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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-15325
INFORMIX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3011736
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4100 BOHANNON DRIVE, MENLO PARK, CA 94025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
650-926-6300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $0.01
PAR VALUE
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
the 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's 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/A. / /
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of February 28, 1998 based on the closing sales price of the
Company's Common Stock, as reported on The Nasdaq Stock Market, was
approximately $1,297,423,211. Shares of Common Stock held by each officer and
director have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of February 28, 1998, Registrant had 166,903,848 shares of Common
Stock issued and outstanding.
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INFORMIX CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
-----------
PART I....................................................................................................... 3
ITEM 1. BUSINESS.................................................................................. 3
ITEM 2. PROPERTIES................................................................................ 11
ITEM 3. LEGAL PROCEEDINGS......................................................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................... 15
PART II...................................................................................................... 16
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................... 16
ITEM 6. SELECTED FINANCIAL DATA................................................................... 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..... 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................... 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...... 50
PART III..................................................................................................... 51
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT............................................ 51
ITEM 11. EXECUTIVE COMPENSATION.................................................................... 55
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................ 63
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................ 65
PART IV...................................................................................................... 68
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........................... 68
SIGNATURES................................................................................................... 73
2
PART I
ITEM 1. BUSINESS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER
"FACTORS THAT MAY AFFECT FUTURE RESULTS" UNDER "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN, OR
INCORPORATED BY REFERENCE INTO, THIS REPORT.
BACKGROUND
The Company is a leading multinational supplier of information management
software. The Company designs, develops, manufactures, markets and supports
relational database management systems ("RDBMS"), connectivity interfaces and
gateways and application development tools for graphical and character-based
software applications as part of an RDBMS. Database management software permits
multiple individual users, employing different application software, to access
and manage the same data concurrently without corrupting the underlying
database. RDBMS software extends the functionality and utility of non-relational
database management software by simplifying the data retrieval process for end-
users, who do not require specific knowledge about the structure of the database
but need only to specify the data to be retrieved. Companies commonly employ
RDBMS software for use in storing, managing and retrieving the large amounts of
data necessary to support internal management information and decision-support
systems as well as mission-critical data processing applications.
The Company believes that technological advances, including the
development and commercialization of the Internet, will lead to increasingly
sophisticated customer requirements for data storage and management beyond the
functionality offered by conventional RDBMS products. In recent years, the types
and quantities of data required to be stored and managed has grown increasingly
complex and includes, in addition to conventional character data, audio, video,
text and three dimensional graphics. In 1996, the Company devoted substantial
resources in the development of object-relational database management systems
("ORDBMS") and tools for applications in multimedia and entertainment, digital
media publishing and financial services.
The Company markets its products to end-users on a worldwide basis
directly through its sales force and indirectly through application resellers,
OEMs and distributors. The principal geographic markets for the Company's
products are North America, Europe, the Asia/Pacific region and Latin America.
In recent years, approximately half of the Company's total revenues have been
generated outside North America. The Company's principal customers include
businesses ranging from small corporations to Fortune 1000 companies,
principally in the manufacturing, financial services, telecommunications, media,
retail/wholesale, hospitality and government services sectors.
The Company was initially incorporated in California in 1980 and was
reincorporated in Delaware in August 1986. Unless the context requires
otherwise, the terms "Company" and "Informix" refer to Informix Corporation and
its subsidiaries. The Company maintains its executive offices at 4100 Bohannon
Drive, Menlo Park, California 94025. Its telephone number at that location is
(650) 926-6300.
PRODUCTS
INFORMIX DYNAMIC SERVER
Informix Dynamic Server is a high performance, enterprise capable online
transaction processing database server. This product is based on Informix's
Dynamic Scalable Architecture and features parallel data processing capability,
replication and connectivity options built into its core. Informix Dynamic
Server is available in a variety of configurations based upon adding one or more
of the configuration options described below.
3
Informix also provides a version of Informix Dynamic Server called the
Workgroup Edition, which has been adapted specifically for workgroup
environments.
SERVER CONFIGURATION OPTIONS
Informix makes available five server configuration options, which are
integrated in various combinations along with Informix Dynamic Server to meet
specific customer requirements.
The Advanced Decision Support Option extends Informix Dynamic Server with
a variety of decision support functions including summarization, sampling, and
"top-N."
The Extended Parallel Option adapts Informix Dynamic Server to work
within loosely coupled, share-nothing computing architectures, including
clusters of symmetric multiprocessing systems and parallel processing systems.
The Universal Data Option extends Informix Dynamic Server with support
for extensibility and SQL3. Extensibility includes the ability to add new
objects and data types, business specific procedures and logic, and new indexing
search methods to the server, as well as support for DataBlade modules, which
can include a related set of data types, functions and indexes for a specific
purpose.
The MetaCube ROLAP Option adds an on-line analytical processing engine to
Informix Dynamic Server that automatically preconsolidates data and provides a
multidimensional view of data without the constraints of two dimensional (row
and table) data model. This option also includes MetaCube Explorer; MetaCube
Scheduler for batch processing; MetaCube Queryback for running queries in the
background; MetaCube Aggregator for creating and maintaining aggregates in a
data warehouse; MetaCube for Excel which enables data Warehouse analysis in an
Excel spreadsheet environment; and MetaCube for the Web which brings MetaCube
analysis capabilities to intranets.
Finally, the Web Integration Option provides connectivity between Web
servers and Informix Dynamic Server. This option enables developers to create
intelligent web applications based upon database information that deliver
multimedia, tailored Web pages to users.
DATABLADE MODULES
DataBlade modules combine new data types, new functions or methods, and
new indexing operations, which taken together extend Informix Dynamic Server.
The DataBlade modules are used in conjunction with the Universal Data Option.
Informix sells the following DataBlade modules, and others are available through
Informix's partners:
The Informix Video Foundation DataBlade module provides an open and
scalable software architecture that allows strategic third-party development
partners to incorporate specific video technologies such as video servers,
external control devices, compression codes or cataloging tools into database
management applications with the Informix Dynamic Server. In addition, the video
data types and data model allow customers to explore new ways to manipulate
video and associated metadata, or information about the video.
The Informix TimeSeries DataBlade module expands the functionality of the
database by adding support for the management of time-series and temporal data.
The TimeSeries DataBlade module supports a regular or irregular repeating
time-stamped series of any datatype supported by Informix Dynamic Server or any
structure or combination of these. For example, a set of open, high, low, and
close currency values can be used to record a time-based series of stock prices.
The granularity of time recording can be adjusted to suit the unique
requirements of the application. The TimeSeries DataBlade module provides
support for three new datatypes, time-series, calendar and calendar pattern, and
over 80 functions to manage them. The time-series type stores sequences of
time-stamped information, and a related calendar allows access to specific
portions of the time series for update, analysis, display or other uses.
4
The Informix Geodetic DataBlade module provides geo-spatial datatypes and
functions supporting two-dimensional representation of the earth's surface based
on a geodetic (longitude, latitude and datum) coordinate system. In addition to
two-dimensional geographic feature support, the Geodetic DataBlade Module allows
an altitude range and a time range to be specified.
CONNECTIVITY PRODUCTS
The Company's principal connectivity products include the following:
Informix--Enterprise Gateway Manager is a connectivity tool allowing
applications running on various operating systems to access data sources via
loadable gateway drivers. The Company also offers gateway drivers for Oracle and
Sybase databases. Drivers for additional data sources are available from various
third parties.
Informix--Enterprise Gateway with DRDA is a UNIX based connectivity tool
allowing interoperability to IBM databases such as DB2/MVS, DB2/VM and DB2/400
from Windows and UNIX clients. Informix-Gateway with DRDA allows applications
built with Informix application development tools to access and modify
information in Distributed Relational Database Architecture compliant database
management systems.
Informix--ESQL for C and COBOL are embedded SQL products which permit
developers to take advantage of SQL technology while building applications is in
C or COBOL.
Informix--CLI is a library of low level functions that provide high
performance direct access to Informix databases from applications built in C or
other third generation languages. Informix--CLI is compliant with Microsoft's
ODBC specifications.
DATABASE TOOLS
The Company offers a variety of database application development tools
designed to allow users to build applications. The Company's principal database
tools include:
Informix Data Director for Visual Basic enables developers to prototype,
build and extend workgroup and enterprise applications. Data Director for Visual
Basic reduces the amount of application code necessary for writing client/server
solutions by automating the data access operations for the client application.
This automation eliminates the time consuming task of writing data access code,
allows developers to incorporate sophisticated functionality without having to
be SQL experts and enables project teams to improve their time to market with
scalable applications. Data Director enables developers to create applications
that support user defined data types, including images, Web pages and spatial
data.
Informix--NewEra is a graphical, object-oriented development environment
designed for creating enterprise-wide multi-tier client/server database
applications. Informix--NewEra features a fourth generation object-oriented
programming language, reusable class libraries, application partitioning and
flexible application deployment and supports open connectivity to Informix and
non-Informix databases. Informix--NewEra is currently available for Microsoft
Windows and OSF Motif.
Informix--4GL is a character-based development environment, which
includes a fourth generation programming language with screen building, report
entry, and SQL database input/output capabilities. The Informix--4GL product
family is comprised of three core products: Informix--4GL Compiled,
Informix--4GL Rapid Development Systems and Informix--4GL interactive Debugger.
Informix--SQL is a package of five interactive tools for creating
character-based applications. Informix--SQL consists of a forms package, a
report writer, an interactive SQL editor, a menu building and an interactive
schema editor.
5
SERVICES, CONSULTING AND CUSTOMER SUPPORT
The Company maintains field-based and centralized corporate technical
staffs to provide a comprehensive range of assistance to its customers. These
services include pre- and post-sales technical assistance, consulting, product
and sales training and technical support services. Consultants and trainers
provide services to customers to assist them in the use of the Company's
products and the design and development of applications that utilize the
Company's products.
The Company provides post-sales support to its customers on an optional
basis for annual fees which generally range from 12% to 18% of the license fees
paid by the customer. These support services usually include product updates.
During fiscal 1996 and the first quarter of fiscal 1997, as part of its
sales and marketing strategy, the Company launched a series of "Information
SuperStores." The Superstores were intended to demonstrate and offer the
Company's software products to customers on actual hardware platforms used by
those customers, thereby permitting the end-user to evaluate and monitor the
performance and functionality of the Company's products prior to purchase. In
addition, the Superstores offered application tools from leading third-party
tools and application vendors installed on a variety of platforms, including
Data General Corporation, Hewlett-Packard Company, International Business
Machines ("IBM"), NCR Corporation/Teradata ("NCR/Teradata"), Pyramid, Sequent
Computer Systems, Inc. ("Sequent"), Silicon Graphics and Sun Microsystems. In
connection with the Company's restructuring announced in the second quarter of
fiscal 1997, the Company scaled back its original plans and repositioned its
remaining sites as solution labs managed by the Company's consulting practice.
The decision to scale back the Superstores resulted in a charge to operations
during fiscal 1997.
MARKETING AND CUSTOMERS
The Company distributes its products through the channels of direct
end-user licensing, OEMs, application vendors addressing specific markets and
distributors. The Company has chosen a multiple channel distribution strategy to
maintain broad market coverage and product availability. The Company, therefore,
has generally avoided exclusive relationships with its licensees and other
resellers of its products. Discount policies and reseller licensing programs are
intended to support each distribution channel with a minimum of channel
conflict. The Company also provides a financing option to customers in
connection with the license of software. For fiscal 1997, sales of licenses
directly to end users accounted for 58% of total license revenues and sales to
OEM's and sales through resellers accounted for 42% of total license revenues.
At December 31, 1997, the Company's sales, marketing and support staff
totaled 986 regular employees in the North America region; 128 regular employees
in the Latin America region; 619 regular employees in Europe, the Middle East
and Africa; and 369 regular employees in the Asia/Pacific region.
LICENSING
END-USER LICENSING
The Company licenses its products to large companies and government
entities through its direct sales force, and to certain of these companies, as
well as smaller end-users, through its telemarketing sales force. The Company
believes that the common core technology of its database management system
products, based on standard operating systems and the SQL database language,
helps it sell into major corporations and government agencies that wish to
standardize their diverse computing environments. As a result, certain of these
end-user organizations have entered into general purchasing agreements with the
Company which offer volume discounts.
6
APPLICATION VENDOR LICENSING
Since its inception, the Company has licensed application vendors to
distribute its products. A typical application vendor develops an application
product (E.G., an insurance agency management system) using one of the Company's
products and then licenses the resultant application software to its customers
in the target market. The application vendor customer purchases a license for
use of the Company's product to develop an applications program. Depending on
the application program developed, it may include a run-only license, a full
version license or even multiple product licenses.
Application vendors develop applications using a wide array of
application development tools, including products from the Company, such as
Informix--NewEra, Informix--4GL and Informix--SQL, as well as products offered
by third parties. Applications developed using the Company's products are
generally portable across various brands of computers and different operating
systems.
The Company has specialized programs to support the application vendor
distribution channel. Under these programs, the Company provides to selected
application vendors a combination of marketing development services, consulting
and technical marketing support and discounts.
OEM LICENSING
The Company's products are also marketed with the assistance of the sales
forces of its OEM customers who have concluded that "solution selling" of a
combination of software and hardware to their respective customers enhances the
sales of their computer equipment. The Company believes that the compatibility
and range of applications for its products are significant to this distribution
channel.
DISTRIBUTOR LICENSING
The Company has established a network of full service international
distributors who provide local service and support, as well as the Company's
products, to their respective national markets. Distributors are used to
supplement the Company's direct sales force and enable the Company to sell its
products and services in countries where the Company has not established a
direct sales force.
PRODUCT DEVELOPMENT
The computer software industry is highly competitive and rapidly
changing. Consequently, the Company dedicates considerable resources to research
and development efforts to enhance its existing product lines and to develop new
products to meet new market opportunities. Most of the Company's current
software products and accompanying documentation have been developed internally;
however, the Company has acquired certain software products from others and
plans to do so again in the future.
Major product releases resulting from research and development projects
in fiscal 1997 included the new releases of Informix Dynamic Server; Universal
Data Option; Extended Parallel Option; Advanced Decision Support Option;
Informix Dynamic Server, Workgroup Edition; and the initial release of Web
Integration Option.
The Company's current product development efforts are focused on (i)
improving and enhancing current products and new products, with particular
emphasis on parallel computer architecture, user-defined database extensions,
Web technology integration, graphical desk top and system administration; (ii)
improving the Company's products to provide greater speed and support for larger
numbers of concurrent users; and (iii) adapting new products to the broad range
of computer brands and operating systems the Company currently supports and
adapting current products to new brands of computers and operating systems which
represent attractive market opportunities for the Company's products.
There can be no assurance that the Company's product development efforts
will be successful or that any new products will achieve significant market
acceptance.
7
As of December 31, 1997, the Company had 941 regular employees engaged in
research and development. In recent months, the Company has experienced high
attrition in its product development group and has had difficulty attracting
qualified replacement development personnel. Failure to attract and retain a
sufficient number of qualified development personnel would have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company's research and development expense for fiscal 1997, 1996 and
1995 was $139.3 million, $120.2 million and $85.6 million, respectively,
representing approximately 21%, 17% and 14% of revenues for such periods. In
addition, during fiscal 1997, 1996, and 1995 the Company capitalized product
development costs of $21.8 million, $28.4 million and $17.5 million,
respectively, in accordance with Statement of Financial Accounting Standards No.
86. See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Research and Development Expenses."
The market for the Company's products and services is characterized by
rapidly changing technology, changing customer needs, frequent new product
introductions and evolving industry standards that may render existing products
and services obsolete. The life cycles of the Company's products are difficult
to estimate. The Company's growth and future financial performance will depend
upon its ability to enhance its existing products and to introduce new products
on a timely and cost-effective basis and that meet dynamic customer
requirements. There can be no assurance that the Company will be successful in
developing new products or enhancing its existing products or that such new or
enhanced products will receive market acceptance or be delivered timely to the
market. The Company's product development efforts are expected to continue to
require substantial investments by the Company, and there can be no assurance
that the Company will have sufficient resources to make the necessary
investments. The Company has experienced product development delays in the past
and may experience delays in the future. Delays in the scheduled availability or
a lack of market acceptance of its products or failure to accurately anticipate
customer demand and meet customer performance requirements, including as a
result of recent attrition in the Company's product development group, could
have a material adverse effect on the Company's business results of operations
and financial condition. In addition, products as complex as those offered by
the Company may contain undetected errors or bugs when first introduced or as
new versions are released. There can be no assurance that, despite testing, new
products or new versions of existing products will not contain undetected errors
or bugs that will delay the introduction or commercial acceptance of such
products. A key determinative factor in the Company's success will continue to
be the ability of the Company's products to operate and perform well with
existing and future leading, industry-standard application software products
intended to be used in connection with RDBMS. Failure to meet existing or future
interoperability requirements of certain independent vendors and performance
requirements of certain independent vendors marketing such applications in a
timely manner could adversely affect the market for the Company's products.
Commercial acceptance of the Company's products and services could also be
adversely affected by critical or negative statements or reports by brokerage
firms, industry and financial analysts and industry periodicals concerning the
Company, its products, business or competitors or by the advertising or
marketing efforts of competitors, or other factors that could affect consumer
perception.
In recent years, the types and quantities of data required to be stored
and managed has grown increasingly complex and includes, in addition to
conventional character data, audio, video, text, and three dimensional graphics.
In 1996, the Company devoted substantial resources in developing the Company's
ORDBMS product line. The market for the products offering object-relational
database functionality is new and evolving, and its growth depends upon a
growing need to store and manage complex data and on broader market acceptance
of the Company's products as a solution for this need. There can be no assurance
that organizations will chose to make the transition from conventional RDBMS to
ORDBMS. Delays in market acceptance of object-relational database management
products offered by the Company could have an adverse effect on the Company's
results of operations and financial condition.
8
COMPETITION
Competitors in the relational database software market compete primarily
on the basis of product price and performance characteristics, name recognition,
technical product support, product training and services. With respect to
product performance, the Company believes that the principal competitive factors
include (i) application development productivity (I.E., the speed with which
applications can be built); (ii) database performance (I.E., the speed at which
database storage and retrieval functions are executed); (iii) product function
and features; (iv) the ability to support large warehouses of information; (v)
reliability, availability and serviceability; (vi) the distribution of software
applications and data across networks of computers from multiple suppliers; and
increasingly (vii) the ability to manage complex data and solve more complex
business problems based on such data. Although the Company believes that it
currently competes favorably with respect to such factors, there can be no
assurance that the Company can maintain its competitive position against current
and potential competitors, especially those with greater financial, marketing,
service, support, technical and other resources. The Company believes that the
technical advantages of its products, its approach to sales and marketing, its
relations with application vendors, OEMs and distributors and its customer
service and support contribute to its ability to compete in this market.
The Company faces intense competition in the market for RDBMS software
products. The market for the Company's products is subject to rapid
technological change and frequent new product introductions and enhancements,
and the Company's competitors in the market include several large vendors that
develop and market databases, applications, development tools or decision
support products. The Company's principal competitors include Computer
Associates International, Inc. ("Computer Associates"), IBM, Microsoft
Corporation ("Microsoft"), NCR/Teradata, Oracle Corporation ("Oracle") and
Sybase, Inc. ("Sybase"). Several of these competitors have significantly greater
financial, technical, marketing and other resources than the Company. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products than the Company. Any failure
by the Company to compete successfully with its existing competitors or future
competitors could have a material adverse effect on the Company's business,
results of operations and financial condition.
Several of the Company's competitors have announced the development of
enhanced versions of their principal database products that are intended to
improve the performance or expand the capabilities of their existing products.
New or enhanced products by existing competitors or new competitors could result
in greater price pressure on the Company's products. In addition, the industry
movement to new operating systems, like Windows NT, access through low-end
desktop computers, and access to data through the Internet may cause downward
pressure on prices of database software and related products. The bundling of
software products for promotional purposes or as a long-term pricing strategy by
certain of the Company's competitors could also result in reductions in the
price the Company may charge for its products. If such downward pressure on
prices were to occur, the Company's operating margins would be adversely
affected. Existing and future competition or changes in the Company's product or
service pricing structure or product or service offerings could result in an
immediate reduction in the prices of the Company's products or services. If
significant price reductions in the Company's products or services were to occur
and not be offset by increases in sales volume, the Company's business, results
of operation and financial condition would be adversely affected. There can be
no assurance that the Company will continue to compete successfully with its
existing competitors or will be able to compete successfully with new
competitors.
In addition, the Company's public announcement in August 1997 of the
pending restatement of its financial statements, delays in reporting operating
results for the second and third quarters of fiscal 1997 while the restatement
was being compiled, threatened de-listing of the Company's Common Stock from the
Nasdaq National Market as a result of the Company's failure to satisfy its
public reporting obligations, corporate actions to restructure operations and
reduce operating expenses and customer uncertainty
9
regarding the Company's financial condition adversely affected the Company's
ability to sell its products in fiscal 1997. In addition, since the beginning of
1997, the Company and its competitors in the RDBMS industry have experienced
substantially slower growth in the market for RDBMS products. The financial
restatement has now been completed, its results have been publicly disclosed and
the Company is current with respect to its public reporting obligations. In
addition, the Company believes that it has effectively controlled its operating
expenses and significantly improved its financial condition. Nevertheless, there
can be no assurance that uncertainties resulting from the restatement, including
ongoing customer concern about the Company's financial condition, will not
continue to have a materially adverse effect on the Company's competitive
position and results of operations.
INTELLECTUAL PROPERTY
The Company's success depends on proprietary technology. To protect its
proprietary rights, the Company relies primarily on a combination of patent,
copyright and trademark laws, trade secrets, confidentiality procedures,
contractual provisions contained in its license agreements and technical
measures. The Company seeks to protect its software, documentation and other
written materials under trade secret and copyright laws, which provide only
limited protection. The Company holds one United States patent and several
pending applications. There can be no assurance that any other patents covering
the Company's inventions will issue or that any patent, if issued, will provide
sufficiently broad protection or will prove enforceable in actions against
alleged infringers.
The Company's products are generally licensed to end-users on a
"right-to-use" basis pursuant to a license that restricts the use of the
products for the customer's internal business purposes. The Company also relies
on "shrink wrap" licenses, which include a notice informing the end-user that,
by opening the product packaging, the end-user agrees to be bound by the
Company's license agreement printed on the package. Despite such precautions, it
may be possible for unauthorized third parties to copy aspects of its current or
future products or to obtain and use information that the Company regards as
proprietary. In particular, the Company has licensed the source code of its
products to certain customers under certain circumstances and for restricted
uses. The Company has also entered source code escrow agreements with a number
of its customers that generally require release of source code to the customer
in the event of the Company's bankruptcy, liquidation or otherwise ceasing to
conduct business. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar or superior technology.
Policing unauthorized use of the Company's software is difficult, and while the
Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States, and
"shrink-wrap" licenses may be wholly or partially unenforceable under the laws
of certain jurisdictions. Litigation may be necessary in the future to enforce
the Company's intellectual property rights, to protect the Company's trade
secrets or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and diversion of
resources and management attention and could have a material adverse effect on
the Company's business, results of operations and financial condition.
The Company is not aware that any of its software product offerings
infringe the proprietary rights of third parties. There can be no assurance,
however, that third parties will not claim infringement by the Company with
respect to its current or future products. The Company expects that software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
10
EMPLOYEES
As of December 31, 1997, the Company and its subsidiaries had 3,489
regular employees worldwide, including 2,102 in sales, marketing and support;
941 in research and development; 69 in operations and 377 in administration and
finance. Of the Company's total employees at December 31, 1997, approximately
1,447 were located outside North America. None of the Company's U.S. employees
are represented by a labor union. A small number of employees located outside of
the United States are represented by labor unions, and the degree and scope of
representation varies from country to country. The Company has not experienced
any work stoppages either domestically or internationally.
Since the first quarter of fiscal 1997, the Company has experienced a
significant number of voluntary resignations and has taken selective actions to
reduce the number of employees in certain functional areas. The Company had
3,489 employees at December 31, 1997, compared to 4,491 at December 31, 1996. In
fiscal 1997, the Company experienced high attrition rates in its product
development and sales groups and has had trouble attracting qualified
replacement personnel. The competition for employees in the software industry is
intense, and the Company expects that such competition will continue for the
foreseeable future. The Company has experienced difficulty in locating
candidates with appropriate qualifications and believes that recent financial
and business developments at the Company have made recruitment more difficult.
ITEM 2. PROPERTIES
The Company's headquarters and its principal marketing, finance, sales,
administration, customer service and research and development operations are
located in five buildings in a corporate office park in Menlo Park, California.
The Company currently leases approximately 214,000 square feet of space in these
buildings. The leases for space in two of these buildings expire in September
2001. The leases for spaces in the remaining three of the buildings were
recently renewed for an additional five year term expiring in March 2003. In
addition, the Company leases space totalling approximately 33,000 square feet in
two additional buildings in close proximity. These leases expire in May 1998 and
October 2000. The Company anticipates renewing the lease expiring in May 1998 at
prevailing market rates.
In addition, certain of the Company's research and development
facilities, a portion of its customer service organization, its principal
domestic manufacturing facility and its telemarketing organization are located
in a 134,000 square foot facility in Lenexa, Kansas. The buildings are leased to
the Company under a lease expiring in April 2003, subject to renewal for up to
two additional five year terms. The Lenexa, Kansas facility was leased to the
Company by a partnership of which the Company held a 50% partnership interest.
The Company entered an agreement to sell 49.9% of its interest in the
partnership to the other partner. Such sale closed in the first quarter of
fiscal 1998. The Company also leases office space, principally for sales and
support offices, in a number of facilities in the United States, Canada and
outside North America. The Company believes that its current facilities are
adequate to meet its needs through the next twelve months.
Some of the research and development operations for the Company's tools
products and a portion of customer service and sales training are located in
Oakland, California. The Company leases approximately 130,000 square feet at
this site, and the lease expires in May 2003. The Company also leases 47,276
square feet in Portland, Oregon, primarily for its research and development
group. The lease on approximately one-half of this space expires on October 31,
1998. The lease on the remaining space expires in March 2000.
In December 1996, the Company announced plans to relocate its corporate
headquarters from the Menlo Park facilities to a new corporate campus in Santa
Clara, California. In January 1997, the Company entered into a two-year lease
for 27 acres of undeveloped commercial real estate in Santa Clara, which was
intended to be used for construction of the new headquarters facility. The
Company also obtained an option to purchase the land for $61.5 million. In order
to secure performance of its obligations under the
11
lease, the Company pledged $61.5 million in cash collateral to the lessor. In
April 1997, the Company exercised its option to purchase the land, and in
December 1997 completed the sale of the real estate for net proceeds of
approximately $59.3 million. In addition, in November 1996, the Company had
leased approximately 200,000 square feet of office space in Santa Clara on
property located adjacent to the 27 acre undeveloped parcel. In December 1997,
the Company assigned its rights under such lease agreement to an unrelated third
party, although the Company remains contingently liable for the lease payments
thereunder.
ITEM 3. LEGAL PROCEEDINGS
ACTIONS ARISING UNDER FEDERAL AND STATE SECURITIES LAWS
Beginning on or about April 16, 1997, a total of 24 complaints alleging
violations of the federal securities laws were filed against the Company, Ernst
& Young LLP, the Company's independent auditors and certain Named Individual
Defendants (listed below) in the United States District Court for the Northern
District of California. Of the 24 complaints, 22 have been filed as purported
class actions by individuals who allege that they are individual investors who
purchased the Company's Common Stock during the purported class period; the
alleged class periods in the different complaints vary according to the date on
which the complaints were filed. The complaints name some or all of the
following current and former officers and directors of the Company as
defendants: Phillip E. White, Howard H. Graham, David H. Stanley, Ronald M.
Alvarez, Karen Blasing, D. Kenneth Coulter, Ira H. Dorf, Stephen E. Hill, Myron
(Mike) Saranga, Steven R. Sommer, Michael R. Stonebraker and Edwin C. Winder
(the "Named Individual Defendants"). On August 20, 1997, the District Court
entered an order consolidating all of the separately-filed class actions pending
at that time, designating the action as IN RE INFORMIX CORPORATION SECURITIES
LITIGATION, and designating as "related cases" all cases brought under the
federal securities laws then pending and any that may be filed after that date.
A consolidated amended class action complaint is set to be filed on April 3,
1998, and defendants will file a response to that consolidated, amended
complaint shortly thereafter. As required by the provisions of the Exchange Act,
as amended by the Private Securities Litigation Reform Act of 1995, the Court
has designated the lead plaintiffs in the federal action and has appointed lead
plaintiffs' counsel.
The existing federal court complaints allege that the Company, the Named
Individual Defendants and Ernst & Young issued false or misleading statements in
the Company's filings with the Commission, press releases, statements to
securities analysts and other public statements regarding its financial results
and business prospects. The alleged class periods vary among the complaints; the
longest class period extends from February 7, 1995 through November 18, 1997. In
particular, plaintiffs allege that defendants overstated the Company's revenue
and earnings during the time period by improperly recognizing revenue from sales
of software licenses. All of these actions allege that the defendants' false and
misleading statements violate section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder. The complaints further allege that the Named Individual
Defendants sold the Company's Common Stock while in the possession of adverse
material non-public information. The existing complaints, in general, do not
specify the amount of damages that plaintiffs seek.
Defendants have not filed any answers, motions to dismiss or other
responsive pleadings in the federal action. Until plaintiffs in IN RE INFORMIX
CORPORATION SECURITIES LITIGATION file their consolidated, amended complaint,
defendants are unable to specify their factual defenses in that action.
On or about March 19, 1998, a complaint alleging securities and common
law fraud and misrepresentation causes of action was filed in the United States
District Court for the Northern District of California. This complaint,
captioned WILLIAMS V. INFORMIX CORPORATION, ET AL., alleges both individual and
class claims on behalf of former securities holders of Illustra Information
Technologies, Inc. ("Illustra") who exchanged their Illustra securities for
securities of the Company in February 1996 in connection with the Company's
February 1996 acquisition of Illustra pursuant to an Agreement and Plan of
Reorganization
12
(the "Illustra Agreement"). The members of the purported class in WILLIAMS are
included within the definition of the class purportedly represented in the IN RE
INFORMIX CORPORATION SECURITIES LITIGATION action also pending in the Northern
District of California. The WILLIAMS complaint, like the previously-filed
federal complaints, alleges that the Company and certain of its former officers
and/or directors, and its independent auditors, issued false or misleading
statements regarding the Company's reported financial results and business
prospects.
Three purported securities class actions containing allegations similar
to the federal actions were filed in the Superior Court of the State of
California, County of San Mateo between May 19, 1997 and August 25, 1997. Those
actions, captioned RILEY V INFORMIX CORPORATION ET AL., DAYANI V. INFORMIX
CORPORATION ET AL., AND GOLDSTEIN V. WHITE ET AL., contained factual allegations
nearly identical to the allegations set forth in the federal court complaints.
The Superior Court has consolidated these actions and has appointed lead
plaintiffs' counsel. By stipulation, plaintiffs filed a consolidated, amended
complaint on December 23, 1997. The state court consolidated, amended complaint
names as defendants the Company, Ernst & Young and the Named Individual
Defendants. The claims in the consolidated amended state complaint arise under
California securities, fraud and unfair business practices statutes.
The state court consolidated, amended complaint alleges that the
defendants issued false financial statements which were not prepared in
conformity with Generally Accepted Accounting Principles for fiscal years 1996,
1995 and 1994, materially overstating the Company's revenue. Plaintiffs allege
that defendants recorded as revenue approximately $300 million from software
license sales which should not have been recorded because INTER ALIA, revenue
was recognized on sales to resellers before end-users were identified; revenue
was recognized in circumstances where customers had rights of return or
cancellation; and the Company recognized revenue from barter transactions in
which the Company allegedly exchanged software licenses for products that had no
value to the Company. Plaintiffs further allege that while the Company's stock
price was artificially inflated due to the overstatement of revenue, the
defendants used the Company's stock to make corporate acquisitions, and the
Named Individual Defendants sold stock while in possession of material adverse
non-public information. The alleged class period in the state court
consolidated, amended complaint is February 7, 1995 through November 18, 1997.
Defendants filed demurrers to the state court consolidated, amended
complaint on February 13, 1998. Defendants base their demurrers to the
consolidated, amended complaint in this action on the grounds that certain of
the individual defendants made no actionable statements during the alleged class
period, the Company did not engage in any market activity during the alleged
class period, the plaintiffs did not actually rely upon any of the alleged false
and misleading statements, the California statutory unfair business practices
claims are inapplicable to securities transactions, and the consolidated,
amended complaint fails to plead the alleged fraud with sufficient
particularity. The hearing on defendants' demurrers is set for May 5, 1998. The
Company will not file an answer in this action unless the Court overrules the
pending and any subsequent demurrers. Further, the Company is not in a position
to state its factual defenses to the consolidated, amended complaint until the
Court rules upon the pending and any subsequent demurrers.
DERIVATIVE ACTIONS
The Company also has been named as a nominal defendant in eight
derivative actions, purportedly brought on its behalf, filed in the Superior
Court of the State of California, County of San Mateo. The Court has appointed
lead plaintiff's counsel in all of these derivative actions, and the cases have
been consolidated under the caption IN RE INFORMIX CORPORATION DERIVATIVE
LITIGATION. The consolidated, amended complaint alleges that, based upon the
facts alleged in the federal and state securities class actions, defendants
breached their fiduciary duties to the Company, engaged in abuses of their
control of the Company, were unjustly enriched by their sales of the Company's
Common Stock, engaged in insider trading in violation of California law and
published false financial information in violation of California law. The
consolidated, amended complaint names as defendants Ernst & Young, the Named
Individual
13
Defendants and Albert F. Knorp, Jr., James L. Koch, Thomas A. McDonnell and
Cyril J. Yansouni, non-management directors of the Company. The plaintiff seeks
unspecified damages on the Company's behalf from each of the defendants. On
December 18, 1997, plaintiffs served their first amended, consolidated
derivative complaint.
The Company, on whose purported behalf the derivative action is asserted,
and the individual defendants and Ernst & Young, against whom the claims are
alleged, filed demurrers to the consolidated derivative complaint on February 6,
1998. The Company's demurrer in this action is based upon the fact that the
plaintiff did not make demand on the Company's board prior to filing the
derivative action as is required by governing Delaware law. In addition, the
Company's current and former officers and directors have brought demurrers to
the consolidated, amended complaint on the grounds that plaintiffs fail to plead
any of their claims with sufficient particularity and that certain of
plaintiffs' California statutory causes of action do not apply, by their terms,
to officers and directors of a Delaware corporation. The hearing on the
Company's demurrers, which, if granted, would be dispositive, is set for March
19, 1998. The defendants' demurrers are scheduled for hearing on May 5, 1998.
The Company will not file an answer in this action unless the Court overrules
the pending or any subsequent demurrer. Further, the Company is not in a
position to state its factual defenses to the consolidated, amended complaint
until the Court rules upon the pending demurrer. Because of the nature of
derivative litigation, any recovery in the action would inure to the benefit of
the Company.
INDEMNIFICATION AGREEMENTS AND LIABILITY INSURANCE
Pursuant to Delaware law, the Company's Certificate of Incorporation, its
Bylaws and the indemnification agreements between the Company and each of its
current and former officers and directors, the Company is obligated to indemnify
its current and former officers and directors for certain liabilities arising
from their employment with or service to the Company. These indemnification
obligations require the Company to indemnify its current and former officers and
directors for any suit or other proceeding, threatened or actual, whether civil,
criminal, administrative, investigative, appellate or any other type of
proceeding, that arises as a result of any act or omission in the indemnitee's
capacity as an officer or director of the Company to the fullest extent
permitted under Delaware or any other applicable law. The indemnification
extends to any and all expenses (including but not limited to attorneys' fees
and costs, and any other out-of-pocket expense) and/or liabilities of any type
(including but not limited to judgments, fines, excise taxes or penalties under
the Employee Retirement Income Security Act ("ERISA"), and amounts paid in
settlement) reasonably incurred in connection with the investigation, defense,
settlement or appeal of such proceedings. The obligation to provide
indemnification does not apply if the indemnitee is adjudicated to be liable for
fraudulent or criminal conduct.
The Company has purchased directors' and officers' liability insurance to
reimburse it for the costs incurred in connection with its indemnification
obligations described above. For the period from August 1996 to August 1997, the
period in which most of the claims against the Company and certain of its
directors and officers were asserted, the Company had in place three directors
and officers liability insurance policies (the "1996 and 1997 D&O Policies"),
each providing $5 million in coverage for an aggregate of $15 million. The
primary policy and first excess policy were issued by Lloyds of London. The
second excess policy was issued by Admiral Insurance Company. The insurance
carriers have taken the position that litigation filed after the policy periods
of the 1996 and 1997 D&O Policies but arising from the same facts and
circumstances as claims filed during the period from August 1996 to August 1997,
"relates back" to the 1996 and 1997 D&O Policies. Thus, the issuance carriers
assert that actions filed after August 1997 do not implicate coverage under the
Company's D&O insurance policies for the period August 1997 to August 1998 (the
"Current D&O Policies"). The Current D&O Policies provide aggregate coverage of
$20 million, subject to various exclusions, including claims relating to the
restatement of the Company's financial statements. The 1996 and 1997 D&O
Policies provide that 100 percent of the costs incurred in defending claims
asserted jointly against the Company and its current and former officers and
14
directors are allocable to the individuals' defense and, thus, are covered by
the policy. However, the 1996 and 1997 D&O Policies do not provide any separate
coverage for the Company. Moreover, the Company does not have separate insurance
to cover the costs of its own defense or to cover any liability for any claims
asserted against it. The Company has not currently set aside any financial
reserves relating to any of the above-referenced actions.
In addition, in July 1997, the Commission issued a formal order of
investigation of the Company and certain unidentified individuals associated
with the Company with respect to non-specified accounting matters, public
disclosures and trading activity in the Company's securities. The Company is
cooperating with the investigation and is providing all information subpoenaed
by the Commission.
ILLUSTRA ESCROW
In January 1997, pursuant to the Illustra Agreement, Informix made a
claim to certain shares held in an escrow fund. In response, the Illustra
shareholders have claimed that the Company wrongfully caused these shares to be
retained in escrow, thereby harming the Illustra shareholders. The Illustra
securities holders have filed a demand for arbitration with the private
arbitration service agreed upon by the parties to the Illustra Agreement;
however, at present, no litigation or arbitration proceedings have been
commenced with respect to the Illustra escrow. In March 1998, a complaint was
filed against the Company on behalf of former Illustra shareholders alleging
securities and common law fraud and misrepresentation causes of actions. See
"--Actions Arising Under Federal and State Securities Laws."
GENERAL
The pending federal and state securities actions are in the early stages
of discovery. Consequently, at this time it is not reasonably possible to
estimate the damages, or the range of damages, that the Company might incur in
connection with such actions. However, the uncertainty associated with
substantial unresolved litigation can be expected to have an adverse impact on
the Company's business. In particular, such litigation could impair the
Company's relationships with existing customers and its ability to obtain new
customers. Defending such litigation will likely result in a diversion of
management's time and attention away from business operations, which could have
a material adverse effect on the Company's results of operations. Such
litigation may also have the effect of discouraging potential acquirors from
bidding for the Company or reduce the consideration such acquirors would
otherwise be willing to pay in connection with an acquisition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders
during the fourth quarter of fiscal 1997.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the National Market of The Nasdaq
Stock Market under the symbol "IFMX." The following table lists the high and low
closing sales prices of the Company's Common Stock for the periods indicated.
HIGH LOW
--------- ---------
FISCAL YEAR ENDING DECEMBER 31, 1998:
First Quarter (through March 30, 1998)....................................................... $ 8.84 $ 5.28
FISCAL YEAR ENDING DECEMBER 31, 1997:
Fourth Quarter............................................................................... $ 8.03 $ 4.06
Third Quarter................................................................................ 12.20 6.28
Second Quarter............................................................................... 15.13 6.78
First Quarter................................................................................ 24.00 15.25
FISCAL YEAR ENDED DECEMBER 31, 1996:
Fourth Quarter............................................................................... $ 28.63 $ 17.63
Third Quarter................................................................................ 30.25 20.31
Second Quarter............................................................................... 26.88 18.38
First Quarter................................................................................ 35.88 26.38
At December 31, 1997, there were approximately 3,800 stockholders of
record of the Company's common stock, as shown in the records of the Company's
transfer agent.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common
Stock. The Company expects to retain future earnings, if any, for use in the
operation of its business and does not anticipate paying any cash dividends on
its Common Stock in the foreseeable future. The holders of the Company's Series
B Convertible Preferred Stock (the "Series B Preferred") are entitled to receive
a cumulative dividend at an annual rate of 5% of the face value of each share of
Series B Preferred, resulting in an aggregate annual dividend accrual of $2.5
million. As of December 31, 1997, aggregate accrued, but unpaid, dividends of
approximately $301,000 were owed to the holders of the Series B Preferred. The
dividend is generally payable upon the conversion or redemption of the Series B
Preferred and may be paid in cash or, at the Company's election and subject to
certain conditions, in shares of Common Stock. In addition, the Certificate of
Designation of the Series B Preferred prohibits the Company from paying any
dividend or other distribution on any security ranking junior to the Series B
Preferred. The Company's Series A-1 Convertible Preferred Stock (the "Series A-1
Preferred") is senior to the Series B Preferred. In the event the Company fails
to satisfy certain contractual obligations under the agreements pursuant to
which the Series A-1 Preferred was issued, the holders of the Series A-1
Preferred are entitled to a 15% annual dividend on the face value of each share
of Series A-1 Preferred which would, based on 160,000 shares of Series A-1
Preferred outstanding as of December 31, 1997, result in an aggregate annual
dividend of $6.0 million, payable quarterly in cash for so long as the Company
is in breach of such obligations. As of the date of this report, there were no
shares of Series A-1 Preferred outstanding. However, Fletcher International
Limited ("Fletcher") holds a presently exercisable warrant to purchase up to
80,000 shares of Series A-1 Preferred. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Recent Developments."
16
RECENT SALES OF UNREGISTERED SECURITIES
The Company has issued and sold the following unregistered securities
during the period covered by this report which have not previously been reported
in the Company's quarterly reports on Form 10-Q:
1. On August 12, 1997, pursuant to a Subscription Agreement dated of
even date (the "Subscription Agreement"), the Company sold 160,000 shares of its
Series A Convertible Preferred Stock (the "Series A Preferred") for aggregate
gross proceeds of $40,000,000 to Fletcher. The Series A Preferred was
convertible into shares of Common Stock at any time after issuance and would
have automatically converted into Common Stock 18 months following the date of
its issuance by the Company. At the holder's option, each share of Series A
Preferred, which had a face value of $250, was convertible into Common Stock at
a per share price equal to 101% of the Common Stock average price for the 30
trading days ending five trading days prior to the conversion, but not greater
than the lesser of (i) 105% of the Common Stock average price of the first five
trading days of such 30 day period, or (ii) $12. The number of shares of Common
Stock to be issued upon conversion varied based on future stock price movements.
In connection with the sale of the Series A Preferred, the Company issued a
warrant to purchase up to 140,000 shares of its Series A Preferred (the "Series
A Warrant") to Fletcher with an aggregate purchase price of $35,000,000. The
Series A Warrant was generally exercisable from and after August 13, 1997 to and
including February 15, 1998, with a provision for extension of the warrant
exercise period under certain circumstances.
2. On November 17, 1997, pursuant to an amendment to the Subscription
Agreement, the Registrant issued 160,000 shares of its Series A-1 Preferred to
Fletcher in exchange for the cancellation of the Series A Preferred that had
been issued in August 1997. The Series A-1 Preferred is generally convertible
according to the same terms as the Series A Preferred described above. In
connection with the issuance of the Series A-1 Preferred, the Company issued a
warrant to purchase up to 140,000 shares of its Series A-1 Preferred to Fletcher
with an aggregate purchase price of $35,000,000 in exchange for the cancellation
of the Series A Warrant (the "Series A-1 Warrant"). The Series A-1 Warrant is
generally exercisable from its date of issuance until April 15, 1999, with a
provision for extension of the warrant exercise period under certain
circumstances.
3. On November 19, 1997, pursuant to a Securities Purchase Agreement
dated November 17, 1997, the Company sold 50,000 shares of newly authorized
Series B Preferred for aggregate gross proceeds of $50,000,000 to an investor
group led by an affiliate of Credit Suisse First Boston. Upon conversion of the
Series B Preferred, the Company is required to issue a warrant to acquire a
number of shares equal to 20% of the shares of Common Stock issued upon the
conversion of the Series B Preferred but no less than 1,300,000 shares, together
with an additional increment of warrants to purchase 200,000 shares of Common
Stock (collectively, the "Series B Warrants"). The Series B Warrants may be
exercised until 2002. In connection with the sale of the Series B Preferred, the
Company issued 100,000 shares of its Common Stock to The Shemano Group, a
financial advisor to the Company ("Shemano"). In addition, the Company agreed to
issue Shemano a warrant to purchase up to 50,000 shares of the Company's Common
Stock if the closing sales price of the Company's Common Stock as reported on
The Nasdaq Stock Market on May 17, 1998 does not exceed $12.50.
4. On February 13, 1998, Fletcher exercised the Series A-1 Warrant in
part and the Company issued 60,000 shares of Series A-1 Preferred (the "Series
A-1 Warrant Stock") to Fletcher for aggregate gross proceeds of $15.0 million.
In addition, pursuant to the Subscription Agreement, Fletcher converted 220,000
shares of Series A-1 Preferred into 12,769,908 shares of the Company's Common
Stock.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Regulation S under the
Securities Act, Section 4(2) of the Securities Act, Regulation D promulgated
thereunder or Section 3(a)(9) of the Securities Act as transactions by an issuer
not involving a public offering or as an exchange of securities of the Company
with existing security holders where no commission or other renumerator is paid
or given directly or indirectly for soliciting such exchange. The
17
recipients of securities in each such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and warrants issued in such transactions. All recipients
had adequate access, through their relationships with the Company, to
information about the Registrant.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL OVERVIEW
FIVE-YEAR SUMMARY (1)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997(2) 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues........................................ $ 662,298 $ 727,849 $ 632,770 $ 451,969 $ 353,115
Net income (loss)................................... (356,867) (73,565) 38,600 48,293 54,989
Net income (loss) per common share
Basic............................................. $ (2.36) $ (0.49) $ 0.27 $ 0.35 $ 0.42
Diluted........................................... $ (2.36) $ (0.49) $ 0.26 $ 0.34 $ 0.40
Retained earnings (accumulated deficit)............. $ (280,046) $ 78,723 $ 154,098 $ 115,668 $ 86,484
Total assets........................................ 563,244 881,998 682,445 447,769 328,001
Long-term obligations............................... 6,311 2,359 2,846 892 451
- ------------------------
The Company has not paid and does not anticipate paying cash dividends on its
Common Stock. The Company is obligated to pay a cumulative dividend on its
outstanding Series B Preferred. The dividend accumulates at an annual rate of 5%
of the face value of the outstanding Series B Preferred and is generally payable
upon conversion. See "Market for Registrant's Common Equity and Related
Stockholder Matters--Dividend Policy" and "Factors That May Affect Future
Results--Risks Associated with Preferred Stock Financings."
(1) See Note 1 to Consolidated Financial Statements for information concerning
the Company's restatement of its financial statements. All financial data in
the table above as of and for fiscal 1996, 1995 and 1994 presented reflect
such restatement.
(2) In fiscal 1997, the Company recorded a restructuring charge of $108.2
million, a write-down of certain assets in Japan of $30.5 million and a
write-down of capitalized software of $14.7 million.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER
"FACTORS THAT MAY AFFECT FUTURE RESULTS" IN THIS ITEM 7 AND ELSEWHERE IN, OR
INCORPORATED BY REFERENCE INTO, THIS REPORT.
OVERVIEW
The Company is a leading multinational supplier of information management
software. It derives license revenues principally from licensing its RDBMS
software and derives service revenues from providing technical product support
and product updates and consulting and training services to customers. The
Company's products are sold directly to end-users and indirectly through
application resellers, OEM's and distributors.
In the first quarter of fiscal 1997, the Company experienced a
substantial shortfall in license revenues compared to forecasts, resulting in a
substantial loss for that quarter. The shortfall in revenue was due to slow
growth in demand for RDBMS products as well as the Company's inability to close
a number of sales transactions that management anticipated would close by
quarter's end, particularly in Europe.
As a result of the shortfall in license revenues for the first quarter of
fiscal 1997, the Company, in the second quarter and again in the third quarter
of fiscal 1997, initiated an internal restructuring of its operations intended
to reduce operating expenses and improve the Company's financial condition.
These restructurings included selective reductions in headcount and leased
facilities and the downsizing, elimination or conversion into solution labs of
the Company's planned Information Superstores. Costs associated with the
restructurings totaled approximately $108.2 million and had a material adverse
effect on the Company's results of operations for fiscal 1997. In addition, the
Company issued newly designated series of Preferred Stock in two financing
transactions which resulted in aggregate net proceeds of $87.6 million to the
Company (excluding a $1.0 million fee paid to a financial advisor of the Company
in connection with the sale of the Series B Preferred) and entered into a senior
secured credit facility agreement with available proceeds of up to $75.0
million, of which the Company was eligible to borrow $47.0 million at December
31, 1997, based on certain eligibility criteria. See "Recent Sales of
Unregistered Securities" and "--Liquidity and Capital Resources."
In August 1997, the Company announced that it had become aware of errors
and irregularities that affected the timing and the dollar amount of reported
earned revenues from license transactions for all annual periods in the three
years ended December 31, 1996. These errors and irregularities included
unauthorized and undisclosed arrangements or agreements between Company
personnel and resellers, recognition of revenue on certain transactions in
reporting periods prior to contract acceptance, the recording of certain
transactions that lacked economic substance and the recording of maintenance
revenue as license revenue. The unauthorized and undisclosed agreements with
resellers introduced acceptance contingencies, permitted resellers to return
unsold licenses for refunds, extended payment terms or committed the Company to
assist resellers in selling the licenses to end-users. Accordingly, license
revenues from these transactions that were recorded at the time product was
delivered to resellers should have instead been recorded at the time all
conditions to the sale lapsed. Because of the pervasiveness of the unauthorized
arrangements with resellers in the 1994, 1995 and 1996 accounting periods, the
Company concluded that all revenue from license agreements with resellers,
except for those licenses sold and billed on a per copy basis, should be
recognized only when the licenses were resold or utilized by resellers and all
related obligations had been satisfied. In addition, amounts received from
resellers or financial institutions as prepayments of software license fees in
advance of revenue recognition should be recorded as advances
19
on unearned license revenue. The financial review undertaken by the Company
resulted in the restatement of the Company's financial results for fiscal 1996,
1995 and 1994 and for the first quarter of fiscal 1997. The Company publicly
disclosed the results of the restatement in November 1997.
In connection with the errors and irregularities discussed above, a
number of conditions which collectively represented a material weakness in the
Company's internal accounting controls were identified. These conditions
included a deterioration in the Company's accounting controls at corporate and
regional management levels, and a related failure to stress the importance of
these controls, an inappropriate level of influence, principally by the
Company's sales organization, over the revenue recognition process and an
apparent lack of clarity and consistent understanding within the Company
concerning the application of the Company's revenue recognition policies to
large, complex reseller license transactions. To address the material weakness
represented by these conditions, the Company is implementing a plan to
strengthen the Company's internal accounting controls. This plan includes
updating the Company's revenue recognition policies regarding accounting and
reporting for large, complex reseller license transactions, developing and
conducting educational programs to help implement such policies, changing the
Company's corporate and regional accounting and reporting structure and
re-establishing the internal audit function reporting to the Company's Board of
Directors.
As a result of the restatement, total revenues were reduced from amounts
previously reported by $211.5 million from $939.3 million as originally reported
to $727.8 million, by $81.4 million from $714.2 million as originally reported
to $632.8 million, and by $18.1 million from $470.1 million as originally
reported to $452.0 million for fiscal 1996, 1995 and 1994, respectively. The
restatement also resulted in an increase in revenues of $15.5 million from
$133.7 million as originally reported to $149.2 million for the first quarter of
fiscal 1997. In addition, the restatement resulted in a reduction in net income
of $171.4 million from $97.8 million as originally reported to a loss of $73.6
million for fiscal 1996; a reduction in net income of $59.0 million from $97.6
million as originally reported to $38.6 million for fiscal 1995; and a reduction
in net income of $13.6 million from $61.9 million as originally reported to
$48.3 million for fiscal 1994. The restatement had a material adverse effect on
the Company's financial condition, most notably evidenced by substantial
reductions in retained earnings and working capital. At December 31, 1996, after
giving effect to the restatement, the Company's working capital decreased $255.3
million from $258.4 million as originally reported to $3.1 million. At December
31, 1997, the Company had a working capital deficit of $140.2 million. The
substantial reductions in working capital at December 31, 1997 and 1996 reflect
substantial operating losses and the addition of "advances on unearned license
revenue" as a current liability on the Company's balance sheet. Such advances
totaled $180.0 million at December 31, 1997 and $239.5 million at December 31,
1996.
The Company's public announcement of the pending restatement, delays in
reporting operating results for the second and third quarters of fiscal 1997
while the restatement was being compiled, threatened de-listing of the Company's
Common Stock from the Nasdaq National Market as a result of the Company's
failure to satisfy its public reporting obligations, corporate actions to
restructure operations and reduce operating expenses, and customer uncertainty
regarding the Company's financial condition adversely affected the Company's
ability to sell its products in fiscal 1997. The financial restatement has now
been completed, its results have been publicly disclosed and the Company is
current with respect to its public reporting obligations. In addition, the
Company believes that it has effectively controlled its operating expenses and
significantly improved its financial condition. Nevertheless, adverse market
conditions, including significant competitive pressures in the Company's markets
and ongoing customer uncertainty about the Company's financial condition and
business prospects, may continue to have an adverse effect on the Company's
ability to sell its products and results of operations.
20
FISCAL YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The following table sets forth operating results as a percentage of net
revenues for the three years ended December 31, 1997, respectively.
YEARS ENDED DECEMBER
31,
---------------------
1997 1996 1995
----- ----- -----
PERCENT OF NET
REVENUE
---------------------
Net revenues:
Licenses.......................................................................... 57% 68% 72%
Services.......................................................................... 43 32 28
----- ----- -----
Total net revenues............................................................ 100 100 100
Cost and expenses:
Cost of software distribution..................................................... 10 6 6
Cost of services.................................................................. 25 20 14
Sales and marketing............................................................... 63 57 48
Research and development.......................................................... 21 16 14
General and administrative........................................................ 13 9 8
Write-off of goodwill and long-term assets........................................ 5 -- --
Write-off of acquired research and development.................................... 1 -- --
Restructuring charges............................................................. 16 -- --
Merger expenses................................................................... -- 1 --
----- ----- -----
Total expenses................................................................ 154 109 90
----- ----- -----
Operating income (loss)............................................................. (54) (9) 10
----- ----- -----
Net income (loss)................................................................... (54)% (10)% 6%
----- ----- -----
----- ----- -----
Informix's operating results for fiscal 1997 were significantly below the
prior year due to decreases in license revenue and increases in costs and
expenses. Revenue declined 9% for fiscal 1997 in comparison to fiscal 1996.
Revenue declined 9%, 7%, 9% and 2% in North America, Asia/Pacific, Europe and
Latin America, respectively. The increase in operating expenses reflects
continued expansion of product and customer support organizations through the
early months of fiscal 1997 as well as incremental legal and audit expenses
related to the stockholder lawsuits and the restatement process, charges of
$30.5 million related to the Company's Japanese operations, $108.2 million for
restructuring charges, $14.7 million for write-down to net realizable value of
previously capitalized software costs and $7.0 million for a write-off of
acquired research and development during the period. The lower revenues combined
with increased operating costs resulted in an operating loss of $357.3 million
for the year. See "Legal Proceedings," "--Cost of Software Distribution,"
"--Write-off of Acquired Research and Development," "--General and
Administrative Expenses" and "--Restructuring Charges."
Informix's operating results were affected negatively in fiscal 1996 as a
result of operating expenses growing more rapidly than revenues. Informix
continued to invest heavily in personnel in the areas of sales, marketing and
customer service and research and development and incurred integration expenses
and fees associated with the acquisition in February 1996 of Illustra. In
December 1996, Informix began shipping its Universal Server product. Informix
incurred significant marketing expenses in connection with the initial
announcement and launch of the Universal Server in fiscal 1996. These
development, integration and marketing expenses adversely affected Informix's
operating margins in fiscal 1996.
REVENUES
The Company derives revenues from licensing its software and providing
post-license technical product support and updates to customers and from
consulting and training services. License revenues may
21
involve the shipment of product by the Company or the granting of a license to a
customer to manufacture products. Service revenues consist of customer telephone
or direct support, product update rights, consulting and training fees. Total
net revenues were $662.3 million, $727.8 million and $632.8 million for fiscal
1997, 1996 and 1995, respectively. Between December 31, 1996 and 1997, total net
revenues decreased by 9% or $65.5 million, primarily as a result of a
substantial decrease in license revenues, partially offset by an increase in
service revenues. Between December 31, 1995 and 1996, total net revenues
increased by 15% or $95.1 million.
LICENSE REVENUES
The Company sells its products directly to end-users as well as through
resellers, including OEM's, distributors and VAR's. During fiscal 1996, the
Company increased the focus on its reseller channels to establish partnerships
with hardware and application vendors in order to utilize their sales force,
obtain access to their installed base of customers and benefit from their
consulting and systems integration organizations. The Company recognizes license
revenue from resellers, except for those sold and billed on a per copy basis,
when the licenses are resold or utilized by the reseller and all related
obligations have been satisfied. License revenues accounted for 57%, 68% and 72%
of total revenues in fiscal 1997, 1996 and 1995, respectively. The year-to-year
declines in license revenues as a percentage of total revenues reflect the fact
that service revenues have grown at a faster pace than license revenues, and
that license revenues declined substantially in fiscal 1997.
License revenue declined by 24% to $376.6 million for fiscal 1997 from
$496.0 million for fiscal 1996. In the first quarter of fiscal 1997, license
revenues decreased 43% compared to the fourth quarter of fiscal 1996. This
decrease was primarily due to slow growth in demand for RDBMS products as well
as the Company's inability to close a number of sales transactions that
management anticipated would close by quarter's end, particularly in Europe. In
the second quarter of fiscal 1997, license revenue increased 27% compared to the
first quarter, principally as a result of stronger product license sales in
North America. In the third quarter of fiscal 1997, license revenues decreased
29% compared to the second quarter. The decrease in the third quarter was
attributable to a significant extent to decreased product license sales in
Europe and Latin America and customer uncertainties resulting from the Company's
announcement of the restatement of its financial statements in August 1997 and
restructuring activities in September 1997. During the fourth quarter of fiscal
1997, license revenues increased 36% as compared to the third quarter of fiscal
1997. The increase in the fourth quarter of fiscal 1997 was principally due to
increased license sales in Europe and Latin America, which the Company believes
was due to improved customer confidence about the Company and its financial
condition following the announcement of its restated financial statements.
The Company does not believe that the decrease in license revenue in
fiscal 1997 compared to fiscal 1996 reflects a reduced acceptance of the
Company's products or a reduced competitive advantage of its products. The
Company believes that this decrease was primarily attributable to the slowing
growth in the market for RDBMS products and customer uncertainty about the
Company's financial condition and viability, due to the Company's operating
losses in the first three quarters of fiscal 1997, the announcement of the
restatement, the delays in reporting operating results for the second and third
quarters of fiscal 1997, the threatened de-listing of the Company's Common Stock
from the Nasdaq National Market as a result of the Company's failure to satisfy
its public reporting obligations, and the Company's actions to restructure
operations and reduce operating expenses. In addition, the Company experienced a
significant turnover in senior management sales positions during 1997, which
adversely affected sales. During the fourth quarter of fiscal 1997, the Company
filled certain key sales positions through new hires, internal promotion and
reorganization of its sales force.
License revenues increased 8% to $496.0 million for fiscal 1996 from
$458.3 million for fiscal 1995. The license revenue growth during fiscal 1996
reflects an increase in sales of the Company's server products, particularly the
Company's flagship database server, OnLine Dynamic Server, partially offset by
22
a decrease in license revenues from its database tool products. The increase in
server product revenues during fiscal 1996 reflected continued acceptance of the
Company's server products. The Company believes that the RDBMS industry has
benefited from market acceptance of UNIX, Windows, Windows NT and other open
operating environments and trends to downsize from large proprietary computer
systems. The Company believes that the decline in license revenues derived from
its database tool products is primarily the result of competitive product
offerings from other companies.
At December 31, 1997, 1996 and 1995 licenses not resold by resellers
representing approximately $180.0 million, $239.5 million and $83.6 million,
respectively, were recorded as advances on unearned license revenues and had not
been recognized as earned revenue. Licenses originally recorded as advances on
unearned license revenue representing approximately $64.8 million, $58.2 million
and $34.2 million were sold through reseller channels to end users during fiscal
1997, 1996 and 1995, respectively, and recognized as earned revenue. The Company
estimates that approximately $50 to $70 million of the advances on unearned
license revenues of $180.0 million at December 31, 1997 will be sold through to
end-users during fiscal 1998. Nevertheless, there can be no assurances that such
licenses will be resold. If the underlying license agreements expire and are not
renewed prior to resellers' selling all licenses to end users and the Company
has no remaining obligations, the remaining revenue relating to customers'
advances will be recognized in the quarter following the expiration of the
reseller license agreements.
The Company's license transactions can be relatively large in size and
difficult to forecast both in timing and dollar value. As a result, these
transactions have caused fluctuations in net revenues and net income (loss)
because of the relatively high gross margin on such revenues. As is common in
the industry, a disproportional amount of the Company's license revenue is
derived from transactions that close in the last weeks or days of a quarter. The
timing of closing large license agreements also increases the risk of
quarter-to-quarter fluctuations. The Company expects that these types of
transactions and the resulting fluctuations will continue.
The Company is currently unable to forecast whether the decreases in
license revenue experienced in fiscal 1997 will continue in fiscal 1998. During
1997, substantial uncertainty existed about the Company's business and financial
condition. The Company believes that various actions taken by the Company during
1997 have substantially improved its financial condition. See "--Restructuring
Charges" and "--Liquidity and Capital Resources." Nevertheless, adverse market
conditions, including significant competive pressures and ongoing customer
uncertainty about the Company's financial condition and business prospects,
could continue to have an adverse effect on license revenues and results of
operations.
SERVICE REVENUES
Service revenues increased 23% to $285.7 million for fiscal 1997 from
$231.8 million for fiscal 1996. Service revenues increased 33% to $231.8 million
for fiscal 1996 from $174.5 million for fiscal 1995. Service revenues accounted
for 43%, 32% and 28% of total revenues in fiscal 1997, 1996 and 1995,
respectively. As the Company's products become more complex, more support
services are expected to be required. The Company intends to satisfy this
requirement through internal support, third-party services and OEM support.
Service revenues are comprised of maintenance, consulting and training revenues.
The Company continues to emphasize support services as a source of revenue and
the growth achieved in absolute dollars reflects the growth in the Company's
installed base and strategic focus on providing consulting services for its
customers. The year-to-year increases in service revenues as a percentage of
total revenues reflect the fact that service revenues have continued to grow
while license revenues declined substantially in fiscal 1997.
Revenue derived from post-contract technical support and fees for
software updates increased 18% to $188.1 million in fiscal 1997 from $159.5
million in fiscal 1996 and 31% in fiscal 1996 from $121.9 million in fiscal
1995. This increase is attributable principally to maintenance contracts for new
license sales in each year as well as the renewal of existing maintenance
contracts. In the event the
23
Company continues to experience substantial declines in license revenue, such
declines would be expected to have an adverse effect on growth in service
revenues.
Consulting and training revenues increased 35% to $97.6 million in fiscal
1997 from $72.3 million in fiscal 1996 and 38% in fiscal 1996 from $52.6 million
in fiscal 1995. The growth in the consulting and training practice was driven by
increased demand for consulting services primarily in North America and in
Europe. Some significant one-time large consulting contracts were also executed
in fiscal 1997 and contributed to the significant increase of consulting
revenues year over year. There can be no assurances that similar one-time large
consulting contracts will be entered into in future periods. Failure to secure
such contracts may have an adverse impact on the growth of service revenues.
GEOGRAPHIC DISTRIBUTION
The Company's distribution markets are organized into four general
markets: North America; Europe, the Middle East and Africa; Latin America; and
the Asia/Pacific region, including Japan. The North America, Europe, Latin
America and Asia/Pacific organizations contributed 46%, 34%, 8% and 12% of the
Company's net revenues, respectively, in fiscal 1997, compared to 46%, 34%, 7%
and 13%, respectively, in fiscal 1996 and 45%, 36%, 6% and 13%, respectively, in
fiscal 1995.
Approximately 54%, 54% and 55% of Informix's net revenues were derived
from sales to foreign customers in fiscal 1997, 1996 and 1995, respectively.
Informix expects that foreign revenues will continue to provide a significant
portion of total revenues. However, changes in foreign currency exchange rates,
the condition of local economies, and the general volatility of software markets
may result in a higher or lower proportion of foreign revenues in the future. In
Europe and Asia/Pacific most revenues and expenses are now denominated in local
currencies. The U.S. dollar strengthened in fiscal 1997 against the major
European and Asia/Pacific currencies, which resulted in lower revenue and
expenses recorded when translated into U.S. dollars, compared with the prior
year periods. Although the Company has also increased its direct presence in
Latin America, a significant percentage of this region's revenue is still
denominated in U.S. dollars. Although the effect was not significant in fiscal
1997, the Company has in the past experienced significant currency fluctuations
in Mexico, and to a lesser extent, other Latin American countries, and expects
such fluctuations may occur in the future. The Company's operating and pricing
strategies take into account changes in exchange rates over time; however, the
Company's results of operations may be significantly affected in the short term
by fluctuations in foreign currency exchange rates. In addition, the current
continued weakness observed in Asian currencies may result in reduced revenues
from the countries affected by this condition, thus having a negative impact on
the overall performance of the Company.
CONCURRENT TRANSACTIONS
Principally during fiscal 1996, the Company entered into software license
agreements with certain computer and service vendors where the Company
concurrently committed to acquire goods and services. These concurrent
transactions in fiscal 1996 included license agreements of approximately $170.0
million and a commitment by the Company to acquire goods and services in the
aggregate of approximately $130.0 million. Concurrent transactions in 1997
included license agreements of approximately $21 million and a commitment by the
Company to acquire goods and services in the aggregate of approximately $50
million. See Notes 1 and 2 of Notes to Consolidated Financial Statements.
24
COST OF SOFTWARE DISTRIBUTION
1997 CHANGE 1996 CHANGE 1995
--------- --------- --------- ----------- ---------
(DOLLARS IN MILLIONS)
Manufactured cost of software distribution........................... $ 26.9 (16)% $ 32.2 26% $ 25.6
Percentage of license revenue........................................ 7% 6% 6%
Amortization of capitalized software................................. $ 21.4 47% $ 14.6 21% $ 12.0
Percentage of license revenue........................................ 6% 3% 3%
Write-down to net realizable value................................... $ 14.7 N.M. -- N.M. --
Percentage of license revenue........................................ 4%
Total cost of software distribution.................................. $ 63.0 35% $ 46.8 24% $ 37.6
Percentage of license revenue........................................ 17% 9% 8%
- ------------------------
N.M. = Not meaningful
Cost of software distribution increased to $63.0 million for fiscal 1997
from $46.8 million and $37.6 million for fiscal 1996 and 1995, respectively.
Software distribution costs consist primarily of (i) manufacturing and related
costs such as media, documentation, product assembly and purchasing costs,
freight, customs, and third-party royalties and (ii) amortization of previously
capitalized software development costs including adjustments to the carrying
value of such capitalized costs based on changes to the Company's estimates of
the net realizable value of related products.
Excluding amortization and the write-down to net realizable value of
previously capitalized software development costs, cost of software distribution
as a percentage of license revenue was 7% for fiscal 1997 and 6% for both fiscal
1996 and 1995. In the future, the cost of software distribution as a percentage
of revenue may vary depending upon the extent to which the product is reproduced
by the Company or by its customers.
Amortization of capitalized software costs commences the quarter
following product introduction. Capitalized software amortization increased 47%
to $21.4 million for fiscal 1997 from $14.6 million for the prior year period.
The increase in amortization of capitalized software in absolute dollars and as
a percentage of net revenues is due to the release of the Company's Universal
Server products in the fourth quarter of fiscal 1996. The absolute value of
amortization of capitalized software will vary period to period as new products
are released and other products become fully amortized.
Amortization of capitalized software increased 21% in fiscal 1996
compared to fiscal 1995 due to the release of several products in the latter
half of fiscal 1995 and 1996. The absolute value of amortization of capitalized
software will vary from quarter to quarter as new products are released and
other product development costs become fully amortized.
The write-down to net realizable value of $14.7 million during the first
quarter of fiscal 1997 was due to the Company's acquisition of CenterView
Software, Inc. ("CenterView") and the related announcements of its revised tool
strategy. In accordance with Financial Accounting Standards Board Statement No.
86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed," a net realizable value test was performed on certain of the
Company's database tool products and resulted in a write-down of $14.7 million
of previously capitalized software costs. In addition to this write-down, the
Company recorded separately a $7.0 million charge for write-off of Acquired
Research and Development in connection with the Company's acquisition of
CenterView. See "--Write-off of Acquired Research and Development."
25
COST OF SERVICES
Cost of services consists primarily of maintenance, consulting and
training expenses. Cost of services increased 15% to $166.9 million for fiscal
1997 from $144.9 million for fiscal 1996. Cost of services increased 58% to
$144.9 million for fiscal 1996 from $91.5 million for fiscal 1995. The overall
growth in cost of services of 15% between fiscal 1996 and 1997 is consistent
with the 23% growth in service revenues over the same period. The cost of
services increased significantly in fiscal 1996 as the Company substantially
expanded its consulting practice in the United States and Europe as well as its
technical support organization in order to provide customer assistance for the
Online Dynamic Server product line. Cost of services decreased as a percentage
of service revenues to 58% for fiscal 1997 compared to 62% for the same period
in 1996. During fiscal 1997, gross margins increased relative to both support
revenue and consulting/training revenue, particularly in the third and fourth
quarters of that year. The Company believes that the increased margins during
fiscal 1997 were principally attributable to more efficient delivery of
services. The increase in cost of services in fiscal 1996 in absolute dollars
and as a percentage of net revenues compared to the prior year is primarily due
to the Company's expansion of consulting and support service capabilities as
products have become more complex.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased less than 1% to $417.2 million for
fiscal 1997 from $413.7 million for fiscal 1996. Sales and marketing expenses
increased 37% to $413.7 million for fiscal 1996 from $301.9 million for fiscal
1995. As a percentage of revenues, sales and marketing expenses increased to 63%
in fiscal 1997 from 57% in fiscal 1996, due to a reduction in net revenues. As a
percentage of revenues, sales and marketing expenses increased to 57% in fiscal
1996 from 48% in fiscal 1995, due to significant increases in sales and
marketing personnel and marketing programs starting in late 1996.
During the late months of fiscal 1996 and in the early months of fiscal
1997, there were significant increases in personnel and expenses as the Company
continued to expand its sales force for anticipated license revenue growth and
continued to implement various marketing programs, including its Information
Superstore program. The Information Superstore program, which was launched in
fiscal 1996 and through the early months of 1997, resulted in increased
depreciation expense due to the fixed asset purchases related to the program.
The slight increase in sales and marketing expense in fiscal 1997 in absolute
dollars compared to fiscal 1996 was a result of continued increased expenses in
the early months of fiscal 1997, offset by a significant reduction in overall
sales and marketing expenses in the second half of fiscal 1997 in connection
with the restructuring plan executed by the Company.
Due to the significant revenue shortfall in the first quarter of fiscal
1997, the Company executed internal restructuring plans in the second quarter
and again in the third quarter, which included reducing headcount, consolidating
facilities and operations, and downsizing, eliminating or converting Information
Superstores into solution labs managed by the Company's consulting practice. The
Company had significantly lower sales and marketing costs in the fourth quarter
of fiscal 1997 as a result of these measures. In the fourth quarter of fiscal
1997, sales and marketing expenses were reduced to $69.3 million. Costs in the
fourth quarter of fiscal 1997 were 43% lower than the prior year quarter and 32%
lower than the third quarter of fiscal 1997.
The significant increase in sales and marketing expenses in fiscal 1996
in absolute dollars compared to fiscal 1995 was a result of the addition of new
sales offices and sales personnel worldwide as the Company expanded its
worldwide sales organization, the opening of new foreign offices, higher
commission expense associated with the increase of revenues prior to the
restatement and increased marketing programs associated with new product
launches.
26
RESEARCH AND DEVELOPMENT EXPENSES
1997 CHANGE 1996 CHANGE 1995
--------- --------- --------- ----------- ---------
(DOLLARS IN MILLIONS)
Incurred product development expenditures......................... $ 161.1 8% $ 148.6 44% $ 103.1
Expenditures capitalized.......................................... 21.8 (23)% 28.4 62% 17.5
Research and development expenses................................. $ 139.3 16% $ 120.2 40% $ 85.6
Expenditures capitalized as a percentage of incurred.............. 14% 19% 17%
Research and development expenses increased 16% to $139.3 million for
fiscal 1997 from $120.2 million for fiscal 1996. Research and development
expenses increased 40% to $120.2 million for fiscal 1996 from $85.6 million for
fiscal 1996. The year-to-year increase in research and development expenses in
absolute dollars for fiscal 1997, is attributable principally to an increase in
staff which occurred during the early part of fiscal 1997, working on new
products and product extensions. The year-to-year increase in research and
development expenses in absolute dollars for fiscal 1996 is attributable
principally to an increase in staff, working on the development of new products
and product extensions, including Universal Server.
Informix accounts for its software development expenses in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." This
statement requires that, once technological feasibility of a developing product
has been established, all subsequent costs incurred in developing that product
to a commercially acceptable level be capitalized and amortized ratably over the
revenue life of the product.
Prior to fiscal 1997, the higher capitalization in absolute dollars of
product development expenditures from year to year resulted from an increase in
the work involved in projects having already reached technological feasibility
as they neared their release dates, including Universal Data Options formerly
Informix Universal Server.
The Company believes that research and development expenditures are
essential to maintaining its competitive position in its primary markets and
expects the expenditure levels to continue to constitute a significant
percentage of revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
In fiscal 1997, general and administrative expenses increased 36% to
$87.5 million from $64.4 million for fiscal 1996. In fiscal 1996, general and
administrative expenses increased 26% to $64.4 million from $51.1 million for
fiscal 1995. The increase in fiscal 1997 in general and administrative expenses
in absolute dollars and as a percentage of net revenue was primarily the result
of the continued expansion of the Company's international operations, higher bad
debt expense of $4.6 million, incremental legal and auditing expenses of $8
million resulting from the stockholders' litigation and the restatement of the
Company's financial statements, and the write-off of certain assets of $2.2
million. General and administrative expenses increased in absolute dollars in
1996 compared to 1995 as a result of the continued expansion of the Company's
international operations.
WRITE-OFF OF GOODWILL AND OTHER LONG-TERM ASSETS
In accordance with Financial Accounting Standards Board Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," the Company records impairment losses on long-lived
assets used in its operations when events and circumstances indicate that the
assets might be impaired and the estimated future undiscounted cash flows to be
generated by those assets are less than the assets' carrying amounts.
In the first quarter of fiscal 1997, the Company's Japanese subsidiary
experienced a significant shortfall in business activity compared to historical
levels. This fact, coupled with continuing competitive
27
pressures in the Japanese market, resulted in the Company adjusting its
forecasts of the subsidiary's future cash flows and further led the Company to
evaluate the recoverability of the subsidiary's long-lived assets, including
computer and other equipment, acquired intangible assets and goodwill. As a
result of this evaluation, the Company determined that the carrying value of
these long-lived assets had been impaired and, accordingly, recorded a charge in
the first quarter of $30.5 million to write-down the assets' carrying value to
their estimated fair value. Fair value was determined using estimated future
discounted cash flows of the subsidiary and/or resale values as appropriate.
WRITE-OFF OF ACQUIRED RESEARCH AND DEVELOPMENT
In February 1997, the Company acquired all of the outstanding capital
stock of CenterView, a privately owned corporation that provides software tools
for application development. The aggregate purchase price was approximately $8.7
million, which included cash plus direct costs of acquisition. For financial
statement purposes, the acquisition has been accounted for as a purchase and,
based on an independent appraisal of all the assets acquired and liabilities
assumed, the purchase price was allocated to the specifically identifiable
tangible and intangible assets acquired, including approximately $7.0 million of
purchased research and development which has been charged to operations in the
period the acquisition was consummated, the first quarter of fiscal 1997.
Based on a review of CenterView's current suite of products, the
Company's management identified and classified future versions of the Company's
Data Director product as in-process technology, specifically Versions 3.0 and
4.0, as of the date of its acquisition. Data Director is an integrated
development extension for Microsoft Visual Basic that enables companies to build
corporate Intranet and client/server applications in a single environment. Data
Director enhances Visual Basic with a model-driven data access engine that
manages all database interactions between client and server, eliminating the
complexity traditionally associated with client/server development and enabling
companies to build client/ server applications faster and more efficiently than
with Visual Basic alone.
Based on discussions with CenterView management, including project
development project managers regarding the stage of development of Versions 3.0
and 4.0, it was determined that these projects had not reached technological
feasibility as of the date of the CenterView acquisition, nor did these projects
have any alternative future use. This determination was based primarily on an
assessment of the history of the research and development schedules for the
projects, their current stage of development, the risks inherent in completing
the incremental research and development efforts necessary to reach
technological feasibility, and the planned general release dates. Version 3.0
was scheduled for first customer release in July 1997 while Version 4.0 was
anticipated to reach first customer release in April 1998. Based on the
discussions with CenterView management regarding historical product releases, it
was determined that commercial release occurs approximately two to three months
after first customer introduction of the product. The projects are expected to
produce positive levels of cash flow during the year ended December 31, 1998.
Moreover, the Company estimated that the costs to complete these projects would
be approximately $8.4 million in fiscal 1997 and approximately $4.2 million in
fiscal 1998. These figures were estimated by considering (i) the development
schedules of the in-process projects; (ii) complexity of the identified
development projects; and (iii) number of engineer hours per project, per year.
The market for the Company's Data Director product is characterized by
rapidly changing technology, frequent new product introductions and evolving
market and customer demands. Although CenterView successfully developed and
marketed Data Director Version 2.1 and previous versions, there can be no
assurance that the Company will be successful in developing and marketing the
enhanced versions of the Data Director product. As such, the in-process
technology embedded in Data Director Versions 3.0 and 4.0 was valued utilizing
risk-adjusted cash flows to incorporate these and other uncertainties associated
with the Company's product development efforts. Failure to successfully complete
these
28
efforts in a timely manner could adversely affect the market potential for the
acquired CenterView products.
RESTRUCTURING CHARGES
In June and again in September 1997, the Company approved plans to
restructure its operations in order to bring expenses in line with forecasted
revenues. In connection with these restructurings, the Company substantially
reduced its worldwide headcount and consolidated facilities and operations to
improve efficiency. The following analysis sets forth the significant components
of the restructuring reserve at December 31, 1997:
RESTRUCTURING NON-CASH CASH ACCRUAL BALANCE AT
EXPENSE COSTS PAYMENTS DECEMBER 31, 1997
------------- ----------- ----------- -------------------
(IN MILLIONS)
Severance and benefits............... $ 21.9 $ -- $ 19.5 $ 2.4
Write-off of assets.................. 48.2 48.2 -- --
Facility charges..................... 34.7 7.7 3.8 23.2
Other................................ 3.4 2.2 .2 1.0