February 2008, due to
market conditions, the auction process for our auction rate
securities failed. Such failures resulted in the interest rate
on these investments resetting to predetermined rates in
accordance with their underlying loan agreements which are, in
some instances, lower than the current market rate of interest.
In the event we need to liquidate our investments in these types
of securities, we will not be able to do so until a future
auction on these investments is successful, the issuer redeems
the outstanding securities, a buyer is found outside the auction
process, the securities mature, or there is a default requiring
immediate repayment from the issuer. In the future, should the
auction rate securities we hold be subject to additional auction
failures
and/or we
determine that the decline in value of auction rate securities
are other than temporary, we would recognize a loss in our
consolidated statement of operations, which could be material.
In addition, any future failed auctions may adversely impact the
liquidity of our investments. Furthermore, if one or more
issuers of the auction rate securities held in our portfolio are
unable to successfully close future auctions and their credit
ratings deteriorate, we may be required to adjust the carrying
value of these investments through an impairment charge, which
could be material.
Due to our inability to sell these securities at auction since
late February 2008, on November 7, 2008, we accepted an
offer from UBS AG (UBS), an investment broker
through whom we purchased par value $15.8 million of
auction rate securities, that grants us the right to sell to UBS
$15.8 million of our total $54.2 million auction rate
securities position, at par, at any time during a two-year
period beginning June 30, 2010 (the Put Right).
Nevertheless, the Put Right only provides us with the
opportunity to liquidate a portion of our auction rate
securities position and to the extent we are not able to
liquidate our auction rate securities, our lack of access to the
underlying value of such securities could have a material impact
on our income and results in operations.
If we
are unable to protect our intellectual property rights, our
competitive position could be harmed or we could be required to
incur significant expenses to enforce our rights.
Our success is dependent in part on obtaining, maintaining and
enforcing our intellectual property and other proprietary
rights. We rely on a combination of trade secret, patent,
copyright and trademark laws and contractual provisions with
employees and third parties, all of which offer only limited
protection. Despite our efforts to protect our intellectual
property and proprietary information, we may not be successful
in doing so, for several reasons. We
21
cannot be certain that our pending patent applications will
result in the issuance of patents or whether the examination
process will require us to narrow our claims. Even if patents
are issued to us, they may be contested, or our competitors may
be able to develop similar or superior technologies without
infringing our patents.
Although we enter into confidentiality, assignments of
proprietary rights and license agreements, as appropriate, with
our employees and third parties, including our contract
engineering firm, and generally control access to and
distribution of our technologies, documentation and other
proprietary information, we cannot be certain that the steps we
take to prevent unauthorized use of our intellectual property
rights are sufficient to prevent their misappropriation,
particularly in foreign countries where laws or law enforcement
practices may not protect our intellectual property rights as
fully as in the United States.
Even in those instances where we have determined that another
party is breaching our intellectual property and other
proprietary rights, enforcing our legal rights with respect to
such breach may be expensive and difficult. We may need to
engage in litigation to enforce or defend our intellectual
property and other proprietary rights, which could result in
substantial costs and diversion of management resources.
Further, many of our current and potential competitors are
substantially larger than we are and have the ability to
dedicate substantially greater resources to defending any claims
by us that they have breached our intellectual property rights.
Our
products may be subject to open source licenses, which may
restrict how we use or distribute our solutions or require that
we release the source code of certain technologies subject to
those licenses.
Some of our proprietary technologies incorporate open source
software. For example, the open source database drivers that we
use may be subject to an open source license. The GNU General
Public License and other open source licenses typically require
that source code subject to the license be released or made
available to the public. Such open source licenses typically
mandate that proprietary software, when combined in specific
ways with open source software, become subject to the open
source license. We take steps to ensure that our proprietary
software is not combined with, or does not incorporate, open
source software in ways that would require our proprietary
software to be subject to an open source license. However, few
courts have interpreted the open source licenses, and the manner
in which these licenses may be interpreted and enforced is
therefore subject to uncertainty. If these licenses were to be
interpreted in a manner different than we interpret them, we may
find ourselves in violation of such licenses. While our customer
contracts prohibit the use of our technology in any way that
would cause it to violate an open source license, our customers
could, in violation of our agreement, use our technology in a
manner prohibited by an open source license.
In addition, we rely on multiple software engineers to design
our proprietary products and technologies. Although we take
steps to ensure that our engineers do not include open source
software in the products and technologies they design, we may
not exercise complete control over the development efforts of
our engineers and we cannot be certain that they have not
incorporated open source software into our proprietary
technologies. In the event that portions of our proprietary
technology are determined to be subject to an open source
license, we might be required to publicly release the affected
portions of our source code, which could reduce or eliminate our
ability to commercialize our products.
As
part of our business strategy, we engage in acquisitions, which
could disrupt our business, cause dilution to our stockholders,
reduce our financial resources and result in increased
expenses.
We acquired NuTech Solutions, Inc. in May 2008 and Tizor
Systems, Inc. in February 2009 (see Note 7 and Note 19
to our accompanying financial statements). In the future, we may
acquire additional companies, assets or technologies in an
effort to complement our existing offerings or enhance our
market position. Any acquisitions we make could subject us to a
number of risks, including:
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the purchase price we pay could significantly deplete our cash
reserves, impair our future operating flexibility or result in
dilution to our existing stockholders;
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we may find that the acquired company, assets or technology do
not further improve our financial and strategic position as
planned;
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we may find that we overpaid for the company, asset or
technology, or that the economic conditions underlying our
acquisition have changed;
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we may have difficulty integrating the operations and personnel
of the acquired company;
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we may have difficulty retaining the employees with the
technical skills needed to enhance and provide services with
respect to the acquired assets or technologies;
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the acquisition may be viewed negatively by customers, financial
markets or investors;
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we may have difficulty incorporating the acquired technologies
or products with our existing product lines;
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we may encounter difficulty entering and competing in new
product or geographic markets;
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we may encounter a competitive response, including price
competition or intellectual property litigation;
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we may have product liability, customer liability or
intellectual property liability associated with the sale of the
acquired companys products;
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we may be subject to litigation by terminated employees or third
parties;
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we may incur debt, one-time write-offs, such as acquired
in-process research and development costs, and restructuring
charges;
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we may acquire goodwill and other intangible assets that are
subject to impairment tests, which could result in future
impairment charges;
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our ongoing business and managements attention may be
disrupted or diverted by transition or integration issues and
the complexity of managing geographically or culturally diverse
enterprises; and
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our due diligence process may fail to identify significant
existing issues with the target companys product quality,
product architecture, financial disclosures, accounting
practices, internal controls, legal contingencies, intellectual
property and other matters.
|
These factors could have a material adverse effect on our
business, operating results and financial condition.
From time to time, we may enter into negotiations for
acquisitions or investments that are not ultimately consummated.
Such negotiations could result in significant diversion of
management time, as well as substantial
out-of-pocket
costs, any of which could have a material adverse effect on our
business, operating results and financial condition.
We
currently rely on a single contract manufacturer to assemble our
products, and our failure to manage our relationship with our
contract manufacturer successfully could negatively impact our
ability to sell our products.
We currently rely on a single contract manufacturer, Sanmina-SCI
Corporation (Sanmina), to assemble our products,
manage our supply chain and participate in negotiations
regarding component costs. While we believe that our use of
Sanmina provides benefits to our business, our reliance on
Sanmina reduces our control over the assembly process, exposing
us to risks, including reduced control over quality assurance,
production costs and product supply. These risks could become
more acute if we are successful in our efforts to increase
revenue. If we fail to manage our relationship with Sanmina
effectively, or if Sanmina experiences delays, disruptions,
capacity constraints or quality control problems in its
operations, our ability to ship products to our customers could
be impaired and our competitive position and reputation could be
harmed. In addition, we are required to provide forecasts to
Sanmina regarding product demand and production levels. If we
inaccurately forecast demand for our products, we may have
excess or inadequate inventory or incur cancellation charges or
penalties, which could adversely impact our operating results
and financial condition.
Additionally, Sanmina can terminate our agreement for any reason
upon 90 days notice or for cause upon
30 days notice. If we are required to change contract
manufacturers or assume internal manufacturing operations due to
any termination of the agreement with Sanmina, we may lose
revenue, experience manufacturing delays,
23
incur increased costs or otherwise damage our customer
relationships. We cannot assure you that we will be able to
establish an alternative manufacturing relationship on
acceptable terms or at all.
We
depend on a continued supply of components for our products from
third-party suppliers, and if shortages of these components
arise, we may not be able to secure enough components to build
new products to meet customer demand or we may be forced to pay
higher prices for these components.
We rely on a limited number of suppliers for several key
components utilized in the assembly of our products, including
disk drives and microprocessors. Although in many cases we use
standard components for our products, some of these components
may only be purchased or may only be available from a single
supplier. In addition, we maintain relatively low inventory and
acquire components only as needed, and neither we nor our
contract manufacturer enter into long-term supply contracts for
these components and none of our third-party suppliers is
obligated to supply products to us for any specific period or in
any specific quantities, except as may be provided in a
particular purchase order. Our industry has experienced
component shortages and delivery delays in the past, and we may
experience shortages or delays of critical components in the
future as a result of strong demand in the industry or other
factors. If shortages or delays arise, we may be unable to ship
our products to our customers on time, or at all, and increased
costs for these components that we could not pass on to our
customers would negatively impact our operating margins. For
example, new generations of disk drives are often in short
supply, which may limit our ability to procure these disk
drives. In addition, disk drives represent a significant portion
of our cost of revenue, and the price of various kinds of disk
drives is subject to substantial volatility in the market. Many
of the other components required to build our systems are also
occasionally in short supply. Therefore, we may not be able to
secure enough components at reasonable prices or of acceptable
quality to build new products, resulting in an inability to meet
customer demand or our own operating goals, which could
adversely affect our customer relationships, business, operating
results and financial condition.
We
currently rely on a contract engineering firm for quality
assurance and product integration engineering.
In addition to our internal research and development staff, we
have contracted with Persistent Systems Pvt. Ltd. located in
Pune, India, to employ a dedicated team of over 60 engineers
focused on certain aspects of our product development.
Persistent Systems can terminate our agreement for any reason
upon 15 days notice. If we were required to change
our contract engineering firm, including due to a termination of
the agreement with Persistent Systems, we may experience delays,
incur increased costs or otherwise damage our customer
relationships. We cannot assure you that we will be able to
establish an alternative contract engineering firm relationship
on acceptable terms or at all.
Future
interpretations of existing accounting standards could adversely
affect our operating results.
Generally Accepted Accounting Principles in the United States,
or GAAP, are subject to interpretation by the Financial
Accounting Standards Board, or FASB, the American Institute of
Certified Public Accountants, or AICPA, the SEC and various
other bodies formed to promulgate and interpret appropriate
accounting principles. A change in these principles or
interpretations could have a significant effect on our reported
operating results, and they could affect the reporting of
transactions completed before the announcement of a change. For
example, we recognize our product revenue in accordance with
AICPA Statement of Position, or
SOP 97-2,
Software Revenue Recognition, and related
amendments and interpretations contained in
SOP 98-9,
Software Revenue Recognition with Respect to Certain
Transactions. The AICPA and its Software Revenue
Recognition Task Force continue to issue interpretations and
guidance for applying the relevant accounting standards to a
wide range of sales contract terms and business arrangements
that are prevalent in software licensing arrangements and
arrangements for the sale of hardware products that contain more
than an insignificant amount of software. Future interpretations
of existing accounting standards, including
SOP 97-2
and
SOP 98-9,
or changes in our business practices could result in delays in
our recognition of revenue that may have a material adverse
effect on our operating results. For example, we may in the
future have to defer recognition of revenue for a transaction
that involves:
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undelivered elements for which we do not have vendor-specific
objective evidence of fair value;
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24
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requirements that we deliver services for significant
enhancements and modifications to customize our software for a
particular customer; or
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material acceptance criteria.
|
Because of these factors and other specific requirements under
GAAP for recognition of software revenue, we must include
specific terms in customer contracts in order to recognize
revenue when we initially deliver products or perform services.
Negotiation of such terms could extend our sales cycle, and,
under some circumstances, we may accept terms and conditions
that do not permit revenue recognition at the time of delivery.
If we
fail to maintain an effective system of internal controls, we
might not be able to report our financial results accurately or
prevent fraud; in that case, our stockholders could lose
confidence in our financial reporting, which could negatively
impact the price of our stock.
Effective internal controls are necessary for us to provide
reliable financial reports and prevent fraud. SEC rules require
that we maintain effective internal control over financial
reporting and disclosure controls and procedures. In particular,
for the fiscal year ended January 31, 2009, we performed
system and process evaluation and testing of our internal
controls over financial reporting to allow management and our
independent registered public accounting firm to report on the
effectiveness of our internal control over financial reporting,
as required by Section 404 of the Sarbanes-Oxley Act. Our
compliance with Section 404 will continue to require that
we incur substantial expense and expend significant management
time on compliance-related issues. Even if we conclude, and our
independent registered public accounting firm concurs, that our
internal control over financial reporting provides reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles,
because of its inherent limitations, internal control over
financial reporting may not prevent or detect fraud or
misstatements. Failure to implement required new or improved
controls, or difficulties encountered in their implementation,
could harm our operating results or cause us to fail to meet our
reporting obligations. If we or our independent registered
public accounting firm discover a material weakness in our
internal control, the disclosure of that fact, even if quickly
remedied, could reduce the markets confidence in our
financial statements and harm our stock price. In addition, a
delay in compliance with Section 404 could subject us to a
variety of administrative sanctions, including ineligibility for
short form registration, action by the SEC, the suspension or
delisting of our common stock from NYSE Arca and the inability
of registered broker-dealers to make a market in our common
stock, which would further reduce our stock price and could harm
our business.
We are
subject to governmental export controls that could impair our
ability to compete in international markets.
Our products are subject to U.S. export controls and may be
exported outside the United States only with the required level
of export license or through an export license exception.
Changes in our products or changes in export regulations may
create delays in the introduction of our products in
international markets, prevent our customers with international
operations from deploying our products throughout their global
systems or, in some cases, prevent the export of our products to
certain countries altogether. Any change in export regulations
or related legislation, shift in approach to the enforcement or
scope of existing regulations or change in the countries,
persons or technologies targeted by these regulations could
result in decreased use of our products by, or in our decreased
ability to export or sell our products to, existing or potential
customers with international operations.
Risks
Related to our Common Stock
The
trading price of our common stock is likely to be
volatile.
The trading price of our common stock has decreased
significantly during the previous 6 months and will be
susceptible to fluctuations in the market due to numerous
factors, many of which may be beyond our control, including:
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changes in operating performance and stock market valuations of
other technology companies generally or those that sell data
warehouse solutions in particular;
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25
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actual or anticipated fluctuations in our operating results;
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the financial guidance that we may provide to the public, any
changes in such guidance, or our failure to meet such guidance;
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changes in financial estimates by securities analysts, our
failure to meet such estimates, or failure of analysts to
initiate or maintain coverage of our stock;
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the publics response to our press releases or other public
announcements by us, including our filings with the SEC;
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announcements by us or our competitors of significant technical
innovations, customer wins or losses, acquisitions, strategic
partnerships, joint ventures or capital commitments;
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introduction of technologies or product enhancements that reduce
the need for our products;
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the loss of key personnel;
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the development and sustainability of an active trading market
for our common stock;
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lawsuits threatened or filed against us;
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future sales of our common stock by our officers or
directors; and
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other events or factors affecting the economy generally,
including those resulting from political unrest, war, incidents
of terrorism or responses to such events.
|
The trading price of our common stock might also decline in
reaction to events that affect other companies in our industry
even if these events do not directly affect us.
Some companies that have had volatile market prices for their
securities have had securities class actions filed against them.
If a suit were filed against us, regardless of its merits or
outcome, it would likely result in substantial costs and divert
managements attention and resources. This could have a
material adverse effect on our business, operating results and
financial condition.
If
securities or industry analysts do not publish research or
publish unfavorable research about our business, our stock price
and trading volume could decline.
The trading market for our common stock depends in part on any
research reports that securities or industry analysts publish
about us or our business. In the event securities or industry
analysts cover our company and one or more of these analysts
downgrade our stock or publish unfavorable reports about our
business, our stock price would likely decline. In addition, if
any securities or industry analysts cease coverage of our
company or fail to publish reports on us regularly, demand for
our stock could decrease, which could cause our stock price and
trading volume to decline.
Provisions
in our certificate of incorporation and by-laws and Delaware law
might discourage, delay or prevent a change in control of our
company or changes in our management and, therefore, may
negatively impact the trading price of our common
stock.
Provisions of our certificate of incorporation and our by-laws
may discourage, delay or prevent a merger, acquisition or other
change in control that stockholders may consider favorable,
including transactions in which you might otherwise receive a
premium for your shares of our common stock. These provisions
may also prevent or frustrate attempts by our stockholders to
replace or remove our management. These provisions:
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establish a classified board of directors so that not all
members of our board are elected at one time;
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provide that directors may only be removed for cause;
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authorize the issuance of blank check preferred
stock that our board of directors could issue to increase the
number of outstanding shares and to discourage a takeover
attempt;
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eliminate the ability of our stockholders to call special
meetings of stockholders;
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26
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prohibit stockholder action by written consent, which has the
effect of requiring all stockholder actions to be taken at a
meeting of stockholders;
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provide that the board of directors is expressly authorized to
make, alter or repeal our by-laws; and
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establish advance notice requirements for nominations for
election to our board of directors or for proposing matters that
can be acted upon by stockholders at stockholder meetings.
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In addition, Section 203 of the Delaware General
Corporation Law may discourage, delay or prevent a change in
control of our company by prohibiting stockholders owning in
excess of 15% of our outstanding voting stock from merging or
combining with us during a specified period unless certain
approvals are obtained.
Insiders
own a significant portion of our outstanding common stock and
will therefore have substantial control over us and will be able
to influence corporate matters.
Our executive officers, directors and their affiliates
beneficially own, in the aggregate, approximately 20% of our
outstanding common stock. As a result, our executive officers,
directors and their affiliates are able to exercise significant
influence over all matters requiring stockholder approval,
including the election of directors and approval of significant
corporate transactions, such as a merger or other sale of our
company or its assets. This concentration of ownership could
limit your ability to influence corporate matters and may have
the effect of delaying or preventing another party from
acquiring control over us.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
|
Not applicable.
Our principal administrative, sales, marketing, customer support
and research and development facility is located at our
headquarters in Marlborough, Massachusetts. We currently occupy
approximately 68,000 square feet of office space in the
Marlborough facility under the terms of an operating lease
expiring in August 2015. We also have leased sales or support
offices in various locations throughout the United States, as
well as in Canada, Europe, Australia, Japan, Korea and Poland.
We believe that our current facilities will be adequate to meet
our needs. We also believe that suitable additional or
alternative facilities will be available as needed on
commercially reasonable terms. For information concerning our
obligations under all operating leases, see Note 15 in the
Notes to our Consolidated Financial Statements contained in
Item 8 of this Annual Report on
Form 10-K.
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ITEM 3.
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LEGAL
PROCEEDINGS
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Not applicable.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Not applicable.
27
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information for Common Stock
Our common stock has traded on NYSE Arca under the symbol
NZ since our initial public offering on
July 19, 2007. Prior to our initial public offering, there
was no public market for our common stock. The following table
presents the high and low closing per share prices of Netezza
common stock on NYSE Arca during the fiscal quarters indicated.
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Fiscal Year 2008
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High
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Low
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Second fiscal quarter ended July 31, 2007 (from
July 19, 2007)
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$
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17.39
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$
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15.00
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Third fiscal quarter ended October 31, 2007
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$
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15.95
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$
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11.25
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Fourth fiscal quarter ended January 31, 2008
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$
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14.81
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$
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9.45
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Fiscal Year
2009
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First fiscal quarter ended April 30, 2008
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$
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10.60
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$
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7.85
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Second fiscal quarter ended July 31, 2008
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$
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13.40
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$
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10.09
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Third fiscal quarter ended October 31, 2008
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$
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14.03
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$
|
8.10
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Fourth fiscal quarter ended January 31, 2009
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$
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9.25
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$
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5.12
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The last reported sale price for our common stock on NYSE Arca
was $6.55 per share on March 20, 2009.
Stockholders
As of March 20, 2009, there were 200 holders of record of
our common stock.
Dividend
Policy
We have never declared or paid any cash dividends on our capital
stock and do not expect to pay any cash dividends for the
foreseeable future. We intend to use future earnings, if any, in
the operation and expansion of our business. Payment of future
cash dividends, if any, will be at the discretion of our board
of directors after taking into account various factors,
including our financial condition, recent and expected operating
results, and current and anticipated cash needs.
28
Comparative
Stock Performance Graph
The following graph compares the relative performance of our
common stock, the Standard & Poors
500 Stock Index and the Standard & Poors
Information Technology Index. This graph covers the period from
July 19, 2007 (date of our initial public offering) through
January 31, 2009.
COMPARISON
OF CUMULATIVE TOTAL RETURN
QUARTERLY RETURN PERCENTAGE
Quarter Ending
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Company/Index
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7/31/07
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10/31/07
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1/31/08
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4/30/08
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7/31/08
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10/31/08
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1/31/09
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Netezza Corporation
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(12.31
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)
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(9.84
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)
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(28.29
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)
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7.51
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21.51
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(26.32
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)
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(36.04
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)
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S&P 500 Index
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(6.30
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)
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6.97
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(10.55
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)
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1.03
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(8.02
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)
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(23.11
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)
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(14.10
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)
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S&P Information Technology Index
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|
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(6.17
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)
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14.40
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(18.26
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)
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3.62
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(5.34
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)
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(26.67
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)
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(12.42
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)
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INDEXED
RETURNS
Quarter Ending
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Company/Index
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|
7/19/07
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7/31/07
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|
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10/31/07
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1/31/08
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4/30/08
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7/31/08
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10/31/08
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1/31/09
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|
Netezza Corporation
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100
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|
|
|
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87.69
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|
|
|
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79.07
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|
|
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56.70
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|
|
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|
60.95
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|
|
|
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74.07
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|
|
|
|
54.57
|
|
|
|
|
34.91
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|
S&P 500 Index
|
|
|
|
100
|
|
|
|
|
93.70
|
|
|
|
|
100.23
|
|
|
|
|
89.66
|
|
|
|
|
90.57
|
|
|
|
|
83.31
|
|
|
|
|
64.05
|
|
|
|
|
55.02
|
|
S&P Information Technology Index
|
|
|
|
100
|
|
|
|
|
93.83
|
|
|
|
|
107.34
|
|
|
|
|
87.74
|
|
|
|
|
90.92
|
|
|
|
|
86.07
|
|
|
|
|
63.11
|
|
|
|
|
55.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Recent
Sales of Unregistered Securities
Not applicable.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
Not applicable.
29
|
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ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The selected financial data set forth below should be read in
conjunction with the audited consolidated financial statements
and related notes thereto included in Part II, Item 8
and Managements Discussion and Analysis of Financial
Condition and Results of Operation in Part II, Item 7
of this Annual Report on
Form 10-K.
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Fiscal Year Ended January 31,
|
|
|
|
2009(1)
|
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2008
|
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2007
|
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2006
|
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2005
|
|
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|
(In thousands, except share and per share amounts)
|
|
|
Summary of Operations:
|
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
Revenue
|
|
$
|
187,769
|
|
|
$
|
126,686
|
|
|
$
|
79,621
|
|
|
$
|
53,851
|
|
|
$
|
36,029
|
|
Operating income (loss)
|
|
|
12,589
|
|
|
|
403
|
|
|
|
(8,251
|
)
|
|
|
(14,034
|
)
|
|
|
(3,134
|
)
|
Income (loss) before cumulative effect of change in accounting
principle and accretion to preferred stock
|
|
|
31,519
|
|
|
|
1,994
|
|
|
|
(7,975
|
)
|
|
|
(13,807
|
)
|
|
|
(3,014
|
)
|
Accretion to preferred stock
|
|
|
|
|
|
|
(2,853
|
)
|
|
|
(5,931
|
)
|
|
|
(5,797
|
)
|
|
|
(4,096
|
)
|
Net income (loss) attributable to common shareholders
|
|
|
31,519
|
|
|
|
(859
|
)
|
|
|
(13,906
|
)
|
|
|
(19,822
|
)
|
|
|
(7,110
|
)
|
Net income (loss) per share attributable to common
stockholders basic
|
|
$
|
0.53
|
|
|
$
|
(0.03
|
)
|
|
$
|
(1.90
|
)
|
|
$
|
(2.99
|
)
|
|
$
|
(1.17
|
)
|
Net income (loss) per share attributable to common
stockholders diluted
|
|
$
|
0.50
|
|
|
$
|
(0.03
|
)
|
|
$
|
(1.90
|
)
|
|
$
|
(2.99
|
)
|
|
$
|
(1.17
|
)
|
Weighted average common shares outstanding basic
|
|
|
58,939,422
|
|
|
|
33,988,696
|
|
|
|
7,319,231
|
|
|
|
6,635,274
|
|
|
|
6,077,538
|
|
Weighted average common shares outstanding diluted
|
|
|
62,764,914
|
|
|
|
33,988,696
|
|
|
|
7,319,231
|
|
|
|
6,635,274
|
|
|
|
6,077,538
|
|
|
|
|
(1) |
|
On May 9, 2008, Netezza completed the acquisition of
NuTech, whereby Netezza acquired NuTech for aggregate
consideration of approximately $6.6 million. The financial
data for the fiscal year ended January 31, 2009 includes
operating results for NuTech for the period following its
acquisition, presented on a consolidated basis. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
|
2009(1)
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
113,330
|
|
|
$
|
92,501
|
|
|
$
|
25,899
|
|
|
$
|
20,329
|
|
|
$
|
28,708
|
|
Total assets
|
|
|
258,859
|
|
|
|
198,752
|
|
|
|
69,199
|
|
|
|
45,864
|
|
|
|
39,443
|
|
Long-term debt, less current portion
|
|
|
|
|
|
|
|
|
|
|
4,099
|
|
|
|
2,489
|
|
|
|
|
|
Convertible redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
97,131
|
|
|
|
91,200
|
|
|
|
80,904
|
|
Total stockholders equity (deficit)
|
|
|
176,622
|
|
|
|
136,475
|
|
|
|
(81,123
|
)
|
|
|
(67,932
|
)
|
|
|
(49,110
|
)
|
|
|
|
(1) |
|
On May 9, 2008, Netezza completed the acquisition of
NuTech, whereby Netezza acquired NuTech for aggregate
consideration of approximately $6.6 million. The financial
data for the fiscal year ended January 31, 2009 includes
assets and liabilities of NuTech for the period following its
acquisition, presented on a consolidated basis. |
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with the
audited consolidated financial statements and the related notes
thereto included in Part II, Item 8 of this Annual
Report on
Form 10-K.
This Annual Report on
Form 10-K
contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of
1934, as amended. These
30
statements are often identified by the use of words such as
may, will, expect,
believe, anticipate, intend,
could, estimate, or
continue, and similar expressions or variations.
Such forward-looking statements are subject to risks,
uncertainties and other factors that could cause actual results
and the timing of certain events to differ materially from
future results expressed or implied by such forward-looking
statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified
below, and those discussed in the section titled Risk
Factors, set forth in Part I, Item 1A of this
Annual Report on
Form 10-K.
The forward-looking statements in this Annual Report on
Form 10-K
represent our views as of the date of this Annual Report on
Form 10-K.
We anticipate that subsequent events and developments will cause
our views to change. However, while we may elect to update these
forward-looking statements at some point in the future, we have
no current intention of doing so except to the extent required
by applicable law. You should, therefore, not rely on these
forward-looking statements as representing our views as of any
date subsequent to the date of this Annual Report on
Form 10-K.
Overview
We were founded in August 2000 to develop data warehouse
appliances that enable real-time business intelligence. Our NPS
appliance integrates database, server and storage platforms in a
purpose-built unit to enable detailed queries and analyses on
large volumes of stored data. The results of these queries and
analyses provide organizations with actionable information to
improve their business operations. The amount of data that is
being generated and stored by organizations is exploding. As the
volume of data continues to grow, enterprises have recognized
the value of analyzing such data to significantly improve their
operations and competitive position. This increasing amount of
data and the importance of data analysis have led to a
heightened demand for data warehouses that provide the critical
framework for data-driven enterprise decision-making and
business intelligence. Many traditional data warehouse systems
were initially designed to aggregate and analyze smaller
quantities of data, using general-purpose database, server and
storage platforms patched together as a data warehouse system.
Such patchwork architectures are often used by default to store
and analyze data, despite the fact that they are not optimized
to handle terabytes of constantly growing and changing data and
as a result, are not as effective in handling the in-depth
analyses that large businesses are now requiring of their data
warehouse systems. The increasing number of users accessing the
data warehouse and the sophistication of the queries employed by
these users is making the strain of using these legacy systems
even more challenging for many organizations.
Business intelligence solutions are still in their early stages
of growth and their continued adoption and growth in the
marketplace remain uncertain. Additionally, our appliance
approach requires our customers to run their data warehouses in
new and innovative ways and often requires our customers to
replace their existing equipment and supplier relationships,
which they may be unwilling to do, especially in light of the
often critical nature of the components and systems involved and
the significant capital and other resources they may have
previously invested. Furthermore, purchases of our products
involve material changes to established purchasing patterns and
policies. Even if prospective customers recognize the need for
our products, they may not select our NPS solution because they
choose to wait for the introduction of products and technologies
that serve as a replacement or substitute for, or represent an
improvement over, our NPS solutions. Therefore, our future
success also depends on our ability to maintain our leadership
position in the data warehouse market and to proactively address
the needs of the market and our customers to further drive the
adoption of business intelligence and to sustain our competitive
advantage versus competing approaches to business intelligence
and alternate product offerings.
Recently, there has been a significant deterioration in economic
conditions in many of the countries and regions in which we do
business. If current global economic conditions, or economic
conditions in the United States, persist or deteriorate further,
our current or prospective customers may experience serious cash
flow problems, or may otherwise reduce their information
technology spending, causing them to modify, delay or cancel
plans to purchase our products, which would have an adverse
impact on our business, operating results and financial
condition.
In addition, some of our traditional competitors have introduced
their own integrated data warehousing solutions which may cause
our sales cycles to be delayed and may have an adverse impact on
our business, operating results and financial condition.
We are currently headquartered in Marlborough, Massachusetts.
Our personnel and operations are also located throughout the
United States, as well as in Canada, the United Kingdom,
Australia, France, Germany, Ireland, Italy,
31
Japan, Korea and Poland. We expect to continue to add personnel
in the United States and internationally to provide additional
geographic sales and technical support coverage.
Revenue
We derive our revenue from sales of products and related
services. We sell our data warehouse appliances worldwide to
large global enterprises, mid-market companies and government
agencies through our direct salesforce as well as indirectly via
distribution partners. To date, we have derived the substantial
majority of our revenue from customers located in the United
States. For fiscal 2009, 2008 and 2007, U.S. customers
accounted for approximately 74%, 80% and 76% our revenue,
respectively. On May 9, 2008, we acquired NuTech, an
advanced analytics and optimization solutions company. The
results of NuTechs operations are included in our
consolidated financial statements since that date. For fiscal
2009, NuTech accounted for approximately 2% of our revenue. Its
revenue is classified as services revenue in our consolidated
financial statements.
Product Revenue. The significant majority of
our revenue is generated through the sale of our NPS appliances,
primarily to companies in the following vertical industries:
telecommunications, digital media, retail, financial services,
outsourced analytics, government and health and life sciences.
Our future revenue growth will depend in significant part upon
further sales of our NPS appliances to our existing customer
base. In addition, increasing our sales to new customers in
existing vertical industries we currently serve and in other
vertical industries that depend upon high-performance data
analysis is an important element of our strategy. We consider
the further development of our direct and indirect sales
channels in domestic and international markets to be a key to
our future revenue growth and the global acceptance of our
products. Our future revenue growth will also depend on our
ability to sustain the high levels of customer satisfaction
generated by providing high-touch, high-quality
support. In addition, the market for our products is
characterized by rapid technological change, frequent new
product introductions and evolving industry standards. Our
future revenue growth is dependent on the successful development
and introduction of new products and enhancements. Such new
introductions and enhancements could reduce demand for our
existing products and cause customers to delay purchasing
decisions until such new products and enhancements are
introduced. To address these risks we will seek to expand our
sales and marketing efforts, continue to pursue research and
development as well as acquisition opportunities to expand and
enhance our product offering.
Services Revenue. We sell product maintenance,
installation, training and professional services to our
customers. The percentage of our total revenue derived from
services was 24% in fiscal 2009 and 19% in each of fiscal 2008
and 2007.
Cost
of Revenue and Gross Profit
Cost of product revenue consists primarily of amounts paid to
Sanmina-SCI Corporation, or Sanmina, our contract manufacturer,
in connection with the procurement of hardware components and
assembly of those components into our NPS appliance systems.
Neither we nor Sanmina enter into long-term supply contracts for
our hardware components, which can cause our cost of product
revenue to fluctuate. These product costs are recorded when the
related product revenue is recognized. Cost of revenue also
includes shipping, warehousing and logistics expenses, warranty
reserves, depreciation and amortization and inventory
write-downs to write down the carrying value of inventory to the
lower of cost or market. Shipping, warehousing and logistics
costs are recognized as incurred. Estimated warranty costs are
recorded when the related product revenue is recognized.
Cost of services revenue consists primarily of salaries and
employee benefits for our support staff and worldwide
installation and technical account management teams and amounts
paid to third parties to provide
on-site
hardware service.
Our gross profit has been and will continue to be affected by a
variety of factors, including the relative mix of product versus
services revenue; our mix of direct versus indirect sales (as
sales through our indirect channels may have lower average
selling prices and gross profit); and changes in the average
selling prices of our products and services, which can be
adversely affected by competitive pressures. Additional factors
affecting gross profit include the timing of new product
introductions, which may reduce demand for our existing product
as customers await the arrival of new products and could also
result in additional reserves against older product inventory,
cost reductions through redesign of existing products and the
cost of our systems hardware. The data warehouse market is
highly
32
competitive and we expect this competition to intensify in the
future, especially as we move into additional vertical
industries. If our market share in such industries increases, we
expect pricing pressure to increase, which will reduce product
gross margins.
If our customer base continues to grow, it will be necessary for
us to continue to make significant upfront investments in our
customer service and support infrastructure to support this
growth. The rate at which we add new customers will affect the
level of these upfront investments. The timing of these
additional expenditures could materially affect our cost of
revenue, both in absolute dollars and as a percentage of total
revenue, in any particular period. This could cause downward
pressure on gross margins.
Operating
Expenses
Operating expenses consist of sales and marketing, research and
development, and general and administrative expenses.
Personnel-related costs are the most significant component of
each of these expense categories. Our headcount increased to
381 employees at January 31, 2009 from
179 employees at January 31, 2006. Included in this
headcount increase are 40 employees from the NuTech
acquisition.
Sales and
Marketing Expenses
Sales and marketing expenses consist primarily of salaries and
employee benefits, sales commissions, marketing program expenses
and allocated facilities expenses. We plan to continue to invest
in sales and marketing by increasing the number of our sales
personnel worldwide, expanding our domestic and international
sales and marketing activities, and further building brand
awareness. Accordingly, we expect sales and marketing expenses
to continue to increase in total dollars although we expect
these expenses to decrease as a percentage of total revenue.
Generally, sales personnel are not immediately productive and
thus sales and marketing expenses related to new sales hires are
not immediately accompanied by higher revenue. Hiring additional
sales personnel may reduce short-term operating margins until
the sales personnel become productive and generate revenue.
Accordingly, the timing of hiring sales personnel and the rate
at which they become productive will affect our future
performance.
Research
and Development Expenses
Research and development expenses consist primarily of salaries
and employee benefits, product prototype expenses, allocated
facilities expenses and depreciation of equipment used in
research and development activities. In addition to our
U.S. development teams, we use an offshore development team
employed by a contract engineering firm in Pune, India. Research
and development expenses are recorded as incurred. We devote
substantial resources to the development of additional
functionality for existing products and the development of new
products. We intend to continue to invest significantly in our
research and development efforts because we believe they are
essential to maintaining and increasing our competitive
position. We expect research and development expenses to
increase in total dollars, although we expect such expense to
decrease as a percentage of total revenue.
General
and Administrative Expenses
General and administrative expenses consist primarily of
salaries and employee benefits, allocated facilities expenses,
fees for professional services such as legal, accounting and
compliance, investor relation expenses and insurance premiums,
including premiums related to director and officer insurance. We
expect general and administrative expenses to continue to
increase in total dollars and to increase slightly as a
percentage of revenue in fiscal 2010 as we continue to invest in
infrastructure to support continued growth.
Other
Interest
Income and Interest Expense
Interest income and interest expense primarily consist of
interest income on investments and cash balances and interest
expense on our outstanding debt. In addition, interest income
includes realized gains and losses on marketable securities.
33
Other
Income (Expense), Net
Other income (expense), net primarily consists of losses or
gains on translation of
non-U.S. dollar
transactions into U.S. dollars, changes in the fair value
of foreign currency forward contracts, losses or gains on
disposal of fixed assets, and
mark-to-market
adjustments on preferred stock warrants. As these warrants for
our preferred stock are no longer outstanding, there will be no
mark-to-market
adjustment expense going forward.
Critical
Accounting Policies and Use of Estimates
Our consolidated financial statements are prepared in accordance
with Generally Accepted Accounting Principles in the United
States (GAAP). These accounting principles require
us to make certain estimates, judgments and assumptions that can
affect the reported amounts of assets and liabilities as of the
dates of the consolidated financial statements, the disclosure
of contingencies as of the dates of the consolidated financial
statements, and the reported amounts of revenue and expenses
during the periods presented. We evaluate these estimates,
judgments and assumptions on an ongoing basis. Although we
believe that our estimates, judgments and assumptions are
reasonable under the circumstances, actual results may differ
from those estimates.
We believe that of our significant accounting policies, which
are described in the notes to our Consolidated Financial
Statements contained in Item 8 of this Annual Report on
Form 10-K,
the following accounting policies involve the most judgment and
complexity:
|
|
|
|
|
revenue recognition;
|
|
|
|
stock-based compensation;
|
|
|
|
inventory valuation;
|
|
|
|
accounting for income taxes
|
|
|
|
valuation of investments; and
|
|
|
|
valuation of goodwill and acquired intangible assets.
|
Accordingly, we believe the policies set forth above are the
most critical to aid in fully understanding and evaluating our
financial condition and results of operations. If actual results
or events differ materially from the estimates, judgments and
assumptions used by us in applying these policies, our reported
financial condition and results of operations could be
materially affected.
Revenue
Recognition
We derive our revenue from sales of products and related
services and enter into multiple-element arrangements in the
normal course of business with our customers and distribution
partners. In all of our arrangements, we do not recognize any
revenue until we can determine that persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or
determinable, and we deem collection to be probable. In making
these judgments, we evaluate these criteria as follows:
|
|
|
|
|
Evidence of an arrangement. We consider a
non-cancelable agreement signed by the customer and us to be
persuasive evidence of an arrangement.
|
|
|
|
Delivery has occurred. We consider delivery to
have occurred when product has been delivered to the customer
and no post-delivery obligations exist other than ongoing
support obligations. In instances where customer acceptance is
required, delivery is deemed to have occurred when customer
acceptance has been achieved.
|
|
|
|
Fees are fixed or determinable. We consider the fee to be
fixed or determinable unless the fee is subject to refund or
adjustment or is not payable within normal payment terms. If the
fee is subject to refund or adjustment, we recognize revenue
when the right to a refund or adjustment lapses. If offered
payment terms exceed our normal terms, we recognize revenue as
the amounts become due and payable or upon the receipt of cash.
|
|
|
|
Collection is deemed probable. We conduct a credit review
for all transactions at the inception of an arrangement to
determine the creditworthiness of the customer. Collection is
deemed probable if, based
|
34
|
|
|
|
|
upon our evaluation, we expect that the customer will be able to
pay amounts under the arrangement as payments become due. If we
determine that collection is not probable, revenue is deferred
and recognized upon the receipt of cash.
|
We enter into multiple element arrangements in the normal course
of business with our customers. Elements in such arrangements
are recognized when delivered and the amount allocated to each
element is based on vendor specific objective evidence of fair
value (VSOE). VSOE is determined based upon the
amount charged when an element is sold separately. VSOE of the
fair value of maintenance services may also be determined based
on a substantive maintenance renewal clause, if any, within a
customer contract. Our current pricing practices are influenced
primarily by product type, purchase volume and maintenance term.
We review services revenue sold separately and maintenance
renewal rates on a periodic basis and update, when appropriate;
our VSOE of fair value for such services to ensure that it
reflects our recent pricing experience. When VSOE exists for
undelivered elements but not for the delivered elements, we use
the residual method. Under the residual method, the
fair values of the undelivered elements are initially deferred.
The residual contract amount is then allocated to and recognized
for the delivered elements. Thereafter, the amount deferred for
the undelivered element is recognized when those elements are
delivered. For arrangements in which VSOE does not exist for
each undelivered element, revenue for the entire arrangement is
deferred and not recognized until delivery of all the elements
without VSOE has occurred, unless the only undelivered element
is maintenance in which case the entire contract is recognized
ratably over the maintenance period.
The determination of VSOE is highly judgmental and is a key
factor in determining whether revenue may be recognized or must
be deferred and the extent to which it may be recognized once
the various elements of an arrangement are delivered. We assess
VSOE based on previous sales of products and services, the type
and size of customer and renewal rates in contracts. We monitor
VSOE on an ongoing basis. A change in our assessment of or our
inability to establish VSOE for products or services may result
in significant variation in our revenues and operating results.
Our service revenue also consists of software customization and
consulting service contracts recognized in accordance with
Accounting Research Bulletin (ARB) No. 45
Long-term Construction-Type Contracts and the
relevant guidance of Statement of Position (SOP)
No. 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts as prescribed by
SOP 97-2,
Software Revenue Recognition. Services
revenues are recognized either as services are performed and
billed to customers for time and material arrangements or on the
percentage-of-completion
method for fixed fee contracts.
Percentage-of-completion
is measured by the percentage of software customization or
consulting hours incurred to date to total estimated hours. This
method is used because management has determined that past
experience has shown expended hours to be the best measure of
progress on these engagements. Revisions in total estimated
hours are reflected in the accounting period in which the
required revisions become known. Anticipated losses on contracts
are charged to income in their entirety when such losses become
evident.
Stock-Based
Compensation
We account for stock-based compensation in accordance with
Statement of Financial Accounting Standards (SFAS)
No. 123R, Share-Based Payment
(SFAS 123R). Under the fair value
recognition provisions of SFAS 123R, stock-based
compensation cost is measured at the grant date based on the
fair value of the award and is recognized as expense over the
vesting period. We have selected the Black-Scholes option
pricing model to determine fair value of stock option awards.
Determining the fair value of stock-based awards at the grant
date requires judgment, including estimating the expected life
of the stock awards and the volatility of the underlying common
stock. Changes to the assumptions may have a significant impact
on the fair value of stock options, which could have a material
impact on our financial statements. In addition, judgment is
also required in estimating the amount of stock-based awards
that are expected to be forfeited. Should our actual forfeiture
rates differ significantly from our estimates, our stock-based
compensation expense and results of operations could be
materially impacted. The calculation of compensation cost in
accordance with SFAS 123R for options issued prior to our
initial public offering required our Board of Directors, with
input from management, to estimate the fair market value of our
35
common stock on the date of grant of those options. These
estimates of fair market value were determined based upon a
number of objective and subjective factors and were, therefore,
inherently subjective estimates.
We account for stock-based compensation expense for
non-employees using the fair value method prescribed by Emerging
Issues Task Force (EITF)
96-18,
Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services and the Black-Scholes
option pricing model, and recorded the fair value of
non-employee stock options as an expense over the vesting term
of the option.
For stock options and restricted stock we recognize compensation
cost on a straight-line basis over the awards vesting
periods for those awards that contain only a service vesting
feature.
Inventory
Valuation
Inventories primarily consist of finished systems and are stated
at the lower of cost or market value. A large portion of our
inventory also relates to evaluation units located at customer
locations, as some of our customers test our equipment prior to
purchasing. The number of evaluation units has increased due to
our overall growth and an increase in our customer base. We
assess the valuation of all inventories, including raw materials
and finished goods, on a periodic basis. We write down inventory
to its estimated market value if less than its cost. Inherent in
our estimates of market value in determining inventory valuation
are estimates related to economic trends, future demand for our
products and technological obsolescence of our products. If
actual market conditions are less favorable than our
projections, additional inventory write-downs may be required.
During the fiscal years ended January 31, 2009, 2008 and
2007, we recorded charges of $5.4 million,
$1.8 million and $0.7 million, respectively, to write
inventory down to the lower of cost or market.
Accounting
for Income Taxes
We are subject to income taxes in both the United States and
foreign jurisdictions and we use estimates in determining our
provisions for income taxes. We account for income taxes in
accordance with SFAS No. 109, Accounting for
Income Taxes (SFAS 109), which is the
asset and liability method for accounting and reporting for
income taxes. Under SFAS 109, deferred tax assets and
liabilities are recognized based on temporary differences
between the financial reporting and income tax bases of assets
and liabilities using statutory rates.
The income tax accounting process involves estimating our actual
current tax liability, together with 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 within our
consolidated balance sheets. We must then assess the likelihood
that our deferred tax assets will be recovered from future
taxable income and, to the extent we believe that it is more
likely than not that all or a portion of the deferred tax assets
will not be realized, we must establish a valuation allowance as
a charge to income tax expense.
As of the end of the third quarter of fiscal 2009, a full
valuation allowance was recorded against our net deferred tax
assets (consisting primarily of U.S. net operating loss
carryforwards and tax credit carryforwards). However, based upon
our operating results over recent years and through
January 31, 2009 as well as an assessment of our expected
future results of operations, we determined in the fourth
quarter of fiscal 2009 that it had become more likely than
not that we would realize a substantial portion of our
deferred tax assets in the U.S. As a result, we reduced our
valuation allowance during the fourth quarter of fiscal 2009,
which resulted in recognition of deferred tax assets of
$23.8 million, a one-time income tax benefit of
approximately $20.8 million, a $1.4 million reduction
to goodwill for acquired tax benefits and $1.6 million
reserve for uncertain tax positions in the U.S., which was
recorded as a reduction to our tax carryforward attributes.
Significant management judgment was required to determine when
the realization of our deferred tax assets was deemed
more-likely-than-not. Had we not released the valuation
allowance in fiscal 2009, we would have reported materially
different results.
As of January 31, 2009, we had a remaining valuation
allowance of $1.7 million against net deferred tax assets
in the U.S. of which $1.3 million was recorded against
other comprehensive income, and a remaining valuation allowance
of $0.8 million against net deferred tax assets in certain
foreign jurisdictions. The valuation allowance recorded against
net deferred tax assets in the U.S. consisted of capital
losses that we had determined were not more
36
likely than not to be realized. The valuation allowance recorded
against net deferred tax assets of certain foreign jurisdictions
consisted primarily of net operating loss carryforwards that
will likely expire without being utilized
Income tax expense related to our international subsidiaries
generally results from taxable income generated by the
subsidiary pursuant to intercompany service agreements. We
believe the compensation associated with these service
agreements is reasonable in light of the level and nature of
services performed by our subsidiaries. However, if a foreign
tax jurisdiction or the Internal Revenue Service were to
challenge these arrangements, we could be subject to additional
income tax expense either in the United States or the foreign
jurisdiction.
In accordance with SFAS 123R, our deferred tax assets do
not include the excess tax benefit related to stock-based
compensation in the amount of approximately $5.0 million as
of January 31, 2009. Consistent with prior years, we use
the with and without approach as described in EITF
Topic
No. D-32
in determining the order in which our tax attributes are
utilized for book purposes. The with and without
approach results in the recognition of the windfall stock option
tax benefit through additional paid-in capital only after all of
our other tax attributes have been considered in the annual tax
accrual computation in the period in which the tax benefit
reduces taxes payable.
On February 1, 2007, we adopted the provisions of Financial
Accounting Standards Board (FASB) Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of SFAS 109.
The new standard defines the threshold for recognizing the
benefits of tax return positions in the financial statements as
more-likely-than-not to be sustained by the taxing
authorities based solely on the technical merits of the
position. If the recognition threshold is met, the tax benefit
is measured and recognized as the largest amount of tax benefit,
in our judgment, which is greater than 50% likely to be
realized. We did not recognize any change in our reserves for
uncertain tax positions as a result of the adoption of this
standard. At the adoption date of February 1, 2007, we had
$0.3 million of unrecognized tax benefits, the benefit of
which, if recognized, would favorably affect our income tax rate
in future periods. We recognize interest and penalties related
to uncertain tax positions in income tax expense. At
January 31, 2009, we recorded an unrecognized tax benefit
of $3.9 million of which $1.9 million would favorably
affect our income tax rate in future periods. To date we have
not accrued interest and penalties on uncertain tax positions.
Valuation
of Investments
Effective February 1, 2008, we implemented
SFAS No. 157, Fair Value Measurement,
(SFAS 157), for our financial assets and
liabilities that are re-measured and reported at fair value at
each reporting period, and non-financial assets and liabilities
that are re-measured and reported at fair value at least
annually. SFAS 157 defines fair value as the exchange price
that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction
between market participants on the measurement date. We have
certain financial assets and liabilities recorded at fair value
(principally cash equivalents and short- and long-term
marketable securities) that have been classified as
Level 1, 2 or 3 within the fair value hierarchy as
described in SFAS 157. Fair values determined by
Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets or liabilities that we have the
ability to access. Fair values determined by Level 2 inputs
utilize data points that are observable such as quoted prices,
interest rates and yield curves. Fair values determined by
Level 3 inputs utilize unobservable data points for the
asset or liability.
Investments and marketable securities classified as
available-for-sale are considered to be impaired when cost basis
exceeds fair value. We periodically evaluate whether a decline
in fair value below cost basis is
other-than-temporary
by considering available evidence regarding these investments
including, among other factors, the duration of the period that,
and extent to which, the fair value is less than cost basis; the
financial health of and business outlook for the issuer,
including industry and sector performance and operational and
financing cash flow factors; overall market conditions and
trends; and our intent and ability to retain our investment in
the security for a period of time sufficient to allow for an
anticipated recovery in market value. Once a decline in fair
value is determined to be
other-than-temporary,
a write-down is recorded and a new cost basis in the security is
established. Assessing the above factors involves inherent
uncertainty. Write-downs, if recorded, could be materially
different from the actual market performance of investments and
marketable securities in our portfolio,
37
if, among other things, relevant information related to our
investments and marketable securities was not publicly available
or other factors not considered by us would have been relevant
to the determination of impairment.
Included in our long-term marketable securities at
January 31, 2009 and 2008 were auction rate securities
(ARS) most of which were AAA-rated bonds,
collateralized by federally guaranteed student loans. ARS are
long-term variable rate bonds tied to short-term interest rates
that may reset through a Dutch auction process that
is designed to occur every 7 to 35 days. Historically, the
carrying value (par value) of ARS approximated fair market value
due to the resetting of variable interest rates. Beginning in
mid-February 2008 and continuing throughout the period ended
January 31, 2009, however, the auctions for ARS then held
by us were unsuccessful. As a result, the interest rates on ARS
reset to the maximum rate per the applicable investment offering
statements. We will not be able to liquidate affected ARS until
a future auction on these investments is successful, a buyer is
found outside the auction process, the securities are called or
refinanced by the issuer, or the securities mature. Due to the
long-term nature of the underlying student loan bonds and the
failure of the auction process to provide a current market, we
classified these investments as long-term on our consolidated
balance sheet as of January 31, 2009.
In light of these liquidity issues, we performed a discounted
cash flow analysis to determine the estimated fair value of
these ARS investments. The discounted cash flow analysis we
performed considered the timing of expected future successful
auctions, the impact of extended periods of maximum interest
rates, collateralization of underlying security investments and
the creditworthiness of the issuer. The discounted cash flow
analysis performed as of January 31, 2009 assumes a
weighted average discount rate of 4.45% and expected term of
three years. The discount rate was determined using a proxy
based upon the current market rates for similar debt offerings
within the AAA-rated ARS market. The expected term was based on
managements estimate of future liquidity. As a result, as
of January 31, 2009, we have estimated an aggregate loss of
$5.0 million, of which $3.4 million was related to the
impairment of ARS deemed to be temporary and included in
accumulated other comprehensive loss within stockholders
equity and of which $1.6 million was related to the
impairment of ARS classified as trading securities and included
in other income (expense), net in the consolidated statement of
operations.
If we had used a term of one year or five years and a discount
rate of 4.07% and 5.01% respectively, the gross unrealized loss
would have been $1.5 million or $8.7 million,
respectively. If we had used a term of three years and a
discount rate of 4.07% or 5.01%, the gross unrealized loss would
have been $4.4 million or $5.7 million, respectively.
If we had used a term of three years and illiquidity discounts
of 1.0% or 2.0%, the gross unrealized loss would have been
$4.2 million or $5.6 million, respectively. Based on
our ability to access our cash and short-term investments and
our expected cash flows, we do not anticipate the current lack
of liquidity on these ARS will affect our ability to operate our
business as usual.
Despite the failed auctions, we continue to receive cash flows
in the form of specified interest payments from the issuers of
ARS. In addition, except for certain ARS with an aggregate par
value of $15.8 million with respect to which we have
entered into an agreement allowing us to sell such ARS at par in
June 2010, we have the intent and ability to hold our ARS until
a recovery of the impairment because we believe we have
sufficient cash and other marketable securities on-hand and from
projected cash flows from operations such that we do not
anticipate a need to sell our ARS prior to a recovery to par
value. See Liquidity and Capital Resources below.
Valuation
of Goodwill and Acquired Intangible Assets
Intangible assets are valued based on estimates of future cash
flows and amortized over their estimated useful lives. We
evaluate goodwill and intangible assets for impairment annually
and when events occur or circumstances change that may reduce
the value of the asset below its carrying amount using forecasts
of discounted future cash flows. Events or circumstances that
might require an interim evaluation include unexpected adverse
business conditions, economic factors, unanticipated
technological changes or competitive activities, loss of key
personnel and acts by governments and courts. Goodwill and
intangible assets totaled $2.0 million and
$2.9 million, respectively, at January 31, 2009.
Estimates of future cash flows require assumptions related to
revenue and operating income growth, asset-related expenditures,
working capital levels and other factors. Different assumptions
from those made in our analysis could materially affect
projected cash flows and our evaluation of goodwill for
impairment. Should the fair value of our goodwill or
indefinite-lived intangible assets decline because of reduced
38
operating performance, market declines, or other indicators of
impairment, or as a result of changes in the discount rate,
charges for impairment may be necessary.
Results
of Operations for the Years Ended January 31, 2009, 2008
and 2007
The following table sets forth our consolidated results of
operations for the periods shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Change
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2009 vs
|
|
|
2008 vs
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
143,463
|
|
|
$
|
102,994
|
|
|
$
|
64,632
|
|
|
|
39.3
|
%
|
|
|
59.4
|
%
|
Services
|
|
|
44,306
|
|
|
|
23,692
|
|
|
|
14,989
|
|
|
|
87.0
|
%
|
|
|
58.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
187,769
|
|
|
|
126,686
|
|
|
|
79,621
|
|
|
|
48.2
|
%
|
|
|
59.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
57,350
|
|
|
|
42,527
|
|
|
|
26,697
|
|
|
|
34.9
|
%
|
|
|
59.3
|
%
|
Services
|
|
|
12,211
|
|
|
|
7,716
|
|
|
|
5,403
|
|
|
|
58.3
|
%
|
|
|
42.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
69,561
|
|
|
|
50,243
|
|
|
|
32,100
|
|
|
|
38.4
|
%
|
|
|
56.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
118,208
|
|
|
|
76,443
|
|
|
|
47,521
|
|
|
|
54.6
|
%
|
|
|
60.9
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
58,429
|
|
|
|
43,210
|
|
|
|
32,908
|
|
|
|
35.2
|
%
|
|
|
31.3
|
%
|
Research and development
|
|
|
32,557
|
|
|
|
23,880
|
|
|
|
18,037
|
|
|
|
36.3
|
%
|
|
|
32.4
|
%
|
General and administrative
|
|
|
14,633
|
|
|
|
8,950
|
|
|
|
4,827
|
|
|
|
63.5
|
%
|
|
|
85.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
105,619
|
|
|
|
76,040
|
|
|
|
55,772
|
|
|
|
38.9
|
%
|
|
|
36.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
12,589
|
|
|
|
403
|
|
|
|
(8,251
|
)
|
|
|
3023.8
|
%
|
|
|
104.9
|
%
|
Interest income
|
|
|
4,045
|
|
|
|
2,971
|
|
|
|
414
|
|
|
|
36.1
|
%
|
|
|
617.6
|
%
|
Interest expense
|
|
|
40
|
|
|
|
717
|
|
|
|
765
|
|
|
|
(94.4
|
)%
|
|
|
(6.3
|
)%
|
Other income (expense), net
|
|
|
(495
|
)
|
|
|
298
|
|
|
|
627
|
|
|
|
(266.1
|
)%
|
|
|
(52.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
16,099
|
|
|
|
2,955
|
|
|
|
(7,975
|
)
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
15,420
|
|
|
|
(961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
31,519
|
|
|
$
|
1,994
|
|
|
$
|
(7,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Total revenue was $187.8 million, $126.7 million and
$79.6 million in fiscal 2009, 2008 and 2007, respectively,
representing increases of 48% in fiscal 2009 and 59% in fiscal
2008.
Revenue growth in fiscal 2009 reflects both organic growth and
revenue from the NuTech acquisition. NuTech revenue has been
included in our results of operations since May 9, 2008.
Accordingly, results for fiscal 2008 and 2007 do not include
NuTech revenue, while results for fiscal 2009 includes
approximately nine months of NuTech revenue totaling
$3.5 million.
Product revenue was $143.5 million, $103.0 million and
$64.6 million in fiscal 2009, 2008 and 2007, respectively,
representing increases of 39% in fiscal 2009 and 59% in fiscal
2008. These increases were primarily driven by a growing
acceptance and need for data warehouse systems and are
indicative of customers valuing the capabilities and return on
investment that they provide. These increases were based on
increased sales volume, due primarily to sales to new and
existing customers rather than price increases. Product revenue
related to existing customer sales increased $23.3 million
in fiscal 2009 and $19.6 million in fiscal 2008. Product
revenue related to new customer sales increased
$17.2 million in fiscal 2009 and $18.8 million in
fiscal 2008. The number of new
39
customers added increased to 88 in fiscal 2009, from 55 in
fiscal 2008 and 41 in fiscal 2007, bringing our total installed
base of customers to 248.
Geographically, 78% of our product revenue was in North America
and 22% was international for fiscal 2009, as compared to 83% of
product revenue occurring in North America and 17% international
in fiscal 2008 and 74% occurring in North America and 26%
international in fiscal 2007. The number of sales and marketing
employees increased to 149 at January 31, 2009, from 104 at
January 31, 2008 and 85 at January 31, 2007. Our
enhanced visibility and reputation in our industry, as our base
of referenceable customers has grown, was an important factor in
generating additional sales.
Services revenue was $44.3 million, $23.7 million and
$15.0 million in fiscal 2009, 2008 and 2007, respectively,
representing increases of 87% in fiscal 2009 and 58% in fiscal
2008. In fiscal 2009, 17% of the increase in services revenue
was attributable to $3.5 million of service revenue
generated by NuTech. The remainder of these increases was the
result of increased product sales, and accompanying sales of new
maintenance and support contracts combined with the renewal of
maintenance and support contracts by existing customers. All of
our customers to date have purchased first-year annual
maintenance and support services and substantially all of our
customers renewed their maintenance and support agreements.
Gross
Margin
Total gross margin was 63% in fiscal 2009 and was 60% in fiscal
2008 and 2007.
Product gross margin was 60% in fiscal 2009 and was 59% in
fiscal 2008 and 2007. This increase in fiscal 2009 was due
primarily to a reduction in the cost of our hardware components,
partially offset by an increase in inventory write-downs.
Services gross margin was 72% in fiscal 2009, 67% in fiscal 2008
and 64% in fiscal 2007. These increased service gross margins
were a result of increased productivity resulting from
attainment of economies of scale. Services headcount increased
84% to 68 at January 31, 2009, from 37 at January 31,
2008, which was an increase of 37% over the services headcount
of 27 at January 31, 2007. The fiscal 2009 headcount
increase includes 24 employees added as a result of the
NuTech acquisition.
Sales
and Marketing Expenses
As a percentage of revenue, sales and marketing expenses were
31%, 34% and 41% in fiscal 2009, 2008 and 2007, respectively.
These decreases in sales and marketing expenses as a percentage
of revenue were a result of attainment of economies of scale.
Sales and marketing expenses increased $15.2 million, or
35%, to $58.4 million in fiscal 2009 from
$43.2 million in fiscal 2008. Sales and marketing expenses
increased $10.3 million, or 31%, in fiscal 2008 from
$32.9 million in fiscal 2007.
The increase in sales and marketing expenses of
$15.2 million in fiscal 2009 was due primarily to increases
of $5.5 million in salaries and employee benefits,
$2.1 million in sales commissions, $1.8 million in
sales travel, $1.3 million in stock-based compensation
expense, $1.1 million in partner referral fees and
$1.1 million in sales office rent and office costs to
support the continued geographic expansion of the sales force.
The increase in sales and marketing expenses of
$10.3 million in fiscal 2008 over fiscal 2007 was due
primarily to increases of $3.9 million in salaries and
employee benefits, $3.3 million in sales commissions,
$1.0 million in stock-based compensation expense,
$0.9 million in sales travel and $0.9 million in sales
office rent and office costs to support the continued geographic
expansion of the sales force.
The number of sales and marketing employees increased to 149 at
January 31, 2009 from 104 at January 31, 2008 and 85
at January 31, 2007, in order to expand our sales force to
provide better geographic distribution and market penetration.
Research
and Development Expenses
As a percentage of revenue, research and development expenses
were 17%, 19% and 23% in fiscal 2009, 2008 and 2007,
respectively. These decreases in research and development
expenses as a percentage of revenue were a
40
result of attainment of economies of scale. Research and
development expenses increased $8.7 million, or 36%, to
$32.6 million in fiscal 2009 from $23.9 million in
fiscal 2008. Research and development expenses increased
$5.8 million, or 32%, in fiscal 2008 from
$18.0 million in fiscal 2007.
The increase in research and development expenses of
$8.7 million in fiscal 2009 was due primarily to increases
of $3.9 million in salaries, benefits and offshore
consulting costs, $1.7 million in prototype expense and
inventory expensed and $1.1 million in stock-based
compensation expense.
The increase in research and development expenses of
$5.8 million in fiscal 2008 over fiscal 2007 was due
primarily to increases of $2.5 million in salaries,
benefits and offshore consulting costs, $1.1 million in
prototype expense and inventory expensed and $0.9 million
in stock-based compensation expense.
The number of research and development employees increased to
113 at January 31, 2009 from 101 at January 31, 2008
and 85 at January 31, 2007, to help us broaden and improve
the development of new technology and product enhancements. The
offshore development team from our contract engineering firm
increased to 64 people at January 31, 2009 from
62 people at January 31, 2008 and 53 people at
January 31, 2007, in order to take advantage of the cost
efficiencies associated with offshore research and development
resources.
General
and Administrative Expenses
As a percentage of revenue, general and administrative expenses
were 8%, 7%, and 6% in fiscal 2009, 2008 and 2007, respectively.
General and administrative expenses increased $5.7 million,
or 63% to $14.6 million in fiscal 2009 from
$8.9 million in fiscal 2008. General and administrative
expenses increased $4.1 million, or 85%, in fiscal 2008
from $4.8 million in fiscal 2007.
The increase in general and administrative expenses of
$5.7 million in fiscal 2009 over fiscal 2008 was due
primarily to increases of $2.4 million in salaries and
benefits, $1.3 million in audit, tax, legal, insurance and
consulting costs and $0.9 million in stock-based
compensation expense.
The increase in general and administrative expenses of
$4.1 million in fiscal 2008 over fiscal 2007 was due
primarily to increases of $1.6 million in audit, tax,
legal, insurance and consulting costs, all of which increased as
a result of becoming a public company, $1.4 million in
stock-based compensation expense and $1.2 million in
salaries and benefits.
The number of general and administrative employees increased to
40 at January 31, 2009, which includes 10 as a result of
the NuTech acquisition, from 23 at January 31, 2008 and 19
at January 31, 2007 to ensure we had appropriate
infrastructure to support the growth of our organization and to
support the additional demands of public company compliance.
Interest
Income and Interest Expense
We recorded $4.0 million of interest income, net in fiscal
2009 as compared to $2.3 million in fiscal 2008 and
$0.4 million of interest expense, net in fiscal 2007.
Interest income, net for fiscal 2009 was comprised of interest
income of $3.7 million and $0.3 million of net
realized gains on the sale of marketable securities. The
components of interest income, net for fiscal 2008 were interest
income of $2.7 million, net realized gains on the sale of
marketable securities of $0.3 million and interest expense
of $0.7 million. The components of interest expense, net
for fiscal 2007 were interest expense of $0.8 million and
interest income of $0.4 million.
Interest income increased $1.0 million for fiscal 2009 over
fiscal 2008, primarily due to higher average cash and investment
balances, partially offset by lower rates of return as compared
to fiscal 2008. The increase in our average cash and investment
balances was due primarily to cash generated from operations. We
do expect significant realized gains or losses on investments in
fiscal 2010.
Other
Income (Expense), Net
We incurred other expense, net of $0.5 million in fiscal
2009 as compared to other income, net of $0.3 million in
fiscal 2008 and other income, net of $0.6 million in fiscal
2007.
41
The components of other expense, net, for fiscal 2009 included
$0.3 million of transaction losses for activities in our
foreign subsidiaries, and a $0.1 million gain associated
with changes in the fair value of foreign currency forward
contracts and other income. In addition, during the year ended
January 31, 2009, we recorded in other income (expense),
net a net loss on investments of $0.3 million, which
reflects a loss of $1.6 million due to
other-than-temporary
impairments on marketable securities and a gain of
$1.3 million realized on a put right received from one of
our investment brokers in November 2008.
The components of other income, net, for fiscal 2008 were
$0.7 million of gains on the translation of
non-U.S. dollar
transactions into U.S. dollars for activities in our
foreign subsidiaries, partially offset by $0.3 million
expense from the
mark-to-market
adjustments on preferred stock warrants and $0.1 million of
early payoff fees charged to our debt payoff. As warrants for
our preferred stock are no longer outstanding, there will be no
mark-to-market
adjustment expense going forward.
The components of other income, net for fiscal 2007 were
$0.8 million of gains on the translation of non-U.S. dollar
transactions into U.S. dollars for activities in our foreign
subsidiaries, partially offset by $0.2 million expense from
the mark-to-market adjustments on preferred stock warrants.
Provision
for Income Taxes
We recorded an income tax benefit of $15.4 million for
fiscal 2009, as compared to a provision of $1.0 million for
fiscal 2008 and $0 for fiscal 2007.
For the year ended January 31, 2009, our effective tax rate
was a benefit of 95.8% on pre-tax income of $16.1 million,
as compared to provisions of 32.5% and 0% in 2008 and 2007 on
pre-tax income of $3.0 million and loss of
$8.0 million, respectively. Our effective tax rate in
fiscal 2009 was lower than the statutory federal income tax rate
of 35% due primarily to (i) our use in the first half of
the year of available NOLs and research and development tax
credits to offset our U.S. taxable income (which partially
reduced the valuation allowance we had previously recorded
against those NOLs) and (ii) a tax benefit of
$20.8 million recorded in the second half of the year upon
our decision in the fourth quarter of fiscal 2009 to release a
significant portion of the valuation allowance recorded against
our net deferred tax assets; both partially offset by the impact
of taxes owed in relation to the income generated by our foreign
subsidiaries. Our effective tax rates for the years ended
January 31, 2008 and 2007 were lower than the statutory
federal income tax rate of 35%, due primarily to our use of NOLs
and research and development tax credits to offset our
U.S. taxable income (which reduced the valuation allowance
we had previously recorded against those NOLs), partially offset
by the impact of taxes owed in relation to the income generated
by our foreign subsidiaries.
As of the end of the third quarter of fiscal 2009, a full
valuation allowance was recorded against our net deferred tax
assets (consisting primarily of U.S. net operating loss
carryforwards and tax credit carryforwards). However, based upon
our operating results over recent years and through
January 31, 2009 as well as an assessment of our expected
future results of operations, we determined in the fourth
quarter of fiscal 2009 that it had become more likely than
not that we would realize a substantial portion of our
deferred tax assets in the U.S. As a result, we reduced our
valuation allowance during the fourth quarter of fiscal 2009,
which resulted in recognition of a one-time income tax benefit
of approximately $20.8 million, a $1.7 million reserve for
uncertain tax positions in the U.S., which was recorded as a
reduction to our tax carryforward attributes, and a
$1.4 million reduction to goodwill for acquired tax benefits
As of January 31, 2009, we had a remaining valuation
allowance of $1.7 million against net deferred tax assets
in the U.S. of which $1.3 million was recorded against
other comprehensive income and a remaining valuation allowance
of $0.8 million against net deferred tax assets in certain
foreign jurisdictions. The valuation allowance recorded against
net deferred tax assets in the U.S. consisted of capital
losses that we have determined are not more likely than not to
be realized. The valuation allowance recorded against net
deferred tax assets of certain foreign jurisdictions consisted
primarily of net operating loss carryforwards that will likely
expire without being utilized.
We anticipate our effective tax rate will increase in fiscal
2010 compared to fiscal 2009 due to the fact that our NOL and
tax credit carryforwards had been substantially recognized as of
January 31, 2009 resulting in a substantial one-time tax
benefit in fiscal 2009.
42
Liquidity
and Capital Resources
As of January 31, 2009, our principal sources of liquidity
were cash and cash equivalents of $111.6 million and
accounts receivable of $34.5 million.
Since our inception, we have funded our operations using a
combination of issuances of convertible preferred stock, which
has provided us with aggregate net proceeds of
$73.3 million, cash collections from customers and a term
loan credit facility and a revolving credit facility with
Silicon Valley Bank. In July 2007, we raised $113.0 million
of proceeds, net of underwriting discounts and expenses, in our
initial public offering. In the future, we anticipate that our
primary sources of liquidity will be cash generated from our
operating activities, as our credit facility with Silicon Valley
Bank expired as of January 31, 2008 and was not renewed.
Our principal uses of cash historically have consisted of
payroll and other operating expenses, repayments of borrowings,
purchases of property and equipment primarily to support the
development of new products and purchases of inventory to
support our sales and the volume of evaluation units located at
customer locations that enable our customers and prospective
customers to test our equipment prior to purchasing.
Additionally, we used cash to fund our acquisition of NuTech in
May 2008.
The following table shows our cash flows from operating
activities, investing activities and financing activities for
the stated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net cash provided by/(used in), operating activities
|
|
$
|
41,450
|
|
|
$
|
26,937
|
|
|
$
|
(11,163
|
)
|
Net cash used in investing activities
|
|
|
20,084
|
|
|
|
(91,759
|
)
|
|
|
(1,477
|
)
|
Net cash provided by financing activities
|
|
|
4,620
|
|
|
|
106,884
|
|
|
|
3,789
|
|
At January 31, 2009, we held ARS with a par value totaling
$54.2 million. These ARS, most of which are AAA-rated bonds
collateralized by federally guaranteed student loans, are
long-term variable rate bonds tied to short-term interest rates
that are reset through a Dutch auction process that
typically occurs every 7 to 35 days. Historically, the
carrying value (par value) of the ARS approximated fair market
value due to the resetting of variable interest rates. Beginning
in late February 2008, however, the auctions for ARS then held
by us were unsuccessful. As a result, the interest rates on the
investments reset to the maximum rate per the applicable
investment offering statements. We will not be able to liquidate
the affected ARS until a future auction on these investments is
successful, a buyer is found outside the auction process, the
securities are called or refinanced by the issuer, or the
securities mature. In light of these liquidity issues, we
performed a discounted cash flow analysis to determine the
estimated fair value of these ARS investments. The discounted
cash flow analysis we performed considered the timing of
expected future successful auctions, the impact of extended
periods of maximum interest rates, collateralization of
underlying security investments and the creditworthiness of the
issuer. The discounted cash flow analysis performed as of
January 31, 2009 assumes a weighted average discount rate
of 4.45% and expected term of three years. The discount rate was
determined using a proxy based upon the current market rates for
similar debt offerings within the AAA-rated ARS market. The
expected term was based on managements estimate of future
liquidity. As a result, we have estimated as of January 31,
2009, an aggregate loss of $5.0 million, of which
$3.4 million was related to the impairment of ARS deemed to
be temporary and included in accumulated other comprehensive
income (loss) within stockholders equity and of which
$1.6 million was related to the impairment of ARS
classified as trading securities and included in other income
(expense), net in the consolidated statement of operations.
If we had used a term of one year or five years and a discount
rate of 4.07% and 5.01% respectively, the gross unrealized loss
would have been $1.5 million or $8.7 million,
respectively. If we had used a term of three years and a
discount rate of 4.07% or 5.01%, the gross unrealized loss would
have been $4.4 million or $5.7 million, respectively.
If we had used a term of three years and illiquidity discounts
of 1.0% or 2.0%, the gross unrealized loss would have been
$4.2 million or $5.6 million, respectively. Based on
our ability to access our cash and short-term investments and
our expected cash flows, we do not anticipate the current lack
of liquidity on these ARS will affect our ability to operate our
business as usual.
43
Cash
Provided by (Used In) Operating Activities
Net cash provided by operating activities was $41.5 million
in fiscal 2009 and primarily consisted of net income of
$31.5 million, an increase in deferred revenue of
$9.2 million, a decrease in inventory of
$10.5 million, an increase in accrued expenses of
$4.7 million and an increase in accounts payable of
$3.0 million. In addition, in fiscal 2009 we had
depreciation and amortization expense of $5.4 million,
stock-based compensation expense of $7.8 million and an
impairment of other long-term assets of $0.8 million, each
of which is a non-cash expense. These sources of cash were
partially offset by a benefit from deferred income taxes, net of
$20.8 million as a result of the reduction of a valuation
allowance and an increase in accounts receivable of
$11.6 million primarily due to the timing of billing and
collections of customer invoices.
Net cash provided by operating activities was $26.9 million
in fiscal 2008 and primarily consisted of net income of
$2.0 million, a decrease in accounts receivable of
$12.2 million, due primarily to the receipt of customer
payments during fiscal 2008, an increase in deferred revenue of
$21.4 million, and an increase in accrued expenses of
$2.0 million. In addition, in fiscal 2008 we had
depreciation expense of $3.3 million, stock-based
compensation expense of $4.3 million and a preferred stock
warrant liability adjustment and non-cash interest expense of
$0.4 million, each of which is a non-cash expense. These
sources of cash were partially offset by a use of
$8.8 million to fund our net increase in inventory
primarily used to provide additional evaluation units to our
increasing customer base and prospective customers, a decrease
in accounts payable of $7.2 million, and an increase in
other assets of $2.7 million.
Net cash used in operating activities was $11.2 million in
fiscal 2007 and primarily consisted of a net loss of
$8.0 million, a use of $15.5 million to fund our net
increase in inventory primarily used to provide additional
evaluation units to our increasing customer base and prospective
customers, and an increase in accounts receivable of
$17.9 million. The uses of cash were partially offset by an
increase in deferred revenue of $14.8 million. Other
changes included depreciation expense of $2.6 million,
stock-based compensation expense of $0.9 million, an
increase in accounts payable of $10.2 million and net
changes in our other operating assets and liabilities of
$1.4 million.
Cash
Provided by (Used in) Investing Activities
Net cash provided by investing activities was $20.1 million
in fiscal 2009, which primarily consisted of $43.9 million
of sales and maturities of our investments. These proceeds were
partially offset by $7.4 million used to purchase our
investments, $6.2 million used to acquire NuTech,
$5.8 million of capital expenditures and $4.4 million
used to purchase other assets.
Net cash used in investing activities was $91.8 million and
$1.5 million in fiscal 2008 and 2007, respectively. Net
cash used in investing activities in fiscal 2008 primarily
consisted of $134.4 million, which primarily consisted of
the net proceeds from our initial public offering, used to
purchase our short-term investments, and $1.1 million of
capital expenditures. These uses of cash were partially offset
by $43.8 million of sales and maturities of our short-term
investments. Net cash used in investing activities in fiscal
2007 consisted primarily of capital purchases.
Cash
Provided by Financing Activities
Net cash provided by financing activities was $4.6 million
in fiscal 2009, which primarily consisted of proceeds received
from the issuance of common stock upon the exercise of stock
options of $2.7 million and $1.9 million in excess tax
benefits from share-based compensation, which lowered our income
taxes payable.
Net cash provided by financing activities was
$106.9 million and $3.8 million in fiscal 2008 and
2007, respectively. Net cash provided by financing activities in
fiscal 2008 primarily consisted of $113.5 million of
proceeds from issuance of common stock, which included proceeds
from our initial public offering of $113.0 million, net of
underwriting discounts and expenses, and $8.0 million of
borrowings under our debt facilities, partially offset by
repayment of $14.6 million under our debt facilities. Net
cash provided by financing activities in fiscal 2007 consisted
primarily of $5.0 million of borrowings under our debt
facilities, partially offset by repayment of $1.4 million
under our debt facilities.
44
Contractual
Obligations
The following is a summary of our contractual obligations as of
January 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
1 - 3 Years
|
|
|
3 - 5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Operating lease obligations
|
|
|
11,712
|
|
|
|
2,195
|
|
|
|
3,433
|
|
|
|
3,481
|
|
|
|
2,603
|
|
Purchase obligations(1)
|
|
|
12,523
|
|
|
|
12,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term obligations including current portion of
long-term obligations
|
|
|
2,000
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Purchase obligations primarily represent the value of purchase
orders issued to our contract manufacturer, Sanmina, for the
procurement of assembled NPS appliance systems for the next
three months. |
The table above does not reflect unrecognized tax benefits of
$3.9 million, the timing of which is uncertain. Refer to
Note 14 of our consolidated financial statements for
additional discussion on unrecognized income tax benefits.
We believe that our cash and cash equivalents of
$111.6 million will be sufficient to fund our projected
operating requirements for at least the next twelve months. Our
future operating requirements will depend on many factors,
including the rate of revenue growth, our expansion of sales and
marketing and product development activities. However, to the
extent that our cash and cash equivalents and our cash flow from
operating activities are insufficient to fund our future
activities, we may need to raise additional funds through bank
credit arrangements or a secondary public offering.
Off-Balance
Sheet Arrangements
We did not have during the periods presented, and we do not
currently have, any off-balance sheet arrangements, as defined
under SEC rules, such as relationships with unconsolidated
entities or financial partnerships, which are often referred to
as structured finance or special purpose entities, established
for the purpose of facilitating financing transactions that do
not have to be reflected on our balance sheet.
Recent
Accounting Pronouncements
We adopted the provisions of SFAS 157, on February 1,
2008 for our financial assets and liabilities. In accordance
with the provisions of FASB Staff Position (FSP)
FAS 157-2,
Effective Date of FASB Statement
No. 157, we deferred the implementation of
SFAS 157 as it relates to its non-financial assets and
non-financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a
recurring basis until February 1, 2009. We are evaluating
the impact the deferral of the implementation of SFAS 157
will have on our financial statements.
We adopted the provisions of SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement
No. 115 (SFAS 159), on
February 1, 2008. SFAS 159 permits entities to choose,
at specified election dates, to measure eligible items at fair
value (the fair value option). Under this
pronouncement, a business entity must report unrealized gains
and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting period. We have
not elected the fair value option for any items on our balance
sheet, except for the put right related to our ARS.
In June 2008, the FASB issued FSP
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities
(FSP
EITF 03-6-1).
FSP
EITF 03-6-1
addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and
therefore need to be included in calculating earnings per share
under the two-class method described in SFAS No. 128,
Earnings per Share. Additionally, FSP
EITF 03-6-1
requires companies to treat unvested share-based payment awards
that have non-forfeitable rights to dividend or dividend
equivalents as a separate class of securities in calculating
earnings per share and is effective for financial statements
issued for fiscal years beginning after December 15, 2008;
early adoption is not permitted. We are currently evaluating the
impact of adopting FSP
EITF 03-6-1
on our results of operations and earnings per share.
45
In April 2008, the FASB issued FSP
No. FAS 142-3,
Determination of the Useful Life of Intangible
Assets (FSP
FAS 142-3).
FSP
FAS 142-3
amends the factors that should be considered in developing
assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill
and Other Intangible Assets, to improve
consistency between the useful life of a recognized intangible
asset and the period of expected cash flows used to measure the
fair value of the asset. FSP
FAS 142-3
is effective for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008 and
applied prospectively to intangible assets acquired after the
effective date. We do not expect the adoption of FSP
FAS 142-3
to have a material impact on our consolidated financial
statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133 (SFAS 161). SFAS 161
requires enhanced disclosures about an entitys derivative
and hedging activities, including (a) how and why an entity
uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133), and its related
interpretations, and (c) how derivative instruments and
related hedged items affect an entitys financial position,
financial performance, and cash flows. SFAS 161 is
effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. We do
not expect the adoption of SFAS 161 will have a material
impact on our financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141(R)). SFAS 141(R) replaces
SFAS No. 141, Business
Combinations. SFAS 141(R) requires the
acquiring entity in a business combination to recognize the full
fair value of assets acquired and liabilities assumed in the
transaction; requires certain contingent assets and liabilities
acquired to be recognized at their fair values on the
acquisition date; requires contingent consideration to be
recognized at its fair value on the acquisition date and changes
in the fair value to be recognized in earnings until settled;
requires the expensing of most transaction and restructuring
costs; and generally requires the reversals of valuation
allowances related to acquired deferred tax assets and changes
to acquired income tax uncertainties to also be recognized in
earnings. This accounting standard is effective for financial
statements issued for fiscal years beginning after
December 15, 2008. We expect that the adoption of
SFAS 141(R) will have an effect on how we account for
business combinations.
From time to time, new accounting pronouncements are issued by
the FASB and subsequently adopted by us as of the specified
effective date. Unless otherwise discussed, we believe that the
impact of recently issued standards, which are not yet
effective, will not have a material impact on our consolidated
results of operations and financial condition upon adoption.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Foreign
Currency Exchange Risk
Our international sales and marketing operations incur expenses
that are denominated in foreign currencies. These expenses could
be materially affected by currency fluctuations. Our exposures
are to fluctuations in exchange rates for the U.S. dollar
versus the British pound, Australian dollar, the Euro, the
Canadian dollar, the Polish zloty, the Korean won and the
Japanese yen. Changes in currency exchange rates could adversely
affect our consolidated results of operations or financial
position. Additionally, our international sales and marketing
operations maintain cash balances denominated in foreign
currencies. In order to decrease the inherent risk associated
with translation of foreign cash balances into our reporting
currency, we have not maintained excess cash balances in foreign
currencies. As of January 31, 2009, we had
$8.6 million of cash in foreign accounts. We enter into
derivative transactions, specifically foreign currency forward
contracts, to manage our exposure to fluctuations in foreign
exchange rates that arise, primarily from our foreign
currency-denominated receivables and payables. The contracts are
in British pounds, Australian dollars, Japanese yen and euros,
typically have maturities of one month and require an exchange
of foreign currencies for U.S. dollars at maturity of the
contracts at rates agreed to at inception of the contracts. We
do not enter into or hold derivatives for trading or speculative
purposes. Generally, we do not designate foreign currency
forward contracts as hedges for accounting purposes, and changes
in the fair value of these instruments are recognized
immediately in current earnings. Because we enter into forward
contracts only as an economic hedge, any gain or loss on the
underlying foreign-denominated balance would be offset by the
loss or
46
gain on the forward contract. Gains and losses on forward
contracts and foreign denominated receivables and payables are
included in other income (expense), net.
At January 31, 2009, we had outstanding foreign currency
forward contracts with an aggregate notional value of
$12.2 million, denominated in British pounds, Australian
dollars, Japanese yen and euros. The
mark-to-market
effect associated with these contracts was a net unrealized gain
of approximately $0.1 million at January 31, 2009. Net
realized gains and losses associated with exchange rate
fluctuations on forward contracts and the underlying foreign
currency exposure being hedged were immaterial for all periods
presented.
Interest
Rate Risk
We had an unrestricted cash and cash equivalents balance of
$111.6 million at January 31, 2009, which was held for
working capital purposes. We do not enter into investments for
trading or speculative purposes. We do not believe that we have
any material exposure to changes in the fair value of these
investments as a result of changes in interest rates. Declines
in interest rates, however, will reduce future investment
income, and increases in interest rates may increase future
interest expense.
Our exposure to market risk for changes in interest rates
relates primarily to our investment portfolio. We place our
investments with high quality issuers and, by policy, limit the
amount of risk by investing primarily in money market funds,
high-quality corporate obligations and certificates of deposit.
At January 31, 2009, we held ARS with a par value of
$54.2 million that had experienced failed auctions, which
has prevented us from liquidating those investments. As a
result, we have classified these investments as long-term assets
in our consolidated balance sheet as of January 31, 2009
and recorded an unrealized loss of $5.0 million related to
the impairment of the ARS. See Note 4 to the accompanying
financial statements for a description of how we value these
ARS. Our valuation of the ARS is sensitive to market conditions
and managements judgment and could change significantly
based on the assumptions used. If we had used a term of one year
or five years and a discount rate of 4.07% and 5.01%
respectively, the gross unrealized loss would have been
$1.5 million or $8.7 million, respectively. If we had
used a term of three years and a discount rate of 4.07% or
5.01%, the gross unrealized loss would have been
$4.4 million or $5.7 million, respectively. If we had
used a term of three years and illiquidity discounts of 1.0% or
2.0%, the gross unrealized loss would have been
$4.2 million or $5.6 million, respectively. Based on
our ability to access our cash and short-term investments and
our expected cash flows, we do not anticipate the current lack
of liquidity on these ARS will affect our ability to operate our
business as usual.
47
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
NETEZZA
CORPORATION
Index To
Consolidated Financial Statements
48
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Netezza
Corporation:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations,
stockholders equity (deficit) and cash flows present
fairly, in all material respects, the financial position of
Netezza Corporation and its subsidiaries at January 31,
2009 and 2008, and the results of their operations and their
cash flows for each of the three years in the period ended
January 31, 2009 in conformity with accounting principles
generally accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
January 31, 2009, based on criteria established in
Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Companys management is responsible for these
financial statements, for maintaining effective internal control
over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in Managements Report on Internal Control over
Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on these financial
statements and on the Companys internal control over
financial reporting based on our audits (which was an integrated
audit in 2009). We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 26, 2009
49
NETEZZA
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share and per share data)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
111,635
|
|
|
$
|
46,184
|
|
Short-term marketable securities
|
|
|
|
|
|
|
37,149
|
|
Accounts receivable
|
|
|
34,457
|
|
|
|
19,999
|
|
Inventory
|
|
|
18,409
|
|
|
|
31,611
|
|
Deferred tax assets, net
|
|
|
12,723
|
|
|
|
|
|
Restricted cash
|
|
|
379
|
|
|
|
379
|
|
Prepaid expenses and other current assets
|
|
|
3,160
|
|
|
|
4,038
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
180,763
|
|
|
|
139,360
|
|
Property and equipment, net
|
|
|
9,586
|
|
|
|
5,467
|
|
Deferred tax assets, net
|
|
|
9,415
|
|
|
|
|
|
Goodwill
|
|
|
2,000
|
|
|
|
|
|
Intangible assets, net
|
|
|
2,935
|
|
|
|
|
|
Long-term marketable securities
|
|
|
49,222
|
|
|
|
53,775
|
|
Restricted cash
|
|
|
739
|
|
|
|
|
|
Other long-term assets
|
|
|
4,199
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
258,859
|
|
|
$
|
198,752
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
8,424
|
|
|
$
|
5,533
|
|
Accrued expenses
|
|
|
6,301
|
|
|
|
5,494
|
|
Accrued compensation and benefits
|
|
|
6,352
|
|
|
|
5,244
|
|
Current portion of deferred revenue
|
|
|
46,356
|
|
|
|
30,588
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
67,433
|
|
|
|
46,859
|
|
Long-term deferred revenue
|
|
|
11,979
|
|
|
|
15,418
|
|
Other long-term liabilities
|
|
|
2,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
14,804
|
|
|
|
15,418
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
82,237
|
|
|
|
62,277
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 15)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 5,000,000 shares
authorized at January 31, 2009 and 2008; none outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 500,000,000 shares
authorized at January 31, 2009 and 2008, 59,760,440 and
57,729,903 shares issued at January 31, 2009 and 2008,
respectively
|
|
|
60
|
|
|
|
58
|
|
Treasury stock, at cost; 139,062 shares at January 31,
2009 and 2008, respectively
|
|
|
(14
|
)
|
|
|
(14
|
)
|
Additional
paid-in-capital
|
|
|
228,658
|
|
|
|
216,253
|
|
Accumulated other comprehensive loss
|
|
|
(4,461
|
)
|
|
|
(682
|
)
|
Accumulated deficit
|
|
|
(47,621
|
)
|
|
|
(79,140
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
176,622
|
|
|
|
136,475
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
258,859
|
|
|
$
|
198,752
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
50
NETEZZA
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
143,463
|
|
|
$
|
102,994
|
|
|
$
|
64,632
|
|
Services
|
|
|
44,306
|
|
|
|
23,692
|
|
|
|
14,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
187,769
|
|
|
|
126,686
|
|
|
|
79,621
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
57,350
|
|
|
|
42,527
|
|
|
|
26,697
|
|
Services
|
|
|
12,211
|
|
|
|
7,716
|
|
|
|
5,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
69,561
|
|
|
|
50,243
|
|
|
|
32,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
118,208
|
|
|
|
76,443
|
|
|
|
47,521
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
58,429
|
|
|
|
43,210
|
|
|
|
32,908
|
|
Research and development
|
|
|
32,557
|
|
|
|
23,880
|
|
|
|
18,037
|
|
General and administrative
|
|
|
14,633
|
|
|
|
8,950
|
|
|
|
4,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
105,619
|
|
|
|
76,040
|
|
|
|
55,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
12,589
|
|
|
|
403
|
|
|
|
(8,251
|
)
|
Interest income
|
|
|
4,045
|
|
|
|
2,971
|
|
|
|
414
|
|
Interest expense
|
|
|
40
|
|
|
|
717
|
|
|
|
765
|
|
Other income (expense), net
|
|
|
(495
|
)
|
|
|
298
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax benefit (expense) and accretion
to preferred stock
|
|
$
|
16,099
|
|
|
$
|
2,955
|
|
|
$
|
(7,975
|
)
|
Income tax benefit (expense)
|
|
|
15,420
|
|
|
|
(961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
31,519
|
|
|
$
|
1,994
|
|
|
$
|
(7,975
|
)
|
Accretion to preferred stock
|
|
|
|
|
|
|
(2,853
|
)
|
|
|
(5,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
31,519
|
|
|
$
|
(859
|
)
|
|
$
|
(13,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.53
|
|
|
$
|
(0.03
|
)
|
|
$
|
(1.90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.50
|
|
|
$
|
(0.03
|
)
|
|
$
|
(1.90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic and
diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,939,422
|
|
|
|
33,988,696
|
|
|
|
7,319,231
|
|
Diluted
|
|
|
62,764,914
|
|
|
|
33,988,696
|
|
|
|
7,319,231
|
|
See accompanying Notes to Consolidated Financial Statements
51
NETEZZA
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Cost
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
|
|
(In thousands, except share amounts)
|
|
|
Balance at January 31, 2006
|
|
|
7,115,459
|
|
|
$
|
7
|
|
|
|
139,062
|
|
|
$
|
(14
|
)
|
|
$
|
|
|
|
$
|
65
|
|
|
$
|
(67,990
|
)
|
|
$
|
(67,932
|
)
|
Issuance of common stock upon exercise of stock options
|
|
|
304,413
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
118
|
|
Vesting of restricted common stock
|
|
|
122,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
Stock options issued to consultants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
877
|
|
|
|
|
|
|
|
|
|
|
|
877
|
|
Accretion of preferred stock to redemption value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,063
|
)
|
|
|
|
|
|
|
(4,868
|
)
|
|
|
(5,931
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(349
|
)
|
|
|
|
|
|
|
(349
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,975
|
)
|
|
|
(7,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2007
|
|
|
7,542,372
|
|
|
|
8
|
|
|
|
139,062
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
(284
|
)
|
|
|
(80,833
|
)
|
|
|
(81,123
|
)
|
Issuance of common stock upon exercise of stock options
|
|
|
802,697
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
569
|
|
|
|
|
|
|
|
|
|
|
|
570
|
|
Vesting of restricted common stock
|
|
|
23,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Issuance of common stock upon exercise of warrants
|
|
|
209,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options issued to consultants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,271
|
|
|
|
|
|
|
|
|
|
|
|
4,271
|
|
Accretion of preferred stock to redemption value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,552
|
)
|
|
|
|
|
|
|
(301
|
)
|
|
|
(2,853
|
)
|
Conversion of preferred stock to common stock
|
|
|
38,802,036
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
100,473
|
|
|
|
|
|
|
|
|
|
|
|
100,512
|
|
Conversion of preferred stock warrants to common stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
494
|
|
Proceeds of initial public offering, net of offering expenses
|
|
|
10,350,000
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
112,943
|
|
|
|
|
|
|
|
|
|
|
|
112,953
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(398
|
)
|
|
|
|
|
|
|
(398
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,994
|
|
|
|
1,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2008
|
|
|
57,729,903
|
|
|
|
58
|
|
|
|
139,062
|
|
|
|
(14
|
)
|
|
|
216,253
|
|
|
|
(682
|
)
|
|
|
(79,140
|
)
|
|
|
136,475
|
|
Issuance of common stock upon exercise of stock options
|
|
|
2,002,829
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2,699
|
|
|
|
|
|
|
|
|
|
|
|
2,701
|
|
Issuance of restricted common stock
|
|
|
27,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,773
|
|
|
|
|
|
|
|
|
|
|
|
7,773
|
|
Stock options issued to consultants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,919
|
|
|
|
|
|
|
|
|
|
|
|
1,919
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,779
|
)
|
|
|
|
|
|
|
(3,779
|
)
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,519
|
|
|
|
31,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2009
|
|
|
59,760,440
|
|
|
$
|
60
|
|
|
|
139,062
|
|
|
$
|
(14
|
)
|
|
$
|
228,658
|
|
|
$
|
(4,461
|
)
|
|
$
|
(47,621
|
)
|
|
$
|
176,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
52
NETEZZA
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
31,519
|
|
|
$
|
1,994
|
|
|
$
|
(7,975
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,388
|
|
|
|
3,300
|
|
|
|
2,615
|
|
Stock-based compensation expense
|
|
|
7,787
|
|
|
|
4,317
|
|
|
|
914
|
|
Benefit from deferred income taxes, net
|
|
|
(20,786
|
)
|
|
|
|
|
|
|
|
|
Change in carrying value of preferred stock warrant liability
|
|
|
|
|
|
|
257
|
|
|
|
198
|
|
Noncash interest expense related to issuance of warrants
|
|
|
|
|
|
|
183
|
|
|
|
71
|
|
Loss on trading securities
|
|
|
1,551
|
|
|
|
|
|
|
|
|
|
Gain on auction rate securities written put right
|
|
|
(1,324
|
)
|
|
|
|
|
|
|
|
|
Impairment of other long-term assets
|
|
|
800
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities, net of acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(11,563
|
)
|
|
|
12,152
|
|
|
|
(17,853
|
)
|
Inventory
|
|
|
10,490
|
|
|
|
(8,763
|
)
|
|
|
(15,510
|
)
|
Other assets
|
|
|
680
|
|
|
|
(2,748
|
)
|
|
|
(275
|
)
|
Accounts payable
|
|
|
2,995
|
|
|
|
(7,154
|
)
|
|
|
10,176
|
|
Accrued compensation and benefits
|
|
|
1,175
|
|
|
|
856
|
|
|
|
2,278
|
|
Accrued expenses
|
|
|
3,556
|
|
|
|
1,111
|
|
|
|
(553
|
)
|
Deferred revenue
|
|
|
9,182
|
|
|
|
21,432
|
|
|
|
14,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
41,450
|
|
|
|
26,937
|
|
|
|
(11,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments
|
|
|
(7,377
|
)
|
|
|
(134,449
|
)
|
|
|
|
|
Sales and maturities of investments
|
|
|
43,854
|
|
|
|
43,832
|
|
|
|
|
|
Acquisition of business, net of cash acquired
|
|
|
(6,221
|
)
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(5,751
|
)
|
|
|
(1,142
|
)
|
|
|
(1,545
|
)
|
Change in other long-term assets
|
|
|
(3,682
|
)
|
|
|
|
|
|
|
|
|
Increase in restricted cash
|
|
|
(739
|
)
|
|
|
|
|
|
|
|
|
Repayment of notes receivable from employees
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
20,084
|
|
|
|
(91,759
|
)
|
|
|
(1,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from note payable
|
|
|
|
|
|
|
8,000
|
|
|
|
5,000
|
|
Repayment of note payable
|
|
|
|
|
|
|
(14,639
|
)
|
|
|
(1,361
|
)
|
Proceeds from issuance of common stock, net
|
|
|
2,701
|
|
|
|
113,523
|
|
|
|
150
|
|
Excess tax benefit from stock-based compensation
|
|
|
1,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
4,620
|
|
|
|
106,884
|
|
|
|
3,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
66,154
|
|
|
|
42,062
|
|
|
|
(8,851
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(703
|
)
|
|
|
(896
|
)
|
|
|
(794
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
46,184
|
|
|
|
5,018
|
|
|
|
14,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
111,635
|
|
|
$
|
46,184
|
|
|
$
|
5,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
|
|
|
$
|
588
|
|
|
$
|
656
|
|
Cash paid for taxes
|
|
$
|
1,771
|
|
|
$
|
288
|
|
|
$
|
|
|
See accompanying Notes to Consolidated Financial Statements
53
NETEZZA
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Nature of
the Business
|
Netezza Corporation (the Company) is a leading
provider of data warehouse appliances. The Companys
product, the Netezza Performance Server, or NPS, integrates
database, server and storage platforms in a purpose-built unit
to enable detailed queries and analyses on large volumes of
stored data. The results of these queries and analyses, often
referred to as business intelligence, provide organizations with
actionable information to improve their business operations. The
NPS data warehouse appliance was designed specifically for
analysis of terabytes of data at higher performance levels and
at a lower total cost of ownership with greater ease of use than
can be achieved via traditional data warehouse systems. The NPS
appliance performs faster, deeper and more iterative analyses on
larger amounts of detailed data, giving customers greater
insight into trends and anomalies in their businesses, thereby
enabling them to make better strategic decisions.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The accompanying consolidated financial statements include those
of the Company and its wholly owned subsidiaries, after
elimination of all intercompany accounts and transactions. The
Company has prepared the accompanying consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America.
Use of
Estimates
The preparation of these financial statements in conformity with
accounting principles generally accepted in the United States of
America requires the Company to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenue
and expenses, and disclosure of contingent assets and
liabilities. On an ongoing basis, management evaluates these
estimates and judgments, including those related to revenue
recognition, the write down of inventory to net realizable
value, stock-based compensation, income taxes and goodwill and
acquired intangible assets. The Company bases these estimates on
historical and anticipated results and trends and on various
other assumptions that the Company believes are reasonable under
the circumstances, including assumptions as to future events.
These estimates form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. By their nature, estimates are
subject to an inherent degree of uncertainty. Actual results may
differ from the Companys estimates.
Cash,
Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an
original or remaining maturity of three months or less at the
time of purchase to be cash equivalents. Cash equivalents and
restricted cash consist primarily of investments in money market
funds and certificates of deposit of major financial
institutions. Accordingly, investments are subject to minimal
credit and market risk. At January 31, 2009 and
January 31, 2008, cash equivalents were comprised of money
market funds totaling $97.4 million and $31.7 million,
respectively. Restricted cash consists of certificates of
deposit required to be maintained by the Company under letters
of credit to comply with the requirements of office space lease
agreements. The letters of credit totaled $1.1 million and
$0.4 million at January 31, 2009 and January 31,
2008, respectively.
Fair
Value of Financial Measurements
Effective February 1, 2008, the Company implemented
Statement of Financial Accounting Standards (SFAS)
No. 157,Fair Value Measurement
(SFAS 157), for its financial assets and
liabilities that are remeasured and reported at fair value at
each reporting period, and non-financial assets and liabilities
that are remeasured and reported at fair value at least annually
(see Note 4). In accordance with the provisions of FASB
Staff Position (FSP)
No. FAS 157-2,
Effective Date of FASB Statement No. 157,
(FSP
FAS 157-2)
the Company
54
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
elected to defer until February 1, 2009 the implementation
of SFAS 157 as it relates to its non-financial assets and
non-financial liabilities that are recognized and disclosed at
fair value in the financial statements on a nonrecurring basis.
SFAS 157 defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market
participants on the measurement date. The Company has certain
financial assets and liabilities recorded at fair value
(principally cash equivalents, investments, and foreign currency
forward contracts) that have been classified as Level 1, 2
or 3 within the fair value hierarchy as described in
SFAS 157. Fair values determined by Level 1 inputs
utilize quoted prices (unadjusted) in active markets for
identical assets or liabilities that the Company has the ability
to access. Fair values determined by Level 2 inputs utilize
data points that are observable such as quoted prices, interest
rates and yield curves. Fair values determined by Level 3
inputs utilize unobservable data points for the asset or
liability. The Companys money market funds have been
classified as Level 1 because their fair values are based
on quoted market prices. The Company has classified its foreign
currency forward contracts as Level 2 because observable
inputs are utilized to value them. The Companys auction
rate securities have been classified as Level 3.
The carrying amounts reflected in the consolidated balance
sheets for accounts receivable, other current assets, accounts
payable, and accrued expenses and accrued compensation and
benefits approximate fair values due to their short-term
maturities.
Investments
The Company accounts for and classifies its investments as
either
held-to-maturity,
available-for-sale,
or trading, in accordance with the guidance outlined
in SFAS No. 115 Accounting for Certain
Investments in Debt and Equity Securities
(SFAS 115). The determination of the
appropriate classification by the Company is based on a variety
of factors, including managements intent at the time of
purchase.
Held-to-maturity
securities are those securities which the Company has the
ability and intent to hold until maturity and are recorded at
amortized cost, adjusted for the amortization or accretion of
premiums or discounts. Premiums and discounts are amortized or
accreted over the life of the related
held-to-maturity
security as an adjustment to yield using the effective interest
method. At January 31, 2009, the Company had no investments
which were classified as
held-to-maturity.
Available-for-sale
securities are those securities which the Company views as
available for use in current operations.
Available-for-sale
investments are stated at fair value with their unrealized gains
and losses included as a separate component of
stockholders equity entitled Accumulated other
comprehensive loss, until such gains and losses are
realized. At January 31, 2009, the Company had
$35.0 million of investments which were classified as
available-for-sale.
Trading securities are those securities which are bought and
held principally for the purpose of selling them in the near
term. Trading securities are stated at fair value with their
unrealized gains and losses included in current earnings. At
January 31, 2009, the Company had $14.2 million of
investments which were classified as trading.
The Company has investments in auction rate securities
(ARS) that consist entirely of municipal debt
securities. Historically, the carrying value (par value) of the
ARS approximated fair market value due to the resetting of
variable interest rates. Beginning in late February 2008,
however, the auctions for ARS then held by the Company were
unsuccessful. As a result, the interest rates on the investments
reset to the maximum rate per the applicable investment offering
statements. The Company will not be able to liquidate the
affected ARS until a future auction on these investments is
successful, a buyer is found outside of the auction process, the
securities are called or refinanced by the issuer, or the
securities mature. Due to the Companys inability to
quickly liquidate these investments, the Company has
reclassified those investments with failed auctions and which
have not been
55
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
subsequently liquidated, as long-term assets in its consolidated
balance sheet based on managements estimate of its
inability to liquidate these investments within the next twelve
months.
In November 2008, the Company entered into an agreement for one
of its investment brokers to repurchase the ARS the Company
holds with such investment advisor at par value beginning on
June 30, 2010. Until that time, the Company expects to
continue to hold these long-term debt instruments until the
earlier of the settlement date or the market for active trading
in ARS at par value has been re-established. At any time during
the period up until the June 2010, the Companys investment
advisor can call these ARS at par value. The agreement entered
into between the parties creates a separate financial instrument
that the Company has elected to measure and report at fair value
per the guidance of SFAS No. 159 The Fair
Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115 (SFAS 159). The
underlying ARS are carried at fair value and were classified as
trading securities as of January 31, 2009. Previously,
these securities were classified as
available-for-sale.
Prior to entering into such agreement, the Companys intent
was to hold the ARS until the earlier of the date on which the
market recovered or payment date of the underlying security. The
unrealized loss on these investments, previously was included in
accumulated other comprehensive income, net of tax.
Managements decision to enter into this agreement resulted
in classifying the unrealized loss on these investments as
other-than-temporary.
As a result, the Company recognized a loss on investments for
the amount of the unrealized loss not previously recognized in
earnings (see Note 4).
On February 1, 2008, the Company adopted SFAS 159,
which permits companies to choose to measure certain financial
assets and liabilities at fair value (the fair value
option). If the fair value option is elected, any upfront
costs and fees related to the item must be recognized in
earnings and cannot be deferred. The fair value election is
irrevocable and may generally be made on an
instrument-by-instrument
basis, even if a company has similar instruments that it elects
not to fair value. At the adoption date, unrealized gains and
losses on existing items for which fair value has been elected
are reported as a cumulative adjustment to beginning retained
earnings. The Company chose not to elect the fair value option
for its financial assets and liabilities existing on
February 1, 2008, and did not elect the fair value option
for any financial assets and liabilities transacted during the
year ended January 31, 2009, except for the put right
related to the Companys ARS (see Note 4).
Gross realized gains and losses are determined on the specific
identification method and are included in interest income in the
statement of operations. During the fiscal years ended
January 31, 2009, 2008 and 2007, realized gains were
$0.3 million, $0.3 million and $0.0 million,
respectively. Interest income is accrued as earned.
Investment
in Pi Solutions
In the second and third quarter of fiscal 2009, the Company
invested $0.8 million in Pi Solutions, a third-party
company that develops and markets analytics applications. This
investment entitles the Company to a series of preferred stock
of Pi Solutions, and is accounted for using the cost method.
This investment is included in other assets in the
Companys accompanying balance sheet as of January 31,
2009.
On a going forward basis, the Company will regularly monitor
this investment to determine if facts and circumstances have
changed in a manner that would require a change in accounting
methodology. Additionally, the Company will regularly evaluate
whether or not this investment has been impaired by considering
such factors as economic environment, market conditions,
operational performance and other specific factors relating to
the business underlying the investment. In connection with this
evaluation, the Company determined that its investment was
impaired and recorded an impairment charge of $0.8 million
in the fourth quarter to reduce the carrying value of the
investment to $0 as of January 31, 2009. The impairment
charge is included in sales and marketing and research and
development in the Statement of Operations in the amounts of
$0.4 million and $0.4 million, respectively.
56
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Derivatives
The Company applies SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities
(SFAS 133) which established accounting and
reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities. All derivatives, whether designated in a
hedging relationship or not, are required to be recorded on the
balance sheet at fair value. SFAS 133 also requires that
changes in the derivatives fair value be recognized
currently in earnings unless specific hedge accounting criteria
are met, and that the Company formally document, designate, and
assess the effectiveness of transactions that receive hedge
accounting. The effectiveness of the derivative as a hedging
instrument is based on changes in its market value being highly
correlated with changes in the market value of the underlying
hedged item.
Derivatives are financial instruments whose values are derived
from one or more underlying financial instruments, such as
foreign currency. The Company enters into derivative
transactions, specifically foreign currency forward contracts,
to manage the Companys exposure to fluctuations in foreign
exchange rates that arise, primarily from the Companys
foreign currency-denominated receivables and payables. The
contracts are in euros, British pounds, Australian dollars and
Japanese yen, typically have maturities of one month and require
an exchange of foreign currencies for U.S. dollars at
maturity of the contracts at rates agreed to at inception of the
contracts. The Company does not enter into or hold derivatives
for trading or speculative purposes. Generally, the Company does
not designate foreign currency forward contracts as hedges for
accounting purposes, and changes in the fair value of these
instruments are recognized immediately in current earnings.
Because the Company enters into forward contracts only as an
economic hedge, any gain or loss on the underlying
foreign-denominated balance would be offset by the loss or gain
on the forward contract. Gains and losses on forward contracts
and foreign denominated receivables and payables are included in
other income (expense), net.
At January 31, 2009, the Company had outstanding foreign
currency forward contracts with an aggregate notional value of
$12.2 million, denominated in euros, British pounds,
Australian dollars and Japanese yen. The
mark-to-market
effect associated with these contracts was a net unrealized gain
of approximately $0.1 million at January 31, 2009. Net
realized gains and losses associated with exchange rate
fluctuations on forward contracts and the underlying foreign
currency exposure being hedged were immaterial for all periods
presented.
Inventory
Inventories are stated at the lower of standard cost or market
value. Cost is determined by average costing and market value
represents the lower of replacement cost or estimated net
realizable value. The Company regularly monitors inventory
quantities on-hand and records write-downs for excess and
obsolete inventories based on the Companys estimated
demand for its products, potential obsolescence of technology,
product life cycles and whether pricing trends or forecasts
indicate that the carrying value of inventory exceeds its
estimated selling price. These factors are impacted by market
and economic conditions, technology changes, and new product
introductions and require estimates that may include elements
that are uncertain. If inventory is written down, a new cost
basis will be established that can not be increased in future
periods.
57
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property
and Equipment
Property and equipment are recorded at cost and consist
primarily of engineering test equipment and computer equipment
and software. Depreciation is computed using the straight-line
method over the estimated useful lives as follows:
|
|
|
|
|
|
|
Estimated
|
|
|
|
Useful Life
|
|
|
Engineering test equipment
|
|
|
1 to 5 years
|
|
Computer equipment and software
|
|
|
3 years
|
|
Furniture and fixtures
|
|
|
5 years
|
|
Leasehold improvements
|
|
|
Shorter of useful life or term of lease
|
|
Expenditures for additions, renewals and betterments of property
and equipment are capitalized. Expenditures for repairs and
maintenance are charged to expense as incurred. As assets are
retired or sold, the related cost and accumulated depreciation
are removed from the accounts and any resulting gain or loss is
credited or charged to operations.
Goodwill
and Acquired Intangible Assets
Intangible assets are valued based on estimates of future cash
flows and amortized over their estimated useful lives. The
Company evaluates goodwill and intangible assets for impairment
annually and when events occur or circumstances change that may
reduce the value of the asset below its carrying amount using
forecasts of discounted future cash flows. Events or
circumstances that might require an interim evaluation include
unexpected adverse business conditions, economic factors,
unanticipated technological changes or competitive activities,
loss of key personnel and acts by governments and courts.
Estimates of future cash flows require assumptions related to
revenue and operating income growth, asset-related expenditures,
working capital levels and other factors. Different assumptions
from those made in the Companys analysis could materially
affect projected cash flows and our evaluation of goodwill for
impairment. Should the fair value of our goodwill decline
because of reduced operating performance, market declines, or
other indicators of impairment, or as a result of changes in the
discount rate, charges for impairment may be necessary.
Impairment
of Long-Lived Assets
The Company periodically evaluates the recoverability of
long-lived assets whenever events and changes in circumstances
indicate that the carrying amount of an asset may not be fully
recoverable. When indicators of impairment are present, the
carrying values of the assets are evaluated in relation to the
operating performance and future undiscounted cash flows of the
underlying business. The net book value of the underlying asset
is adjusted to fair value if the sum of the expected discounted
cash flows is less than book value. Fair values are based on
estimates of market prices and assumptions concerning the amount
and timing of estimated future cash flows and assumed discount
rates, reflecting varying degrees of perceived risk.
Revenue
Recognition
The Company derives revenue from the sale of its products and
related services. Revenue is recognized when persuasive evidence
of an arrangement exists, delivery has occurred, the sales price
is fixed or determinable and collectibility of the related
receivable is probable. This policy is applicable to all revenue
transactions, including sales to resellers and end users. The
following summarizes the major terms of the Companys
contractual relationships with end users and resellers and the
manner in which these transactions are accounted.
The Companys product offerings include the sale of
hardware with its embedded propriety software. Revenue from
these transactions is recognized upon shipment unless shipping
terms or local laws do not allow the title and risk of loss to
transfer at shipping point. In those cases, the Company defers
revenue until title and risk of loss
58
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
transfer to the customer. The Company does not customarily offer
a right of return on its product sales and any acceptance
criteria is normally based upon published specifications. In
cases where a right of return is granted, the Company defers
revenue until such rights expire. If acceptance criteria are not
based on published specifications with which the Company can
ensure compliance, the Company defers revenue until acceptance
has been confirmed or the right of return expires. Customers may
purchase a standard maintenance agreement which typically
commences upon product delivery. The Company also provides a
90-day
standard product warranty.
The Companys service revenue consists of installation,
maintenance, training and professional services. Installation
and professional services are not considered essential to the
functionality of the Companys products as these services
do not customize or alter the product capabilities and could be
performed by customers or third party vendors. Installation and
professional services revenue is recognized upon completion of
installation or requested services. Maintenance revenue is
recognized ratably over the contract period. Training revenue is
recognized upon the completion of the training or expiration.
The Companys service revenue also consists of software
customization and consulting service contracts recognized in
accordance with Accounting Research Bulletin No. 45
Long-Term Construction-Type Contracts
(ARB 45) and the relevant guidance of Statement
of Position (SOP)
No. 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts, as prescribed by
SOP 97-2
Software Revenue Recognition. Services
revenues are recognized either as services are performed and
billed to customers for time and material arrangements or on the
percentage-of-completion
method for fixed fee contracts.
Percentage-of-completion
is measured by the percentage of software customization or
consulting hours incurred to date to total estimated hours. This
method is used because management has determined that past
experience has shown expended hours to be the best measure of
progress on these engagements. Revisions in total estimated
hours are reflected in the accounting period in which the
required revisions become known. Anticipated losses on contracts
are charged to income in their entirety when such losses become
evident.
The Company enters into multiple element arrangements in the
normal course of business with its customers. Elements in such
arrangements are recognized when delivered and the amount
allocated to each element is based on vendor specific objective
evidence of fair value (VSOE). VSOE is determined
based upon the amount charged when an element is sold
separately. VSOE of the fair value of maintenance services may
also be determined based on a substantive maintenance renewal
clause, if any, within a customer contract. The Companys
current pricing practices are influenced primarily by product
type, purchase volume and maintenance term. The Company reviews
services revenue sold separately and maintenance renewal rates
on a periodic basis and updates, when appropriate, the
Companys VSOE of fair value for such services to ensure
that it reflects the Companys recent pricing experience.
When VSOE exists for undelivered elements but not for the
delivered elements, the Company uses the residual
method. Under the residual method, the fair values of the
undelivered elements are initially deferred. The residual
contract amount is then allocated to and recognized for the
delivered elements. Thereafter, the amount deferred for the
undelivered element is recognized when those elements are
delivered. For arrangements in which VSOE does not exist for
each undelivered element, revenue for the entire arrangement is
deferred and not recognized until delivery of all the elements
without VSOE has occurred, unless the only undelivered element
is maintenance in which case the entire contract is recognized
ratably over the maintenance period.
For sales through resellers and distributors, the Company
delivers the product directly to the end user customer to which
the product has been sold. Revenue recognition on reseller and
distributor arrangements is accounted for as described above.
Research
and Development
Costs incurred in research and development, which consist
primarily of salaries and employee benefits, product prototype
expenses, allocated facilities expenses and depreciation of
equipment used in research and development activities of the
Companys products, are expensed as incurred, except
certain software development costs. Costs associated with the
development of computer software are expensed as incurred prior
to the
59
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
establishment of technological feasibility in accordance with
SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise
Marketed. Costs incurred subsequent to the
establishment of technological feasibility and prior to the date
when the software is
available-for-sale
are capitalized. No software development costs have been
capitalized to date since costs incurred between the
establishment of technological feasibility and the
softwares
available-for-sale
date have been insignificant.
Foreign
Currency Translation
The financial statements of the Companys foreign
subsidiaries are translated in accordance with
SFAS No. 52, Foreign Currency
Translation. The functional currency for the
Companys foreign subsidiaries is the applicable local
currency. For financial reporting purposes, assets and
liabilities of subsidiaries outside the United States of America
are translated into U.S. dollars using year-end exchange
rates. Revenue and expense accounts are translated at the
average rates in effect during the year. The effects of foreign
currency translation adjustments are included in accumulated
other comprehensive income as a component of stockholders
equity. Transaction gains (losses) for the fiscal years ended
January 31, 2009, 2008 and 2007 were $(0.3) million,
$0.7 million and $0.6 million, respectively and
recorded as other income (expense), net in the consolidated
statements of operations.
Concentration
of Credit Risk and Significant Customers
The Company maintains its cash in bank deposit accounts at high
quality financial institutions. The individual balances, at
times, may exceed federally insured limits. However, the Company
does not believe that it is subject to unusual credit risk
beyond the normal credit risk associated with commercial banking
relationships.
Financial instruments which potentially expose the Company to
concentrations of credit risk consist of accounts receivable.
Management believes its credit policies are prudent and reflect
normal industry terms and business risk. At January 31,
2009, three customers accounted for 15%, 11% and 10% of accounts
receivable, while two customers accounted for 28% and 11% of
accounts receivable at January 31, 2008. One customer
accounted for 16% of the Companys total revenue for the
fiscal year ended January 31, 2009, one customer accounted
for 10% of the Companys total revenue for the fiscal year
ended January 31, 2008, while no customer accounted for 10%
or greater of the Companys total revenue for the fiscal
year ended January 31, 2007.
Stock-Based
Compensation
The Company accounts for stock-based compensation in accordance
with SFAS No. 123R, Share-Based Payment
(SFAS 123R). Under the fair value
recognition provisions of SFAS 123R, stock-based
compensation cost is measured at the grant date based on the
fair value of the award and is recognized as expense over the
vesting period. The Company has selected the Black-Scholes
option pricing model to determine fair value of stock option
awards. Determining the fair value of stock-based awards at the
grant date requires judgment, including estimating the expected
life of the stock awards and the volatility of the underlying
common stock. Changes to the assumptions may have a significant
impact on the fair value of stock options, which could have a
material impact on the Companys financial statements. In
addition, judgment is also required in estimating the amount of
stock-based awards that are expected to be forfeited. Should the
Companys actual forfeiture rates differ significantly from
the Companys estimates, the Companys stock-based
compensation expense and results of operations could be
materially impacted. The calculation of compensation cost in
accordance with SFAS 123R for options issued prior to the
Companys initial public offering required the
Companys Board of Directors, with input from management,
to estimate the fair market value of the Companys common
stock on the date of grant of those options. These estimates of
fair market value were determined based upon a number of
objective and subjective factors and were, therefore, inherently
subjective estimates.
For stock options and restricted stock the Company recognizes
compensation cost on a straight-line basis over the awards
vesting periods for those awards that contain only a service
vesting feature. For awards with a
60
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
performance condition vesting feature, the Company recognizes
compensation cost on a graded-vesting basis over the
awards expected vesting periods.
The Company accounts for stock-based compensation expense for
non-employees using the fair value method prescribed by Emerging
Issues Task Force (EITF)
96-18,
Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services and the Black-Scholes
option pricing model, and records the fair value of non-employee
stock options as an expense over the vesting term of the option.
The fair value of each option granted during the fiscal years
ended January 31, 2009, 2008 and 2007 was estimated on the
date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Dividend yield
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Expected volatility
|
|
|
47.5
|
%
|
|
|
68.3
|
%
|
|
|
79.4
|
%
|
Risk-free interest rate
|
|
|
2.6
|
%
|
|
|
4.4
|
%
|
|
|
4.8
|
%
|
Expected life (in years)
|
|
|
5.0
|
|
|
|
6.2
|
|
|
|
6.5
|
|
Weighted-average fair value at grant date
|
|
$
|
4.41
|
|
|
$
|
4.25
|
|
|
$
|
2.00
|
|
For the third and fourth quarters of fiscal year 2009, the
expected volatility assumption used in the Black-Scholes
option-pricing model was based on the historical trading
activity of the Companys common stock and an analysis of
peer group volatility. Prior to the third and fourth quarters of
fiscal year 2009, the Companys expected volatility
assumption was based on peer group volatility. The expected life
assumption is based on the simplified method in accordance with
the SECs Staff Accounting Bulletin No. 110. The
simplified method is based on the vesting period and contractual
term for each vesting tranche of awards. The mid-point between
the vesting date and the expiration date is used as the expected
term under this method. The risk-free interest rate used in the
Black-Scholes model is based on the implied yield curve
available on U.S. Treasury zero-coupon issues at the date
of grant with a remaining term equal to the Companys
expected term assumption. The Company has never declared or paid
a cash dividend and has no current plans to pay cash dividends.
As required under SFAS 123R, management made an estimate of
expected forfeitures of equity awards and is recognizing
compensation costs only for those awards expected to vest.
The amounts included in the consolidated statements of
operations for the fiscal years ended January 31, 2009,
2008 and 2007 relating to share-based expense under
SFAS 123R are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cost of product
|
|
$
|
176
|
|
|
$
|
94
|
|
|
$
|
12
|
|
Cost of services
|
|
|
227
|
|
|
|
116
|
|
|
|
19
|
|
Sales and marketing
|
|
|
2,535
|
|
|
|
1,222
|
|
|
|
207
|
|
Research and development
|
|
|
2,067
|
|
|
|
1,007
|
|
|
|
160
|
|
General and administrative
|
|
|
2,768
|
|
|
|
1,832
|
|
|
|
479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,773
|
|
|
$
|
4,271
|
|
|
$
|
877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Per Share
The Company computes basic net income (loss) per share
attributable to common stockholders by dividing its net income
(loss) attributable to common stockholders for the period by the
weighted average number of common shares outstanding during the
period. Net income (loss) attributable to common stockholders is
calculated using the
61
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
two-class method; however, preferred stock dividends were not
included in the Companys diluted net income (loss) per
share for fiscal years 2008 and 2007 calculations because to do
so would be anti-dilutive for all periods presented.
The components of the net income (loss) per share attributable
to common stockholders were as follows (in thousands except
share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
31,519
|
|
|
$
|
(859
|
)
|
|
$
|
(13,906
|
)
|
Weighted average shares used to compute net income (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,939,422
|
|
|
|
33,988,696
|
|
|
|
7,319,231
|
|
Dilutive effect of stock options and restricted stock
|
|
|
3,825,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
62,764,914
|
|
|
|
33,988,696
|
|
|
|
7,319,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.53
|
|
|
$
|
(0.03
|
)
|
|
$
|
(1.90
|
)
|
Diluted
|
|
$
|
0.50
|
|
|
$
|
(0.03
|
)
|
|
$
|
(1.90
|
)
|
The following convertible redeemable preferred stock, warrants
to purchase outstanding convertible redeemable preferred stock,
and options and warrants to purchase common stock have been
excluded from the computation of diluted net loss per share for
the periods presented because including the convertible
redeemable preferred stock, options and warrants would be
anti-dilutive. The Company has excluded the convertible
redeemable preferred stock from the basic earnings per share
calculation as the preferred stockholders did not have a
contractual obligation to share in the losses of the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Convertible preferred stock upon conversion to common stock
|
|
|
|
|
|
|
|
|
|
|
38,774,847
|
|
Warrants to purchase convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
241,490
|
|
Warrants to purchase common stock
|
|
|
34,893
|
|
|
|
34,893
|
|
|
|
192,036
|
|
Options to purchase common stock
|
|
|
5,331,004
|
|
|
|
9,379,774
|
|
|
|
7,480,447
|
|
Advertising
Expense
The Company expenses advertising costs as they are incurred.
During the fiscal years ended January 31, 2009, 2008 and
2007, advertising expense totaled $0.2 million,
$0.3 million and $0.3 million, respectively.
Income
Taxes
The Company records income taxes using the asset and liability
method. Deferred income tax assets and liabilities are
recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective income tax
bases, and operating loss and tax credit carryforwards. The
Companys consolidated financial statements contain certain
deferred tax assets related to temporary differences between
financial and tax accounting. SFAS No. 109,
Accounting for Income Taxes,
(SFAS 109) requires the Company to establish a
valuation allowance if the likelihood of realization of the
deferred tax assets is not more-likely-than-not, based on an
evaluation of objective verifiable evidence. Significant
management judgment is required in determining the
Companys provision for income taxes, the Companys
62
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
deferred tax assets and liabilities and any valuation allowance
recorded against those net deferred tax assets. The Company
evaluates the weight of all available evidence to determine
whether it is more likely than not that some portion or all of
the net deferred income tax assets will not be realized.
Comprehensive
Income (Loss)
Comprehensive income (loss) consists of net income (loss),
adjustments to stockholders equity for foreign currency
translation adjustments and net unrealized gains or losses from
investments. For the purposes of comprehensive income (loss)
disclosures, the Company does not record tax provisions or
benefits for the net changes in the foreign currency translation
adjustment, as the Company intends to permanently reinvest
undistributed earnings in its foreign subsidiaries in accordance
with Accounting Principles Board Opinion 23. Accumulated other
comprehensive income consists of foreign exchange gains and
losses and net unrealized gains or losses from investments.
The components of comprehensive income (loss) are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net income (loss)
|
|
$
|
31,519
|
|
|
$
|
1,994
|
|
|
$
|
(7,975
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency adjustment, net of tax of $0
|
|
|
(105
|
)
|
|
|
(670
|
)
|
|
|
(349
|
)
|
Net unrealized gain (loss) from investments, net of tax of $0
|
|
|
(3,674
|
)
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
27,740
|
|
|
$
|
1,596
|
|
|
$
|
(8,324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss consists of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Foreign currency adjustment
|
|
$
|
(1,059
|
)
|
|
$
|
(954
|
)
|
Net unrealized gain (loss) from investments
|
|
|
(3,402
|
)
|
|
|
272
|
|
Total accumulated other comprehensive loss
|
|
$
|
(4,461
|
)
|
|
$
|
(682
|
)
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
The Company adopted the provisions of SFAS 157 on
February 1, 2008 for its financial assets and liabilities.
In accordance with the provisions of FSP
FAS 157-2,
the Company deferred the implementation of SFAS 157 as it
relates to its non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis
until February 1, 2009. The Company is evaluating the
impact the deferral of the implementation of SFAS 157 will
have on its financial statements.
The Company adopted the provisions of SFAS 159 on
February 1, 2008. SFAS 159 permits entities to choose,
at specified election dates, to measure eligible items at fair
value (the fair value option). Under this
pronouncement, a business entity must report unrealized gains
and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting period. The
Company has not elected the fair value option for any items on
its balance sheet, except for the put right related to the
Companys ARS (see Note 4).
In June 2008, the FASB issued FSP
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities
(FSP
EITF 03-6-1).
FSP
EITF 03-6-1
addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and
therefore need to be included in calculating earnings per share
under the two-class method described in SFAS No. 128,
Earnings per Share. Additionally, FSP
EITF 03-6-1
requires companies to treat unvested share-based payment
63
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
awards that have non-forfeitable rights to dividend or dividend
equivalents as a separate class of securities in calculating
earnings per share and is effective for financial statements
issued for fiscal years beginning after December 15, 2008;
early adoption is not permitted. The Company is currently
evaluating the impact of adopting FSP
EITF 03-6-1
on its results of operations and earnings per share.
In April 2008, the FASB issued FSP
No. FAS 142-3,
Determination of the Useful Life of Intangible
Assets (FSP
FAS 142-3).
FSP
FAS 142-3
amends the factors that should be considered in developing
assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill
and Other Intangible Assets,
(SFAS 142) to improve consistency between
the useful life of a recognized intangible asset and the period
of expected cash flows used to measure the fair value of the
asset. FSP
FAS 142-3
is effective for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008 and
applied prospectively to intangible assets acquired after the
effective date. The Company does not expect the adoption of FSP
FAS 142-3
to have a material impact on its consolidated financial
statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133 (SFAS 161). SFAS 161
requires enhanced disclosures about an entitys derivative
and hedging activities, including (a) how and why an entity
uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities,
(SFAS 133), and its related
interpretations, and (c) how derivative instruments and
related hedged items affect an entitys financial position,
financial performance, and cash flows. SFAS 161 is
effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The
Company does not expect the adoption of SFAS 161 will have
a material impact on its financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141(R)). SFAS 141(R) replaces
SFAS No. 141, Business Combinations
(SFAS 141). SFAS 141(R) requires the
acquiring entity in a business combination to recognize the full
fair value of assets acquired and liabilities assumed in the
transaction; requires certain contingent assets and liabilities
acquired to be recognized at their fair values on the
acquisition date; requires contingent consideration to be
recognized at its fair value on the acquisition date and changes
in the fair value to be recognized in earnings until settled;
requires the expensing of most transaction and restructuring
costs; and generally requires the reversals of valuation
allowances related to acquired deferred tax assets and changes
to acquired income tax uncertainties to also be recognized in
earnings. This accounting standard is effective for financial
statements issued for fiscal years beginning after
December 15, 2008. The Company expects that the adoption of
SFAS 141(R) will have an effect on how it accounts for
business combinations.
From time to time, new accounting pronouncements are issued by
the FASB and subsequently adopted by the Company as of the
specified effective date. Unless otherwise discussed, the
Company believes that the impact of recently issued standards,
which are not yet effective, will not have a material impact on
the Companys consolidated results of operations and
financial condition upon adoption.
|
|
3.
|
Initial
Public Offering
|
On July 24, 2007, the Company closed its initial public
offering of 10,350,000 shares of common stock at an
offering price of $12.00 per share, raising proceeds of
approximately $113.0 million, net of underwriting discounts
and expenses.
At the close of the initial public offering, the Companys
outstanding shares of convertible redeemable preferred stock
were automatically converted into 38,802,036 shares of
common stock and warrants to purchase convertible, redeemable
preferred stock were converted into warrants to purchase
58,000 shares of common stock.
64
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Fair
Value Measurements
|
On February 1, 2008, the Company adopted the provisions of
SFAS 157. As permitted by FSP
FAS 157-2,
the Company elected to defer until February 1, 2009 the
adoption of SFAS 157 for all non-financial assets and
non-financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a
recurring basis. The adoption of this accounting pronouncement
did not have a material effect on the Companys
consolidated financial statements for financial assets and
liabilities and any other assets and liabilities carried at fair
value. The Company is currently in the process of evaluating the
impact of adopting this pronouncement for other non-financial
assets or liabilities.
SFAS 157 provides a framework for measuring fair value
under generally accepted accounting principles in the United
States and requires expanded disclosures regarding fair value
measurements. SFAS 157 defines fair value as the exchange
price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction
between market participants on the measurement date.
SFAS 157 also establishes a fair value hierarchy that
requires an entity to maximize the use of observable inputs,
where available, and minimize the use of unobservable inputs
when measuring fair value. The standard describes three levels
of inputs that may be used to measure fair value:
|
|
|
|
|
Level 1
|
|
|
|
Quoted prices in active markets for identical assets or
liabilities.
|
Level 2
|
|
|
|
Observable inputs, other than Level 1 prices, such as
quoted prices in active markets for similar assets and
liabilities, quoted prices for identical or similar assets and
liabilities in markets that are not active, or other inputs that
are observable or can be corroborated by observable market data.
|
Level 3
|
|
|
|
Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the
assets or liabilities. This includes certain pricing models,
discounted cash flow methodologies and similar techniques that
use significant unobservable inputs.
|
The following table summarizes the composition of the
Companys investments at January 31, 2009 and
January 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Aggregate
|
|
|
Short Term
|
|
|
Long Term
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Marketable
|
|
|
Marketable
|
|
January 31, 2009
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Securities
|
|
|
Securities
|
|
|
Auction Rate Securities
|
|
$
|
54,175
|
|
|
$
|
|
|
|
$
|
(4,953
|
)
|
|
$
|
49,222
|
|
|
$
|
|
|
|
$
|
49,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,175
|
|
|
$
|
|
|
|
$
|
(4,953
|
)
|
|
$
|
49,222
|
|
|
$
|
|
|
|
$
|
49,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Aggregate
|
|
|
Short Term
|
|
|
Long Term
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Marketable
|
|
|
Marketable
|
|
January 31, 2008
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Securities
|
|
|
Securities
|
|
|
Corporate debt securities
|
|
$
|
9,867
|
|
|
$
|
103
|
|
|
$
|
|
|
|
$
|
9,970
|
|
|
$
|
9,970
|
|
|
$
|
|
|
U.S. treasury and government agency securities
|
|
|
2,001
|
|
|
|
3
|
|
|
|
|
|
|
|
2,004
|
|
|
|
2,004
|
|
|
|
|
|
Commercial Paper
|
|
|
16,709
|
|
|
|
166
|
|
|
|
|
|
|
|
16,875
|
|
|
|
16,875
|
|
|
|
|
|
Auction Rate Securities
|
|
|
62,075
|
|
|
|
|
|
|
|
|
|
|
|
62,075
|
|
|
|
8,300
|
|
|
|
53,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
90,652
|
|
|
$
|
272
|
|
|
$
|
|
|
|
$
|
90,924
|
|
|
$
|
37,149
|
|
|
$
|
53,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table details the fair value measurements within
the fair value hierarchy of the Companys financial assets
at January 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
Total Fair Value at
|
|
|
Reporting Date Using
|
|
|
|
January 31, 2009
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
97,376
|
|
|
$
|
97,376
|
|
|
$
|
|
|
|
$
|
|
|
Certificates of deposit
|
|
|
1,118
|
|
|
|
1,118
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
|
49,222
|
|
|
|
|
|
|
|
|
|
|
|
49,222
|
|
Put right related to auction rate securities
|
|
|
1,324
|
|
|
|
|
|
|
|
|
|
|
|
1,324
|
|
Foreign currency forward contracts
|
|
|
84
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
149,124
|
|
|
$
|
98,494
|
|
|
$
|
84
|
|
|
$
|
50,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reflects the activity for the Companys
major classes of assets measured at fair value using
level 3 inputs (in thousands):
|
|
|
|
|
|
|
Auction Rate
|
|
|
|
Securities
|
|
|
Balance as of January 31, 2008
|
|
$
|
|
|
Transfers in from level 1
|
|
|
55,875
|
|
Unrealized losses included in accumulated other comprehensive
loss
|
|
|
(3,402
|
)
|
Unrealized losses included in other income (expense), net
|
|
|
(1,551
|
)
|
Sales of securities
|
|
|
(1,700
|
)
|
|
|
|
|
|
Balance as of January 31, 2009
|
|
$
|
49,222
|
|
|
|
|
|
|
At January 31, 2009 ARS represented 33% of total financial
assets measured at fair value.
At January 31, 2009, the Company grouped money market funds
and certificates of deposit using a level 1 valuation
because market prices were readily available. At
January 31, 2009, the foreign currency forward contract
valuation inputs were based on quoted prices and quoted pricing
intervals from public data and did not involve management
judgment. Accordingly, these have been classified within
Level 2 of the fair value hierarchy. At January 31,
2009, the fair value of the Companys assets grouped using
a level 3 valuation consisted of ARS, most of which were
AAA-rated bonds collateralized by federally guaranteed student
loans. ARS are long-term variable rate bonds tied to short-term
interest rates that are reset through a Dutch
auction process that typically occurs every 7 to
35 days. Historically, the carrying value (par value) of
the ARS approximated fair market value due to the resetting of
variable interest rates.
Beginning in late February 2008, however, the auctions for ARS
then held by the Company were unsuccessful. As a result, the
interest rates on ARS reset to the maximum rate per the
applicable investment offering statements. The Company will not
be able to liquidate affected ARS until a future auction on
these investments is successful, a buyer is found outside the
auction process, the securities are called or refinanced by the
issuer, or the securities mature. Due to these liquidity issues,
the Company performed a discounted cash flow analysis to
determine the estimated fair value of these investments. The
discounted cash flow analysis performed by the Company
considered the timing of expected future successful auctions,
the impact of extended periods of maximum interest rates,
66
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
collateralization of underlying security investments and the
creditworthiness of the issuer. The discounted cash flow
analysis included the following assumptions:
|
|
|
Expected Term
|
|
3 Years
|
Illiquidity Discount
|
|
1.5-1.8%
|
Discount Rate
|
|
4.45%
|
The discount rate was determined using a proxy based upon the
current market rates for successful auctions within the
AAA-rated ARS market. The expected term was based on
managements estimate of future liquidity. The illiquidity
discount was based on the levels of federal insurance or FFELP
backing for each security.
On November 7, 2008, the Company accepted an offer from UBS
AG (UBS), one of the Companys brokers, which
provided the Company with rights (the Put Right) to
sell UBS $15.8 million of its ARS investments at par, which
were purchased through UBS, at any time during a two-year period
beginning June 30, 2010. In addition, UBS agreed to provide
a no net cost loan equal to 75% of the par value of the
Companys ARS positions with UBS should the Company desire
such a loan before June 30, 2010. Before accepting the Put
Right, the Company had the intent and ability to hold these
securities until a successful auction or another liquidating
event occurred and had previously recognized the unrealized loss
as a temporary impairment and recorded the decline in value in
accumulated other comprehensive loss. As a result of
accepting the Put Right, the Company has entered into a separate
financial instrument that has been recorded as an asset that is
initially measured at its fair value. The Company has elected to
apply the fair value option in SFAS 159 to the Put Right
and accordingly will record future changes in fair value of the
Put Right through earnings. The Company also elected to
reclassify the ARS investment subject to the Put Right from
available-for-sale
to trading securities and accordingly will record future changes
in fair value through earnings. The Company recorded the fair
value of the Put Right, $1.3 million, as an unrealized gain
in other income (expense), net and the unrealized
loss of $1.6 million on ARS classified as trading
securities in other income (expense), net in its
consolidated statement of operations. The Put Right represents
the right to sell the corresponding ARS back to UBS at par
beginning June 30, 2010 and has therefore been classified
as a long-term asset in the Companys consolidated balance
sheet. As part of assessing the fair value of the Put Right in
future periods, the Company will continue to assess the economic
ability of UBS to meet its obligation under the Put Right.
In accordance with FSP
FAS 115-1
and Staff Accounting Bulletin Topic 5M, the Company
considered the following factors in determining whether the
impairment related to its
available-for-sale
securities was
other-than-temporary
or temporary: (i) the nature of the investment;
(ii) the cause and duration of the impairment;
(iii) the financial condition and near-term prospects of
the Company; (iv) the ability to hold the security for a
period of time sufficient to allow for any anticipated recovery
in fair value; and (v) the extent to which fair value was
less than cost. The Company specifically noted that it had a
cash and cash equivalent balance of approximately
$111.6 million in investments other than ARS, and that the
Company continued to generate positive cash flow on a quarterly
basis. As a result, as of January 31, 2009, the Company
recorded an unrealized loss of $3.4 million related to the
temporary impairment of the
available-for-sale
securities, which was included in accumulated other
comprehensive loss within stockholders equity.
Inventory consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Raw materials
|
|
$
|
770
|
|
|
$
|
2,203
|
|
Finished goods
|
|
|
17,639
|
|
|
|
29,408
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,409
|
|
|
$
|
31,611
|
|
|
|
|
|
|
|
|
|
|
67
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Property
and Equipment
|
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Engineering test equipment
|
|
$
|
17,015
|
|
|
$
|
11,047
|
|
Computer equipment and software
|
|
|
5,508
|
|
|
|
4,329
|
|
Furniture and fixtures
|
|
|
860
|
|
|
|
215
|
|
Leasehold improvements
|
|
|
754
|
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,137
|
|
|
|
15,857
|
|
Less: accumulated depreciation
|
|
|
14,551
|
|
|
|
10,390
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,586
|
|
|
$
|
5,467
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the fiscal years ended January 31,
2009, 2008 and 2007, was $4.5 million, $3.3 million,
and $2.6 million, respectively. During the fiscal years
ended January 31, 2009, 2008 and 2007, the Company disposed
of property and equipment with an original cost of
$0.4 million, $0.0 million, and $0.5 million,
respectively, resulting in a net gain on disposal of
$0.0 million in each of the fiscal years. During the fiscal
years ended January 31, 2009, 2008 and 2007,
$2.7 million, $3.4 million and $0.4 million of
inventory was reclassified to fixed assets representing a non
cash increase in property and equipment respectively.
On May 9, 2008, the Company acquired by merger all of the
outstanding capital stock of NuTech Solutions, Inc.,
(NuTech), a privately held advanced analytics and
optimization solutions company based in Charlotte,
North Carolina. The results of NuTechs operations
have been included in the consolidated financial statements of
the Company since that date.
The aggregate purchase price was approximately
$6.6 million, including $0.2 million of capitalized
acquisition costs. Capitalized acquisition costs consist of fees
for legal, consulting and accounting services. The acquisition
was accounted for using the purchase method of accounting in
accordance with SFAS 141 and SFAS 142. The following
table summarizes the allocation of the purchase price (in
thousands):
|
|
|
|
|
Total Consideration:
|
|
|
|
|
Cash paid
|
|
$
|
6,392
|
|
Transaction costs
|
|
|
167
|
|
|
|
|
|
|
Total purchase consideration
|
|
$
|
6,559
|
|
|
|
|
|
|
Allocation of the purchase consideration:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
338
|
|
Accounts receivable
|
|
|
477
|
|
Prepaid expenses and other assets
|
|
|
63
|
|
Property and equipment
|
|
|
83
|
|
Deferred tax assets, net
|
|
|
1,370
|
|
Identifiable intangible assets
|
|
|
3,400
|
|
Goodwill
|
|
|
2,000
|
|
|
|
|
|
|
Total assets acquired
|
|
|
7,731
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
1,172
|
|
|
|
|
|
|
Total net assets acquired
|
|
$
|
6,559
|
|
68
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The purchase price allocation resulted in $2.0 million of
goodwill, none of which is deductible for income tax purposes.
The resulting amount of goodwill reflects the Companys
expectations of the following synergistic benefits: (1) the
potential to extend the Companys capabilities in advanced
analytics by leveraging NuTechs intellectual property and
expertise and (2) the potential to sell the Companys
products into NuTechs traditional customer base.
The following table reflects the fair value of the acquired
identifiable intangible assets and related estimates of useful
lives (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
Useful Life
|
|
|
|
Value
|
|
|
(Years)
|
|
|
Developed technology
|
|
$
|
1,300
|
|
|
|
7
|
|
Order backlog
|
|
|
300
|
|
|
|
2
|
|
Customer relationships
|
|
|
1,300
|
|
|
|
6
|
|
Trademark and tradename
|
|
|
500
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the pro forma statements of
operations obtained by combining the historical consolidated
statements of operations of the Company and NuTech for the
fiscal years ended January 31, 2009 and 2008, giving effect
to the merger as if it occurred on February 1, 2008 and
2007, respectively (in thousands, except share and per share
data):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Pro forma revenue
|
|
$
|
189,420
|
|
|
$
|
130,697
|
|
Pro forma operating income (loss)
|
|
$
|
12,580
|
|
|
$
|
(1,324
|
)
|
Pro forma net income (loss)
|
|
$
|
31,398
|
|
|
$
|
(11
|
)
|
Pro forma accretion to preferred stock
|
|
$
|
|
|
|
$
|
(2,853
|
)
|
Pro forma net income (loss) attributable to common stockholders
|
|
$
|
31,398
|
|
|
$
|
(2,864
|
)
|
Pro forma net income (loss) per share attributable to common
stockholders:
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per share
|
|
$
|
0.53
|
|
|
$
|
(0.0
|
)
|
Pro forma accretion to preferred stock
|
|
|
|
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per share attributable to common
stockholders
|
|
$
|
0.53
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per share
|
|
$
|
0.50
|
|
|
$
|
(0.0
|
)
|
Pro forma accretion to preferred stock
|
|
|
|
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per share attributable to common
stockholders
|
|
$
|
0.50
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,939,422
|
|
|
|
33,988,696
|
|
Diluted
|
|
|
62,764,914
|
|
|
|
33,988,696
|
|
69
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The pro forma net income (loss) and net income (loss) per share
for each period presented primarily includes adjustments for
amortization of intangibles, interest income and interest
expense. This pro forma information does not purport to indicate
the results that would have actually been obtained had the
acquisition been completed on the assumed dates, or which may be
realized in the future.
|
|
8.
|
Goodwill
and Acquired Intangible Assets
|
Goodwill
The carrying amount of goodwill of the Company was
$2.0 million as of January 31, 2009 and $0 as of
January 31, 2008. The Companys goodwill resulted from
the acquisition of NuTech in May 2008 (see Note 7). In
accordance with SFAS 142, goodwill is not amortized, but
instead is reviewed for impairment at least annually in the
fourth quarter or more frequently when events and circumstances
occur indicating that the recorded goodwill may be impaired. The
Companys annual goodwill impairment test did not result in
an impairment in fiscal 2009.
The change in the carrying amount of goodwill for the fiscal
year ended January 31, 2009 is as follows
(in thousands):
|
|
|
|
|
Balance as of January 31, 2008
|
|
$
|
0
|
|
Goodwill related to the acquisition of NuTech
|
|
|
2,000
|
|
|
|
|
|
|
Balance as of January 31, 2009
|
|
$
|
2,000
|
|
|
|
|
|
|
Acquired
Intangible Assets
The carrying amount of acquired intangible assets was
$2.9 million as of January 31, 2009 and $0 as of
January 31, 2008. Intangible assets acquired in a business
combination are recorded under the purchase method of accounting
at their estimated fair values at the date of acquisition. The
Company amortizes acquired intangible assets over their
estimated useful lives.
Acquired intangible assets consist of the following as of
January 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Developed technology
|
|
$
|
1,300
|
|
|
$
|
(136
|
)
|
|
$
|
1,164
|
|
Order backlog
|
|
|
300
|
|
|
|
(110
|
)
|
|
|
190
|
|
Customer relationships
|
|
|
1,300
|
|
|
|
(158
|
)
|
|
|
1,142
|
|
Trademark and tradename
|
|
|
500
|
|
|
|
(61
|
)
|
|
|
439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,400
|
|
|
$
|
(465
|
)
|
|
$
|
2,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of acquired intangible assets was approximately
$465,000 and $0 for the fiscal years ended January 31, 2009
and 2008, respectively.
70
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is the expected future amortization expense of the
Companys acquired intangible assets as of January 31,
2009 for the respective fiscal years ending January 31 (in
thousands):
|
|
|
|
|
2010
|
|
$
|
636
|
|
2011
|
|
|
526
|
|
2012
|
|
|
486
|
|
2013
|
|
|
487
|
|
2014
|
|
|
486
|
|
Thereafter
|
|
|
314
|
|
|
|
|
|
|
Total
|
|
$
|
2,935
|
|
|
|
|
|
|
The weighted average useful life of acquired intangible assets
is 6 years.
On August 6, 2008, the Company entered into a purchase and
distribution agreement with Intelligent Integration Systems,
Inc. to acquire technology, including spatial analytic
capabilities and an extended SQL toolkit. Under the terms of the
agreement, the Company will pay up to $6.0 million in cash
through August 6, 2011, with a required minimum payment of
$3.0 million, in exchange for an exclusive license to
distribute the technology with transfer of ownership to the
Company upon completion of the cash payments. As of
January 31, 2009, license costs of $2.3 million, net
of amortization, were recorded as other long-term assets on the
balance sheet. Amortization of the license costs was
approximately $0.5 million for the fiscal year ended
January 31, 2009.
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Corporate taxes
|
|
$
|
117
|
|
|
$
|
933
|
|
Accrued warranty
|
|
|
747
|
|
|
|
1,141
|
|
Accrued license payable
|
|
|
973
|
|
|
|
|
|
Sales meetings and events
|
|
|
950
|
|
|
|
1,103
|
|
Legal/audit/compliance
|
|
|
682
|
|
|
|
411
|
|
Rent/phone/utilities
|
|
|
869
|
|
|
|
106
|
|
Partner fees
|
|
|
192
|
|
|
|
168
|
|
Travel and entertainment
|
|
|
447
|
|
|
|
224
|
|
Inventory items
|
|
|
238
|
|
|
|
581
|
|
Other
|
|
|
1,086
|
|
|
|
827
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,301
|
|
|
$
|
5,494
|
|
|
|
|
|
|
|
|
|
|
In June 2005, the Company entered into a credit line agreement
with an outside party. Under this agreement, the Company was
able to borrow up to $8.0 million. The Company was required
to make interest only payments on any amounts borrowed through
June 2006 and was then required to make 36 equal consecutive
monthly installments of principal and interest through June
2009. The Company had borrowed the full $8.0 million as of
June 30, 2006. Interest rates were fixed for the term of
the loan at the time of each advance and were 10%, 10.75%,
11.75% and
71
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
12%. The loan was secured by all assets of the Company,
excluding intellectual property. All borrowings under this
credit line were repaid in full in July 2007. In addition, in
conjunction with the line of credit, the Company issued warrants
to purchase 125,490 shares of Series D preferred stock
at a price of $2.55 per share. These warrants were exercised in
July 2007. As the credit line was no longer outstanding, the
remaining debt discount and premium were recorded as interest
expense during the fiscal year ended January 31, 2008.
In January 2007, the Company entered into a revolving credit
line agreement with an outside party. Under this agreement, the
Company could borrow up to $15.0 million. Borrowings under
the line were due and payable on the maturity date of
January 31, 2008. The interest on this revolving credit
line was a floating rate of 1% below the prime rate, payable
monthly. The Company borrowed $4.0 million in April 2007
and $4.0 million in May 2007 under the revolving line of
credit. The Company repaid the outstanding balance under the
revolving line of credit of $8.0 million in July 2007. This
agreement expired on January 31, 2008.
|
|
12.
|
Warrants
for Preferred Stock
|
In conjunction with obtaining and drawing down on lines of
credit, the Company issued warrants to purchase
80,000 shares of Series A convertible preferred stock
and 36,000 shares of Series B convertible redeemable
preferred stock. Upon the closing of the initial public
offering, these warrants converted into warrants to purchase
58,000 shares of common stock. In August 2005, in
accordance with
FSP 150-5,
Issuers Accounting under FASB Statement
No. 150 for Freestanding Warrants and Other Similar
Instruments on Shares That Are Redeemable,
the Company reclassified all of its freestanding preferred
stock warrants as a liability and began adjusting the warrants
to their respective fair values at each reporting period. In the
fiscal year ended January 31, 2007, the Company recorded
$0.1 million of expense to reflect the increase in fair
value between February 1, 2006 and January 31, 2007.
In the fiscal year ended January 31, 2008, the Company
recorded $0.3 million of additional expense to reflect the
increase in fair value between February 1, 2007 and the
closing of the Companys initial public offering. Upon the
closing of the initial public offering in July 2007, the
preferred stock warrant liability was reclassified to additional
paid-in capital and is no longer required to be adjusted at each
reporting period.
In conjunction with obtaining and drawing down on a line of
credit, the Company issued warrants to purchase
125,490 shares of Series D convertible preferred
stock. These warrants were exercised in July 2007 prior to the
closing date of the initial public offering.
As discussed above, the Company reclassified all of its
freestanding preferred stock warrants as a liability and began
adjusting the warrants to their respective fair values at each
reporting period. Upon exercise of the warrants, the liability
was adjusted to the intrinsic value plus cash consideration and
reclassified as preferred stock in the mezzanine section of the
balance sheet. The line of credit was closed, therefore, the
remaining debt premium and debt discounts which were recorded at
the issuance of the warrants were recorded as interest expense
during the second quarter of fiscal 2008.
|
|
13.
|
Stock
Incentive Plans
|
The Company has two stock plans. The Companys 2007 Stock
Incentive Plan (2007 Plan), was adopted by the board
of directors on March 21, 2007 and approved by stockholders
on April 27, 2007. The 2007 Plan permits the Company to
make grants of incentive and nonqualified stock options, stock
appreciation rights, restricted stock, restricted stock units
and other stock-based awards. These awards may be granted to the
Companys employees, officers, directors, consultants, and
advisors. Stock option vesting typically occurs over five years
and is at the discretion of the Board of Directors. Options
granted typically have a maximum term of seven years. Upon
approval of the plan, the Company reserved 2,000,000 shares
of its common stock for the issuance under the 2007 Plan. On
February 1, 2008, 2,015,679 shares were added to the
shares issuable under the 2007 Plan.
The Companys 2000 Stock Incentive Plan, as amended
(2000 Plan) provided for the grant of incentive
stock options and nonqualified stock options, restricted stock,
warrants and stock grants for the purchase of up to
72
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
15,721,458 shares of common stock, to employees, officers,
directors and consultants of the Company. The 2000 Plan is
administered by the Companys board of directors. In
connection with the adoption of the 2007 Plan, the board of
directors determined not to grant any further awards under the
2000 Plan subsequent to the closing of the Companys
initial public offering.
Non-employee
Awards
At various times during the fiscal years ended 2001 to 2008, the
Company issued equity instruments to non-employees, including
warrants and options to purchase common stock. In accordance
with
EITF 96-18,
Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services, the Company measures and
records the value of the shares over the period of time services
are provided. Stock-based compensation expense for non-employees
for the fiscal years ended January 31, 2009, 2008 and 2007
was approximately $14,000, $46,000 and $37,000, respectively.
At January 31, 2009, nonstatutory options to purchase
12,500 shares of common stock remained outstanding, of
which 10,000 were fully vested and exercisable. At
January 31, 2009, there were warrants outstanding to
purchase 34,893 shares of common stock, consisting of
warrants to purchase 5,893 shares at $0.002 per share,
24,000 shares at $0.20 per share and 5,000 shares at
$0.10 per share. These warrants are exercisable and will expire
September 30, 2010.
Restricted
Common Stock
In June 2008, the Company awarded each of its non-employee
directors shares of restricted common stock under the 2007 Plan
having a market value on the date of grant of $60,000 for each
director. The vesting term of these awards is one year, assuming
continued service. The vested shares under these awards can not
be sold until the directors separation from the Company,
or upon an earlier acquisition of the Company. The Company
amortizes the fair market value of the awards at the time of the
grant to expense over the period of vesting. Recipients of
restricted stock have the right to vote such shares and receive
dividends. The fair value of restricted stock awards is
determined based on the number of shares granted and the market
value of the Companys common stock on the grant date,
adjusted for any forfeiture factor.
The following table summarizes the Companys restricted
stock activity during the fiscal year ended January 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Grant Date Fair
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Value
|
|
|
Non-vested as of January 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
27,708
|
|
|
$
|
0.001
|
|
|
$
|
12.99
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of January 31, 2009
|
|
|
27,708
|
|
|
$
|
0.001
|
|
|
$
|
12.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Options
The following table summarizes stock option activity for the
fiscal year ended January 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Shares
|
|
|
Number of
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Available
|
|
|
Options
|
|
|
Exercise
|
|
|
Remaining Life
|
|
|
Intrinsic
|
|
|
|
for Grant
|
|
|
Outstanding
|
|
|
Price
|
|
|
in Years
|
|
|
Value
|
|
|
Outstanding at January 31, 2008
|
|
|
1,394,500
|
|
|
|
9,414,667
|
|
|
$
|
4.12
|
|
|
|
|
|
|
|
|
|
Additional shares authorized
|
|
|
2,015,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(3,365,500
|
)
|
|
|
3,365,500
|
|
|
$
|
10.05
|
|
|
|
|
|
|
|
|
|
Restricted shares granted
|
|
|
(27,708
|
)
|
|
|
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
(2,002,829
|
)
|
|
$
|
1.35
|
|
|
|
|
|
|
|
|
|
Forfeited, cancelled or expired(1)
|
|
|
99,500
|
|
|
|
(302,707
|
)
|
|
$
|
7.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2009
|
|
|
116,471
|
|
|
|
10,474,631
|
|
|
$
|
6.44
|
|
|
|
6.71 years
|
|
|
$
|
17.7 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 31, 2009
|
|
|
|
|
|
|
3,610,893
|
|
|
$
|
3.44
|
|
|
|
6.40 years
|
|
|
$
|
12.2 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at January 31, 2009
|
|
|
|
|
|
|
10,306,994
|
|
|
$
|
6.41
|
|
|
|
6.70 years
|
|
|
$
|
17.6 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Options cancelled under the 2000 Plan after July 24, 2007
are not considered available for grant, as the Company is no
longer granting options under this plan. For the fiscal year
ended January 31, 2009, options for 203,207 shares
granted under the 2000 Plan were cancelled. |
The aggregate intrinsic value in the table above was calculated
as the difference between the exercise price of the stock
options and the fair value of the underlying common stock as of
January 31, 2009, which was $6.07 per share. The aggregate
intrinsic value of options exercised for the years ended
January 31, 2009, 2008 and 2007 was $19.2 million,
$6.9 million and $0.8 million, respectively.
The Company recognized excess tax benefits of $1.9 million
for the fiscal year ended January 31, 2009 related to the
exercise of stock options, which was recorded as an increase to
additional
paid-in-capital.
At January 31 2009, unrecognized compensation expense related to
unvested stock options and unvested restricted shares was
$27.1 million and $0.1 million, respectively, which is
expected to be recognized over a weighted-average period of 3.4
and 0.4 years, respectively.
Income before income tax expense consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Domestic
|
|
$
|
15,747
|
|
|
$
|
2,136
|
|
|
$
|
(8,659
|
)
|
Foreign
|
|
|
352
|
|
|
|
819
|
|
|
|
684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,099
|
|
|
$
|
2,955
|
|
|
$
|
(7,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of income taxes consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
3,505
|
|
|
$
|
16
|
|
|
$
|
|
|
Deferred
|
|
|
(16,177
|
)
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
1,008
|
|
|
|
39
|
|
|
|
|
|
Deferred
|
|
|
(4,406
|
)
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
853
|
|
|
|
906
|
|
|
|
|
|
Deferred
|
|
|
(203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income tax
|
|
$
|
(15,420
|
)
|
|
$
|
961
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net deferred tax assets were as follows at
January 31, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Net operating loss carryforwards
|
|
$
|
5,244
|
|
|
$
|
10,410
|
|
Deferred revenue
|
|
|
6,066
|
|
|
|
3,782
|
|
Research and development credit carryforwards
|
|
|
3,414
|
|
|
|
4,394
|
|
Inventory
|
|
|
2,362
|
|
|
|
655
|
|
Unrealized loss on marketable securities
|
|
|
1,311
|
|
|
|
|
|
Capitalized research and development expenses
|
|
|
2,392
|
|
|
|
2,867
|
|
Depreciation
|
|
|
523
|
|
|
|
554
|
|
Stock-based compensation
|
|
|
2,503
|
|
|
|
18
|
|
Accrued expenses and other
|
|
|
1,567
|
|
|
|
1,003
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
25,382
|
|
|
|
23,683
|
|
Deferred tax valuation allowance
|
|
|
(2,538
|
)
|
|
|
(23,683
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
22,844
|
|
|
|
|
|
Financial basis in excess of tax basis of intangibles
|
|
|
(706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,138
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities are recognized based on the
expected future tax consequences, using current tax rates, of
temporary differences between the financial statement carrying
amounts and the income tax basis of assets and liabilities. A
valuation allowance is applied against any net deferred tax
asset if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will
not be realized.
As of the end of the third quarter of fiscal 2009, a full
valuation allowance was recorded against the Companys net
deferred tax assets (consisting primarily of U.S. net
operating loss carryforwards and tax credit carryforwards).
However, based upon the Companys operating results over
recent years and through January 31, 2009 as well as an
assessment of the Companys expected future results of
operations, the Company determined in the fourth quarter of
fiscal 2009 that it had become more likely than not
that the Company would realize a substantial portion of the
Companys deferred tax assets in the U.S. As a result,
the Company reduced its valuation allowance during the fourth
quarter of fiscal 2009, which resulted in recognition of
deferred tax assets of $23.8 million, a one-time
75
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
income tax benefit of approximately $20.8 million, a
$1.4 million reduction to goodwill for acquired tax
benefits and $1.6 million reserve for uncertain tax positions in
the U.S., which was recorded as a reduction to our tax
carryforward attributes.
As of January 31, 2009, the Company had a remaining
valuation allowance of $1.7 million against net deferred
tax assets in the U.S. of which $1.3 million was
recorded against other comprehensive income, and a remaining
valuation allowance of $0.8 million against net deferred
tax assets in certain foreign jurisdictions. The valuation
allowance recorded against net deferred tax assets in the
U.S. consisted of capital losses that the Company had
determined were not more likely than not to be realized. The
valuation allowance recorded against net deferred tax assets of
certain foreign jurisdictions consisted primarily of net
operating loss carryforwards that will likely expire without
being utilized.
At January 31, 2009, the Company had available net
operating loss carryforwards for federal tax purposes of
approximately $16.0 million, of which, approximately
$9.4 million was related to excess tax benefits from
share-based payments which were not reflected as deferred tax
assets, the benefits of which will be credited to additional
paid-in capital when the deductions reduces current taxes
payable. These federal net operating loss carryforwards may be
utilized to offset future taxable income and expire at various
dates through fiscal year 2028. The Company also had available
research and development credit carryforwards to offset future
federal and state taxes of approximately $3.1 million and
$2.6 million, respectively, which may be used to offset
future taxable income and expire at various dates through fiscal
year 2029 and 2024 for federal and state purposes, respectively.
Included in the research and development credit carryforwards
were approximately $1.2 million and $0.3 million of
federal and state tax credits, respectively, generated from
excess tax deductions related to share-based payment awards
which are not reflected as deferred tax assets, the tax benefits
of which will be credited to additional paid-in capital when the
credits reduce current taxes payable. Under the Internal Revenue
Code of 1986, as amended, certain substantial changes in the
Companys ownership may result in an annual limitation on
the amount of net operating loss and tax credit carryforwards
that may be utilized in future years.
A reconciliation of the Companys effective tax rate to the
statutory federal rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
U.S. federal income tax statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
(35.0
|
)%
|
State taxes, net of federal taxes
|
|
|
3.3
|
%
|
|
|
(5.0
|
)
|
|
|
(2.4
|
)
|
Tax rate differential for international jurisdictions
|
|
|
0.3
|
%
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
Federal and state tax credits
|
|
|
(6.6
|
)%
|
|
|
(10.7
|
)
|
|
|
(14.0
|
)
|
Permanent items
|
|
|
14.3
|
%
|
|
|
3.6
|
|
|
|
1.8
|
|
Stock-based compensation
|
|
|
1.7
|
%
|
|
|
50.6
|
|
|
|
3.7
|
|
Change in valuation allowances
|
|
|
(143.8
|
)%
|
|
|
(41.2
|
)
|
|
|
46.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95.8
|
)%
|
|
|
32.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 1, 2007, the Company adopted the provisions of
FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of
SFAS 109. The new standard defines the threshold
for recognizing the benefits of tax return positions in the
financial statements as more-likely-than-not to be
sustained by the taxing authorities based solely on the
technical merits of the position. If the recognition threshold
is met, the tax benefit is measured and recognized as the
largest amount of tax benefit, in the Companys judgment,
which is greater than 50% likely to be realized. The Company did
not recognize any change in its reserve for uncertain tax
positions as a result of the adoption of this standard. At the
adoption date of February 1, 2007, the Company had
approximately $0.3 million of unrecognized tax benefits.
76
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a roll forward of the Companys gross
liability for unrecognized income tax benefits for the fiscal
years ended January 31, 2009, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Balance as of the beginning of the year
|
|
$
|
324
|
|
|
$
|
250
|
|
|
$
|
250
|
|
Increases related to prior year tax positions
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
Increases related to current year tax positions
|
|
|
2,245
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of the end of the year
|
|
$
|
3,869
|
|
|
$
|
324
|
|
|
$
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the unrecognized tax benefits of $3.9 million
at January 31, 2009 was $1.9 million of tax benefits
that, if recognized, would reduce the Companys annual
effective tax rate. The Company estimates that its total
unrecognized tax benefit will not change significantly within
the next twelve months.
The Companys accounting policy is to recognize interest
and/or
penalties related to income tax matters in income tax expense.
The Company had no accrual for interest or penalties on the
Companys balance sheet at January 31, 2009, and has
not recognized interest or penalties in the statement of
operations for the fiscal year ended January 31, 2009. The
Company is not currently under federal, state or foreign income
tax examination.
The major domestic tax jurisdictions that remain subject to
examination are: U.S. federal fiscal years
2004-2008
and U.S. states fiscal years
2004-2008.
The Company is no longer subject to IRS examination for years
prior to 2004, although carryforward attributes that were
generated prior to 2004 may still be adjusted upon
examination by the IRS if they either have been or will be used
in a future period. Within limited exceptions, the Company is no
longer subject to state or local examinations for years prior to
2004, however, carryforward attributes that were generated prior
to 2004 may still be adjusted upon examination by state or
local tax authorities if they either have been or will be used
in a future period. The major international tax jurisdictions
that remain subject to examination are: UK fiscal
years
2004-2008,
Japan fiscal years
2006-2008
and Australia fiscal years
2005-2008.
Thorough January 31, 2009, the Company had not provided
deferred income taxes on the distributed earnings of its foreign
subsidiaries because such earnings were intended to be
permanently reinvested outside of the United States.
Determination of the potential deferred income tax liability on
these undistributed earnings is not practicable because such
liability, if any, is dependent on circumstances existing if and
when remittance occurs. At January 31, 2009, the Company
had $1.8 million of undistributed earnings in its foreign
subsidiaries.
|
|
15.
|
Commitments
and Contingencies
|
Lease
Obligations
The Company leases its office space and certain equipment under
noncancelable operating lease agreements. Total rent expense
under the operating leases for the fiscal years ended
January 31, 2009, 2008 and 2007 was $3.3 million,
$2.5 million and $2.1 million, respectively.
On January 2, 2008, the Company entered into a lease as
amended on July 8, 2008, to rent approximately
68,000 square feet of office space in Marlborough,
Massachusetts to be used as the Companys primary business
location. The lease term expires in August, 2015.
77
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total lease commitments for office space and equipment under
noncancelable operating leases are as follows (in thousands):
|
|
|
|
|
|
|
Operating
|
|
Fiscal Year Ended January 31,
|
|
Leases
|
|
|
2010
|
|
$
|
2,195
|
|
2011
|
|
|
1,728
|
|
2012
|
|
|
1,705
|
|
2013
|
|
|
1,768
|
|
2014
|
|
|
1,713
|
|
Thereafter
|
|
|
2,603
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
11,712
|
|
|
|
|
|
|
Guarantees
and Indemnification Obligations
The Company enters into standard indemnification agreements in
the ordinary course of business. Pursuant to these agreements,
the Company indemnifies and agrees to reimburse the indemnified
party for losses incurred by the indemnified party, generally
the Companys customers, in connection with any patent,
copyright, trade secret or other proprietary right infringement
claim by any third party with respect to the Companys
products. The term of these indemnification agreements is
generally perpetual any time after execution of the agreement.
Based on historical information and information known as of
January 31, 2009, the Company does not expect it will incur
any significant liabilities under these indemnification
agreements.
Warranty
The Company provides warranties on most products and has
established a reserve for warranty based on identified warranty
costs. The reserve is included as part of accrued expenses
(Note 10) in the accompanying balance sheets.
Activity related to the warranty accrual was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Balance at beginning of period
|
|
$
|
1,141
|
|
|
$
|
1,093
|
|
|
$
|
690
|
|
Provision
|
|
|
2,035
|
|
|
|
2,071
|
|
|
|
1,737
|
|
Warranty usage*
|
|
|
(2,429
|
)
|
|
|
(2,023
|
)
|
|
|
(1,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
747
|
|
|
$
|
1,141
|
|
|
$
|
1,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Warranty usage includes expiration of product warranty |
|
|
16.
|
Industry
Segment, Geographic Information and Significant
Customers
|
SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information, establishes
standards for reporting information about operating segments.
Operating segments are defined as components of an enterprise
for which separate financial information is available and
evaluated regularly by the chief operating decision-maker, or
decision-making group, in deciding how to allocate resources and
in assessing performance. The Company is organized as, and
operates in, one reportable segment: the development and sale of
data warehouse appliances. Our chief operating decision-maker is
our Chief Executive Officer. Our Chief Executive Officer reviews
financial information presented on a consolidated basis,
accompanied by information about revenue by geographic region,
for purposes of evaluating financial performance and allocating
resources. The Company and its Chief Executive
78
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Officer evaluate performance based primarily on revenue in the
geographic locations in which the Company operates. Revenue is
attributed by geographic location based on the location of the
end customer.
Revenue, classified by the major geographic areas in which the
Companys customers are located, was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
North America
|
|
$
|
146,217
|
|
|
$
|
104,087
|
|
|
$
|
62,282
|
|
International
|
|
|
41,552
|
|
|
|
22,599
|
|
|
|
17,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
187,769
|
|
|
$
|
126,686
|
|
|
$
|
79,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys total assets,
by geographic location (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
North America
|
|
$
|
249,085
|
|
|
$
|
189,403
|
|
International
|
|
|
9,774
|
|
|
|
9,349
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
258,859
|
|
|
$
|
198,752
|
|
|
|
|
|
|
|
|
|
|
|
|
17.
|
Quarterly
Information (unaudited and in thousands, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
|
|
April 30,
|
|
|
July 31,
|
|
|
October 31,
|
|
|
January 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
Revenue
|
|
$
|
25,342
|
|
|
$
|
28,400
|
|
|
$
|
33,418
|
|
|
$
|
39,526
|
|
Gross margin
|
|
|
15,299
|
|
|
|
16,963
|
|
|
|
20,094
|
|
|
|
24,087
|
|
Net income (loss)
|
|
|
(1,905
|
)
|
|
|
(1,096
|
)
|
|
|
1,586
|
|
|
|
3,409
|
|
Net income (loss) per share attributable to common
stockholders-basic
|
|
$
|
(0.44
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
0.03
|
|
|
$
|
0.06
|
|
Net income (loss) per share attributable to common
stockholders-diluted
|
|
$
|
(0.44
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
0.02
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
|
|
April 30,
|
|
|
July 31,
|
|
|
October 31,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
Revenue
|
|
$
|
39,576
|
|
|
$
|
47,035
|
|
|
$
|
50,579
|
|
|
$
|
50,579
|
|
Gross margin
|
|
|
24,878
|
|
|
|
30,142
|
|
|
|
31,247
|
|
|
|
31,941
|
|
Net income
|
|
|
2,132
|
|
|
|
3,141
|
|
|
|
3,464
|
|
|
|
22,782
|
|
Net income per share attributable to common stockholders-basic
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
|
$
|
0.06
|
|
|
$
|
0.38
|
|
Net income per share attributable to common stockholders-diluted
|
|
$
|
0.03
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.37
|
|
79
NETEZZA
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In March 2007, the Companys Board of Directors approved a
one-for-two
reverse stock split of the Companys common stock (the
Stock Split) which became effective upon the filing
of the restated certificate of incorporation on June 25,
2007. All references to shares in the consolidated financial
statements and the accompanying notes, including but not limited
to the number of shares and per share amounts, unless otherwise
noted, have been adjusted to reflect the Stock Split
retroactively. Previously awarded options and warrants to
purchase shares of the Companys common stock and the
shares of common stock issuable upon the conversion of the
convertible redeemable preferred stock have also been
retroactively adjusted to reflect the Stock Split.
On February 18, 2009, the Company completed the acquisition
of all outstanding capital stock of Tizor Systems, Inc., a
provider of advanced enterprise data auditing and protection
solutions for the data center, for approximately
$3.1 million in cash.
80
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Our management, with the participation of our chief executive
officer and chief financial officer, evaluated the effectiveness
of our disclosure controls and procedures as of January 31,
2009. The term disclosure controls and procedures,
as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended, means
controls and other procedures of a company that are designed to
ensure that information required to be disclosed by a company in
the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms. Disclosure
controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to
be disclosed by a company in the reports that it files or
submits under the Exchange Act is accumulated and communicated
to the companys management, including its principal
executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Management recognizes
that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving
their objectives and management necessarily applies its judgment
in evaluating the cost-benefit relationship of possible controls
and procedures. Based on the evaluation of our disclosure
controls and procedures as of January 31, 2009, our chief
executive officer and chief financial officer concluded that, as
of such date, our disclosure controls and procedures were
effective at the reasonable assurance level.
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act as a process designed by, or
under the supervision of, a companys principal executive
and principal financial officers, or persons performing similar
functions, and effected by a companys board of directors,
management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
Internal control over financial reporting includes those
policies and procedures that:
|
|
|
|
|
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of a companys assets;
|
|
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that a companys receipts and expenditures are being made
only in accordance with authorizations of the companys
management and directors; and
|
|
|
|
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of a
companys assets that could have a material effect on the
financial statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Our
management assessed the effectiveness of our internal control
over financial reporting as of January 31, 2009. In making
this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control Integrated
Framework.
Based on our assessment, our management has concluded that, as
of January 31, 2009, our internal control over financial
reporting was effective based on those criteria.
81
The effectiveness of the Companys internal control over
financial reporting as of January 31, 2009, has been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which appears
herein.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change in our internal control over financial reporting
occurred during the fiscal quarter ended January 31, 2009
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
Not applicable.
PART III
Pursuant to Paragraph G(3) of the General Instructions to
Form 10-K,
information required by Part III (Items 10, 11, 12, 13
and 14) is being incorporated by reference herein from our
proxy statement to be filed with the Securities and Exchange
Commission within 120 days of the end of the fiscal year
ended January 31, 2009 in connection with our 2009 Annual
Meeting of Stockholders (our Proxy Statement).
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information required by this item is contained in the Proxy
Statement in the sections Board of Directors and Corporate
Governance Information under the captions
Members of the Board of Directors,
Executive Officers, Board
Committees and Code of Business Conduct
and Ethics and in the section Other
Matters Section 16(a) Beneficial Ownership
Reporting Compliance and is incorporated herein by
reference.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information required by this item is contained in the Proxy
Statement in the section Executive and Director
Compensation and Related Matters and is incorporated
herein by reference.
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ITEM 12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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Information required by this item is contained in the Proxy
Statement in the sections Proposal 2 Amendment to our
2007 Stock Incentive Plan Equity Compensation Plan
Information and General Information About the Annual
Meeting Beneficial Ownership of Voting Stock
and is incorporated herein by reference.
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ITEM 13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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Information required by this item is contained in the Proxy
Statement in the section Board of Directors and Corporate
Governance Information under the captions
Determination of Independence,
Board Committees and
Related Person Transactions and is
incorporated herein by reference.
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ITEM 14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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Information required by this item is contained in the Proxy
Statement in the section Proposal 3 Ratification of
Selection of Independent Registered Public Accounting
Firm Independent Registered Public Accounting
Firms Fees and Other Matters and is incorporated
herein by reference.
82
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ITEM 15.
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EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
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(a) Index
1. Financial Statements: Our consolidated financial
statements and the Report of Independent Registered Public
Accounting Firm are set forth in Part II, Item 8 of
this Annual Report on
Form 10-K.
2. Financial Statement Schedules: Schedules have been
omitted since they are either not required, not applicable, or
the information is otherwise included.
3. Exhibits: See Index to Exhibits below for a listing of
all exhibits to this Annual Report on
Form 10-K.
(b) Exhibits
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Incorporated by Reference to
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Exhibit
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Form and
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SEC
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Exhibit
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Filed with
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No.
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Description
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SEC File No.
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Filing Date
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No.
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this 10-K
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2
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.1
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Agreement and Plan of Merger, dated as of April 24, 2008,
by and among Netezza Corporation, Netezza Holding Corp. and
NuTech Solutions, Inc.
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8-K (001-33445)
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5-15-2008
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2.1
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3
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.1
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Second Amended and Restated Certificate of Incorporation
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10-Q (001-33445)
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9-14-2007
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3.1
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3
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.2
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Amended and Restated By-laws of the Registrant
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S-1 (333-141522)
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3-22-2007
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3.3
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4
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.1
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Specimen Stock Certificate Evidencing the Shares of Common Stock
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S-1/A (333-141522)
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6-28-2007
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4.1
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10
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.1#
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2000 Stock Incentive Plan, as amended
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S-1 (333-141522)
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3-22-2007
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10.1
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10
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.2#
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Form of Incentive Stock Option Agreement under 2000 Stock
Incentive Plan
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S-1 (333-141522)
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3-22-2007
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10.2
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10
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.3#
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Form of Nonstatutory Stock Option Agreement under 2000 Stock
Incentive Plan
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S-1 (333-141522)
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3-22-2007
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10.3
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10
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.4#
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Form of Restricted Stock Agreement under 2000 Stock Incentive
Plan
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S-1 (333-141522)
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3-22-2007
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10.4
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10
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.5#
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2007 Stock Incentive Plan, as amended
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10-Q (001-33445)
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9-9-2008
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10.1
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10
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.6#
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Form of Incentive Stock Option Agreement under 2007 Stock
Incentive Plan
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S-1/A (333-141522)
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5-4-2007
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10.6
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10
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.7#
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Form of Nonstatutory Stock Option Agreement under 2007 Stock
Incentive Plan
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S-1/A (333-141522)
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5-4-2007
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10.7
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10
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.8#
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Form of Nonstatutory Stock Option Agreement for Non-Employee
Directors under 2007 Stock Incentive Plan
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S-1/A (333-141522)
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5-4-2007
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10.8
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10
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.9#
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Fiscal 2009 Executive Officer Incentive Bonus Plan
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8-K (001-33445)
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3-3-2008
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10.1
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10
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.10#
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Fiscal 2010 Executive Officer Incentive Bonus Plan
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8-K (001-33445)
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3-13-2009
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10.1
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10
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.11
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Lease Agreement, dated January 2, 2008, by and between the
Registrant and NE Williams II, LLC
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10-K (001-33445)
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4-18-2008
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10.12
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10
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.12
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First Amendment dated as of July 8, 2008, to the Lease,
dated January 2, 2008, by and between the Company and NE
Williams II, LLC.
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10-Q (001-33445)
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9-9-2008
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10.2
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83
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Incorporated by Reference to
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Exhibit
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Form and
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SEC
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Exhibit
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Filed with
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No.
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Description
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SEC File No.
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Filing Date
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No.
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this 10-K
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10
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.13
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Third Amended and Restated Investor Rights Agreement among the
Registrant, the Founders and the Purchasers, dated as of
December 22, 2004
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S-1 (333-141522)
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3-22-2007
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10.11
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10
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.14
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Amendment No. 1 to the Third Amended and Restated Investor
Rights Agreement among the Registrant, the Founders and the
Purchasers, dated as of June 14, 2005
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S-1 (333-141522)
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3-22-2007
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10.12
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10
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.15
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Amendment No. 2 to the Third Amended and Restated Investor
Rights Agreement among the Registrant, the Founders and the
Purchasers, dated as of April 30, 2007
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*
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10
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.16#
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Letter Agreement between the Registrant and James Baum, dated
June 1, 2006
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S-1 (333-141522)
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3-22-2007
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10.13
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10
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.17#
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Form of Amended and Restated Executive Retention Agreement for
each of James Baum, Patrick J. Scannell, Jr., Raymond Tacoma and
Patricia Cotter
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*
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10
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.18#
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Second Amended and Restated Executive Retention Agreement by and
between the Registrant and Jitendra S. Saxena, dated as of
March 12, 2009
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8-K (001-33445)
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3-13-2009
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10.2
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10
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.19#
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Form of Indemnification Agreement for each of Jitendra S.
Saxena, James Baum, Patrick J. Scannell, Jr., Raymond Tacoma,
Patricia Cotter, Sunil Dhaliwal, Ted R. Dintosmith, Francis A.
Dramis Jr., Robert J. Dunst, Jr., Paul J. Ferri, Peter Gyenes,
Charles F. Kane and Edward J. Zander
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S-1/A (333-141522)
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6-28-2007
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10.15
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10
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.20
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Contractor Agreement between Persistent Systems Pct. Ltd and the
Registrant, dated as of February 1, 2001
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S-1/A (333-141522)
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7-3-2007
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10.18
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10
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.21
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Manufacturing Services Agreement by and between the Registrant
and Sanmina-SCI Corporation, dated as of June 17, 2004, as
amended by Amendment No. 1 to the Manufacturing Services
Agreement, dated as of May 11, 2005
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S-1/A (333-141522)
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5-15-2007
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10.19
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21
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.1
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Subsidiaries of the Registrant
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*
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23
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.1
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Consent of PricewaterhouseCoopers LLP
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*
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31
|
.1
|
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Certification of Principal Executive Officer, Pursuant to
Securities Exchange Act
Rules 13a-14(a)
and 15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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*
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31
|
.2
|
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Certification of Principal Financial Officer, Pursuant to
Securities Exchange Act
Rules 13a-14(a)
and 15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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*
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84
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Incorporated by Reference to
|
|
|
Exhibit
|
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|
|
Form and
|
|
SEC
|
|
Exhibit
|
|
Filed with
|
No.
|
|
Description
|
|
SEC File No.
|
|
Filing Date
|
|
No.
|
|
this 10-K
|
|
|
32
|
.1
|
|
Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to Securities Exchange Act
Rules 13a-14(b)
and 15d-14(b), as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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*
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Confidential treatment requested as to certain portions, which
portions have been separately filed with the Securities and
Exchange Commission. |
|
# |
|
Management contracts or compensatory plans or arrangements
required to be filed as an exhibit hereto pursuant to
Item 15(a) of
Form 10-K. |
85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NETEZZA CORPORATION
James Baum
President and Chief Executive Officer
Date: March 26, 2009
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
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Signature
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Title
|
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Date
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By:
|
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/s/ James
Baum
James
Baum
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President, Chief Executive Officer and Director (principal
executive officer)
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March 26, 2009
|
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By:
|
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/s/ Patrick
J. Scannell, Jr.
Patrick
J. Scannell, Jr.
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Senior Vice President and Chief Financial Officer (principal
financial and accounting officer)
|
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March 26, 2009
|
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By:
|
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/s/ Francis
A. Dramis, Jr.
Francis
A. Dramis, Jr.
|
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Director
|
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March 26, 2009
|
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By:
|
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/s/ Robert
J. Dunst, Jr.
Robert
J. Dunst, Jr.
|
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Director
|
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March 26, 2009
|
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|
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|
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By:
|
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/s/ Paul
J. Ferri
Paul
J. Ferri
|
|
Director
|
|
March 26, 2009
|
|
|
|
|
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|
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By:
|
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/s/ Peter
Gyenes
Peter
Gyenes
|
|
Director
|
|
March 26, 2009
|
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|
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By:
|
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/s/ Charles
F. Kane
Charles
F. Kane
|
|
Director
|
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March 26, 2009
|
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|
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By:
|
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Jitendra
S. Saxena
|
|
Director
|
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March , 2009
|
|
|
|
|
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By:
|
|
/s/ Edward
J. Zander
Edward
J. Zander
|
|
Director
|
|
March 26, 2009
|
86