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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
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
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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 26, 1999 based on the closing sales price of the
Company's Common Stock, as reported on The Nasdaq Stock Market, was
approximately $1,654,026,369. 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 26, 1999, Registrant had 189,031,585 shares of Common Stock
issued and outstanding.
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INFORMIX CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I................................................................................................... 1
ITEM 1. BUSINESS................................................................................. 1
ITEM 2. PROPERTIES............................................................................... 11
ITEM 3. LEGAL PROCEEDINGS........................................................................ 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................... 13
PART II.................................................................................................. 14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................... 14
ITEM 6. SELECTED FINANCIAL DATA.................................................................. 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.... 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................... 46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................. 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..... 47
PART III................................................................................................. 49
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT........................................... 49
ITEM 11. EXECUTIVE COMPENSATION................................................................... 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................... 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... 49
PART IV.................................................................................................. 50
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................... 50
SIGNATURES............................................................................................... 54
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PART I
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.
ITEM 1. BUSINESS
Informix Corporation is a leading supplier of information management
software and solutions to governments and enterprises worldwide. We design,
develop, manufacture, market and support
- Relational database management systems
- Connectivity interfaces and gateways
- Graphical and character-based application development tools for building
database applications that allow customers to access, retrieve and
manipulate business data
We also offer complete solutions, which include our database management
software, our own and third-party software, and our consulting services, to help
customers design and deploy data warehouses, Web-based enterprise repositories
and electronic commerce applications.
On December 31, 1998, we expanded our ability to deliver data warehousing
solutions by acquiring Red Brick Systems, Inc. We issued approximately 7.6
million shares of our Common Stock to the former stockholders of Red Brick in
exchange for all of the outstanding shares of Red Brick stock. In addition, we
assumed all of the outstanding options to purchase shares of Red Brick common
stock. Red Brick's data mart technology is offered as part of our data
warehousing solution. See "Products--Solutions" below.
BACKGROUND
Today's organizations generate and store ever-increasing amounts of
information. Databases and database management systems were developed to
electronically store, manage, retrieve and analyze information (data) in the
most efficient way possible. In general, databases represent large aggregations
of data records, such as sales transactions, inventories, and customer profiles.
Database management systems ("DBMS") control the organization, storage,
retrieval, security and integrity of data in a database. By managing user
read/write authorizations, the DBMS also allows concurrent access to the stored
data by multiple users without corrupting the underlying data.
Relational databases, developed in 1970, address the issues of data
redundancy and data dependence common in pre-relational or hierarchical
databases. By organizing the data into pre-defined and related tables,
relational database management systems ("RDBMS") protect the integrity of the
data and improve the efficiency of the database. A relational database also has
the important advantage of being easy to extend with new data categories.
Organizations commonly employ RDBMS software for use in storing, managing
and retrieving the large amounts of data necessary to support four types of
systems:
- Internal management information systems, such as accounting, human
resources and manufacturing
- Mission-critical online transaction processing ("OLTP") systems that
process business information from a large number of locations or users
- Data warehousing/data mart systems that aggregate data from multiple OLTP
systems and perform sophisticated analyses to support business decisions
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- Internet applications, including dynamic site publishing, information
retrieval and electronic commerce.
We believe 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 audio, video, text and three dimensional graphics in
addition to conventional character data. Since 1996, we have devoted substantial
resources to the development of object-relational database management systems,
which provide RDBMS functionality for complex data such as images, video, audio
and spatial data, and tools for applications in multimedia and entertainment,
digital media publishing, retail and financial services.
We market our products to end-users on a worldwide basis directly through
our sales force and indirectly through application resellers, original equipment
manufacturers ("OEMs") and distributors. The principal geographic markets for
our products are North America, Europe, the Asia/Pacific region, and Latin
America. In recent years, approximately half of our total revenues have been
generated outside North America. Our 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. We also market our products to state, local and
national governments.
PRODUCTS
Our products can be divided into three main categories:
- SOFTWARE PRODUCTS, which include our database management systems, tools,
and connectivity products
- SERVICES, including maintenance, consulting, education and training and
customer support
- SOLUTIONS, which combine both software and services into business
solutions for data warehousing, web-based enterprise repositories and
electronic commerce
SOFTWARE PRODUCTS
INFORMIX DYNAMIC SERVER
The core of our product offering is Informix Dynamic Server-TM- ("IDS"), our
powerful, multithreaded enterprise database server designed for scalability,
manageability, and performance. IDS offers full RDBMS functionality across
various hardware architectures (uniprocessor, symmetric multiprocessor,
symmetric multiprocessor clusters, and massively parallel processing
architectures) and database models (relational and object-relational) to enable
seamless migration of applications, data and skills. As an open system built to
support industry standards, IDS uses a single architecture for the Windows NT,
UNIX and Linux operating systems.
We also provide workgroup, personal and developer versions of IDS, which
have been adapted for workgroup, single-user and development environments.
Based on our Dynamic Scalable Architecture-TM-, IDS features parallel data
processing capability, replication and connectivity options built into its core.
IDS is available in a variety of configurations based upon adding one or more of
the configuration options described below.
ADVANCED DECISION SUPPORT OPTION-TM- extends IDS with a variety of data
warehousing functions including summarization, sampling, and "top-N."
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EXTENDED PARALLEL OPTION-TM- adapts IDS to work within loosely coupled,
share-nothing computing architectures, including clusters of symmetric
multiprocessing systems and parallel processing systems.
UNIVERSAL DATA OPTION-TM- adds extensibility to IDS and support for SQL3 and
DataBlade-Registered Trademark- modules. Extensibility includes the ability to
add new objects and data types, such as images, audio, video and spatial data,
business specific procedures and logic, and new indexing search methods to the
server. DataBlade modules encapsulate specific datatypes and logic for easy
integration with IDS so that organizations can quickly extend the functionality
of the database to support datatypes unique to an organization. We offer
DataBlade modules for text, rich content, unicode, video, geodetic, spatial and
time series data. Additional DataBlade modules are available from third parties,
including DataBlade modules for local languages, advanced search and retrieval
capabilities, digital media, spatial and geo-spatial applications, messaging,
data warehousing (data cleansing, qualification and queries), bio-informatics
and medical imaging and security.
INFORMIX METACUBE-REGISTERED TRADEMARK- adds to IDS a business analysis
environment for data warehouses. This option provides a multidimensional view of
data without the constraints of a 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 extends analysis capabilities to
intranets. MetaCube currently supports both Informix's and Oracle's databases.
WEB INTEGRATION OPTION-TM- delivers an open platform that provides
high-performance connectivity between Web servers and IDS. This option enables
developers to create intelligent web applications based upon data stored in a
database to deliver tailored, multimedia Web pages to users.
CONNECTIVITY AND GATEWAY PRODUCTS
Connectivity and gateway products provide for the integration of our
database servers with business applications and data from other databases. Our
family of connectivity products includes INFORMIX-Client SDK-TM-, a package of
several application programming interfaces ("APIs") that allow developers to
write applications in the language (Java, C++, C, or ESQL) with which they are
most familiar, as well as specialized connectivity products supporting the ESQL
and C languages, Open Database Connectivity standards, object-oriented APIs, and
Java. Our gateway products allow tools and applications to access data from
Oracle, Sybase, IBM and other non-Informix databases.
DATABASE TOOLS
We provide a comprehensive array of application development tools that are
tightly integrated with IDS and which enable the creation of powerful business
applications for the IDS environment. Using our development tools, application
developers can quickly create a wide range of applications, including Web-ready,
dynamic content management and Java-based systems. Our application development
tools include:
INFORMIX-4GL PRODUCT FAMILY: The INFORMIX-4GL product family includes
INFORMIX-4GL Rapid Development System, INFORMIX-4GL Interactive Debugger and
INFORMIX-4GL Compiler. Together they form a comprehensive fourth-generation
application development and production environment that provides abundant power
and flexibility without the need for third-generation languages like C or COBOL.
In 1998, a new release of INFORMIX-4GL added Global Language Support, allowing
developers to deploy a single application worldwide, and DBCENTURY, providing a
simple upgrade path for applications that were initially coded to support two
digit year fields.
INFORMIX DYNAMIC 4GL: Informix Dynamic 4GL is the latest addition to the
INFORMIX 4GL product family and enables transformation of character-based 4GL
programs into Windows and Motif Graphical User Interface database applications,
with a simple recompile. Informix Dynamic 4GL offers
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customers a choice of deployment options from character, Windows 3.11, Windows
95, Windows NT and X11 Window System (UNIX and Macintosh) clients, to NT and
UNIX servers. Informix Dynamic 4GL's "thin client" three-tier architecture,
combined with these flexible deployment options, allows customers to deploy new,
state-of-the-art Graphical User Interface applications within existing desktop
and network infrastructures.
INFORMIX DATA DIRECTOR-TM- FAMILY: The INFORMIX Data Director product suite
is an advanced solution for building Web-ready, dynamic content management
applications for IDS. Data Director greatly reduces the amount of application
code developers need to write for client/server solutions by automating all of
the data access operations of the client application. INFORMIX Data Director for
Visual Basic is a powerful, model-driven data access and data management
platform that enables Visual Basic developers to create scalable database-aware
forms. INFORMIX Data Director for Web is a robust and visually intuitive
development environment that enables developers to quickly prototype, build, and
deploy dynamic Web applications that are optimized for IDS.
INFORMIX VISIONARY-TM-: Visionary is a no-code, enabling technology that
brings powerful visual information and exploration capabilities to IDS with
Universal Data Option. Informix Visionary provides a window, or portal, into all
corporate data through the creation of "worlds" or applications. Users can
explore each of these worlds or applications to see ever-increasing levels of
detail. The full product suite includes Visionary Studio, a no-code authoring
environment, and a runtime viewer that can be embedded as an ActiveX control,
providing seamless integration with other best-of-breed development tools.
SERVICES
We maintain field-based and centralized corporate technical staffs to
provide a comprehensive range of assistance to our customers. These services
include pre-sales 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 our products and the design
and development of applications that utilize our products.
We provide post-sales support to our customers on an optional basis for
annual fees which generally range from 16% to 24% of the license fees paid by
the customer. These support services usually include product updates.
SOLUTIONS
In 1998 we announced plans to offer complete solutions, including our
database engines, related application software and consulting services, for data
warehousing, Web-based enterprise repositories and electronic commerce.
INFORMIX DECISION FRONTIER-TM- SOLUTION SUITE is our integrated suite of
products for deploying data warehouses and data marts. Informix Decision
Frontier consists of:
- INFORMIX DYNAMIC SERVER WITH ADVANCED DECISION SUPPORT AND EXTENDED
PARALLEL OPTIONS--our core database system with features designed to
support large general purpose data warehouses
- RED BRICK WAREHOUSE--our database designed specifically for single-purpose
data marts
- INFORMIX METACUBE-REGISTERED TRADEMARK---our relational online analytical
processing (ROLAP) business analysis environment for Informix and Oracle
databases. Metacube provides a multidimensional view of warehouse data so
it can be compared and analyzed over various combinations of business
dimensions, such as time and geography
- INFORMIX DATASTAGE--an extract, transfer and load tool for extracting data
from multiple sources and loading it into the data warehouse
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- SEAGATE CRYSTAL INFO--a distributed report creation system that presents
data analysis results flexibly and attractively
- INFORMIX DECISION FASTSTART-TM---a consulting and service package that
helps customers reduce the timetable for designing and implementing data
warehouses
INFORMIX I.REACH is our Web-based enterprise repository solution that allows
organizations to manage enterprise information across intranet, extranet and
Internet environments. Informix i.Reach allows content authors to publish and
distribute their own content, reducing the time and cost associated with
managing and maintaining corporate information. It is a rapidly deployable
solution that includes Informix Dynamic Server with Universal Data Option, the
Web Integration Option, Informix DataBlade technology and our enterprise
consulting services for value-based delivery.
INFORMIX I.SELL scheduled for general release in April 1999, is our
electronic storefront solution that integrates our database technology with
application server technology and application software to provide a complete,
rapidly deployable E-Commerce solution. E-Commerce Web sites built with Informix
i.Sell are capable of dynamically merchandising products tailored to each
shopper, handling large numbers of transactions, and collecting and analyzing
customer data to improve profitability.
MARKETING AND CUSTOMERS
We distribute our products through the channels of direct end-user
licensing, OEMs, application vendors addressing specific markets, and
distributors. We have chosen a multiple channel distribution strategy to
maintain broad market coverage and product availability. We have generally
avoided exclusive relationships with our licensees and other resellers of our
products. Discount policies and reseller licensing programs are intended to
support each distribution channel with a minimum of channel conflict. For fiscal
1998, sales of licenses directly to end users accounted for 69% of our total
license revenues and sales to OEMs and sales through distributors and resellers
accounted for 31% of our total license revenues.
At December 31, 1998, our sales, marketing and support staff totaled 1,128
employees in the North America region; 179 employees in the Latin America
region; 606 employees in Europe, the Middle East and Africa; and 370 employees
in the Asia/Pacific region.
LICENSING
END-USER LICENSING
We license our products to organizations worldwide through our direct sales
force, value-added resellers and telemarketing. We believe that the common core
technology of our database management system products, based on standard
operating systems and the SQL database language, helps us 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 us which offer volume
discounts.
APPLICATION VENDOR AND OEM LICENSING
Since our inception, we have licensed application vendors to distribute our
products. A typical application vendor develops an application (E.G., an
insurance agency management system) using one of our products. The application
vendor purchases a license for the use of our product to develop the application
program. Depending on the application developed, the vendor may purchase a
run-only license, a full version license or multiple product licenses. In
addition, the application vendor may resell our products to end users for use in
conjunction with its own applications.
Application vendors develop applications using a wide array of application
development tools, including our products such as Informix-4GL and Informix-SQL,
as well as products offered by third
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parties. Applications developed using our products are generally portable across
various brands of computers and different operating systems.
We have specialized programs to support the application vendor distribution
channel. Under these programs, we provide to selected application vendors a
combination of marketing development services, consulting and technical
marketing support and discounts.
Our products are also distributed by hardware manufacturers under original
equipment manufacturer (OEM) licenses as an embedded part of the their product.
DISTRIBUTOR LICENSING
We have established a network of full service international distributors who
provide local service and support, as well as our products, to their respective
national markets. We use distributors to supplement our direct sales force,
which enables us to increase our worldwide market coverage.
PRODUCT DEVELOPMENT
The computer software industry is highly competitive and rapidly changing.
Consequently, we dedicate considerable resources to research and development
efforts to enhance our existing product lines and to develop new products to
meet new market opportunities. Most of our current software products have been
developed internally; however, we have acquired certain software products from
others and plan to do so again in the future.
Major product releases resulting from research and development projects in
fiscal 1998 included new releases of IDS and the Advanced Decision Support
Option; IDS support for the NT, Linux, and Solaris 7 operating environments;
IDS, Personal Edition; Informix Dynamic 4GL; enhancements to the Informix 4GL
development tool; a new version of Informix Data Director; and the Decision
Frontier Solution Suite.
Our current product development efforts are focused on:
- Improving and enhancing current products and developing new products, with
particular emphasis on parallel computer architecture, user-defined
database extensions, Web technology integration, graphical desk top and
system administration, analytical templates, and support for industry
standard and emerging development tools
- Improving our products to provide greater speed and support for larger
numbers of concurrent users
- Adapting new products to the broad range of computer brands and operating
systems that we currently support, and adapting current products to new
brands of computers and operating systems that represent attractive market
opportunities for our products
As of December 31, 1998, we had 1,079 regular employees engaged in research
and development. The market for qualified development engineers remains highly
competitive.
Our research and development expenditures for fiscal 1998, 1997 and 1996
were $146.3 million, $139.3 million, and $120.2 million, respectively,
representing approximately 20%, 21%, and 16% of net revenues for these periods.
In addition, during fiscal 1998, 1997 and 1996, we capitalized product
development costs of $18.6 million, $21.8 million, and $28.4 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."
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COMPETITION
Competitors in the RDBMS 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, we
believe that the principal competitive factors include:
- Application development productivity (I.E., the speed with which
applications can be built)
- Database performance (I.E., the speed at which database storage and
retrieval functions are executed)
- Product function and features
- The ability to support large warehouses of information
- Reliability, availability and serviceability
- The distribution of software applications and data across networks of
computers from multiple suppliers
- The ability to manage complex data and solve more complex business
problems based on such data
The RDBMS software market is extremely competitive and subject to rapid
technological change and frequent new product introductions and enhancements.
Our competitors in the market include several large vendors that develop and
market databases, applications, development tools or decision support products.
Our principal competitors include Computer Associates International, Inc.; IBM;
Microsoft; NCR/Teradata; Oracle and Sybase. Additionally, as we expand our
business into the data warehousing and Web/E-commerce markets, we expect to
compete with companies offering highly specialized products in each of these
market segments.
INTELLECTUAL PROPERTY
Our success depends on proprietary technology. To protect our proprietary
rights, we rely primarily on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality procedures, contractual provisions
contained in our license agreements and technical measures. We seek to protect
our software, documentation and other written materials under trade secret and
copyright laws, which provide only limited protection. We hold seven United
States patents and several pending applications.
Our 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. We also rely on "shrink wrap" and "click wrap"
licenses, which include a notice informing the end-user that, by opening the
product packaging or, in the case of an online transaction, by downloading the
product, the end-user agrees to be bound by our license agreement printed on the
package or displayed on the customer's computer screen. Despite such
precautions, it may be possible for unauthorized third parties to copy aspects
of our current or future products or to obtain and use information that we
regard as proprietary. In particular, we have licensed the source code of our
products to certain customers under certain circumstances and for restricted
uses. We have also entered into source code escrow agreements with a number of
our customers that generally require release of source code to the customer in
the event of our bankruptcy, liquidation or otherwise ceasing to conduct
business.
EMPLOYEES
As of December 31, 1998, Informix and its subsidiaries employed 3,984
regular employees worldwide, including 2,283 in sales, marketing and support,
1,079 in research and development, 84 in operations and 538 in administration
and finance. Of our total employees at December 31, 1998, approximately 1,561
were located outside North America. None of our employees located in the United
States are represented by a labor union. A small number of employees located
outside the United States are represented by labor
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unions, and the degree and scope of representation varies from country to
country. We have not experienced any work stoppages either domestically or
internationally.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning our executive
officers as of December 31, 1998, with the exception of Howard A. Bain, III, our
Executive Vice President and Chief Financial Officer, who joined us in January,
1999.
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
Robert J. Finocchio, Jr. ................. 47 President, Chief Executive Officer and Chairman of the Board of
Directors
Howard A. Bain, III....................... 53 Executive Vice President and Chief Financial Officer
Jean-Yves F. Dexmier...................... 47 Executive Vice President, Field Operations
Karen Blasing............................. 42 Vice President, Business Development Finance
Susan T. Daniel........................... 57 Vice President, Human Resources
James F. Engle............................ 52 Vice President and Treasurer
Diane L. Fraiman.......................... 43 Vice President, Corporate Marketing
James F. Hendrickson, Jr. ................ 59 Vice President, Customer Services, and Lenexa (Kansas) Site
General Manager
Stephen E. Hill........................... 40 Vice President and General Manager, Tools Business Unit
Donald W. Hunt............................ 43 Vice President, North American Field Operations
Gary Lloyd................................ 51 Vice President, Legal, General Counsel and Secretary
Leonard Palomino.......................... 39 Vice President and General Manager, Data Warehousing
Wesley Raffel............................. 43 Vice President and General Manager, Web and E-Commerce
Stephanie P. Schwartz..................... 50 Vice President, Corporate Controller
Michael R. Stonebraker.................... 55 Vice President and Chief Technology Officer
F. Steven Weick........................... 53 Vice President, Research & Development
ROBERT J. FINOCCHIO, JR. has served as our Chairman, President and Chief
Executive Officer since July 1997. From December 1988 until May 1997, Mr.
Finocchio was employed with 3Com Corporation ("3Com"), a global data networking
company, where he held various positions, most recently serving as President,
3Com Systems. Prior to his employment with 3Com, Mr. Finocchio held various
executive positions in sales and service with Rolm Communications, a
telecommunications and networking company, most recently as Vice President of
Rolm Systems Marketing. Mr. Finocchio also serves as a director of Latitude
Communications, a teleconferencing company, and UpShot Corporation, a web
technology company. Mr. Finocchio is also a Regent of Santa Clara University.
Mr. Finocchio holds a B.S. in economics from Santa Clara University and an
M.B.A. from the Harvard Business School.
HOWARD A. BAIN, III has served as our Executive Vice President and Chief
Financial Officer since January 1999. Prior to joining us, Mr. Bain held various
positions at Symantec Corporation, since October 1991. Most recently Mr. Bain
was Vice President, Worldwide Operations and CFO at Symantec Corporation. Mr.
Bain graduated from California Polytechnic University in 1971 with a B.S. in
business and is a Certified Public Accountant.
JEAN-YVES F. DEXMIER has served as our Executive Vice President, Field
Operations since January 1999. He served as our Executive Vice President and
Chief Financial Officer from October 1997 to January 1999. Mr. Dexmier also
served as our Secretary from October 1997 to February 1998. Mr. Dexmier served
as a strategy consultant to high technology companies from February 1997 to
September 1997. From November 1995 until February 1997, Mr. Dexmier served as
Senior Vice President and Chief Financial Officer of Octel Communications
Corporation, a provider of voice messaging systems ("Octel"). From April 1995 to
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October 1995, Mr. Dexmier served as Chief Financial Officer for Kenetech
Corporation, a wind energy company. From May 1994 to March 1995, Mr. Dexmier
served as Chief Financial Officer for Air Liquide America Corporation, a U.S.
subsidiary of the French-based group Air Liquide, a worldwide producer of
industrial gases. From January 1991 to January 1994, Mr. Dexmier served as Chief
Financial Officer for Thomson Consumer Electronics, Inc., a subsidiary of
Thomson SA, a worldwide electronics manufacturer. Mr. Dexmier holds a B.S. in
mathematics from Lycee Pasteur, a Ph.D. in electronics from the Ecole Nationale
Superieure de l'Aeronautique et de l'Espace and an M.B.A. in economics and
finance from the Ecole Polytechnique. In addition, he attended the executive
management program at the University of Michigan School of Business
Administration.
KAREN BLASING has served as our Vice President, Business Development Finance
since May 1998. Prior to that time, Ms. Blasing served as our Corporate
Controller since June 1996 and as a Vice President of Informix since August 1997
before resigning from such positions in April 1998. Ms. Blasing joined Informix
in November 1992 as its Director of Financial Reporting and Analysis. From
January 1989 to October 1992, Ms. Blasing was a Senior Financial Manager at
Oracle Corporation, a provider of information management software and services.
Ms. Blasing holds a B.S. in both economics and business from the University of
Montana and an M.B.A. from the University of Washington.
SUSAN T. DANIEL has served as our Vice President, Human Resources since
February 1998. From March 1981 until February 1998, Ms. Daniel served in a
variety of positions at Advanced Micro Devices, Inc., a semiconductor
manufacturer, most recently as Vice President, Human Resource Operations. Ms.
Daniel holds a B.A. in History from Queens College, an M.A. in social studies
from Syracuse and J.D. from Santa Clara University.
JAMES F. ENGLE has served as our Vice President and Treasurer since December
1997. Mr. Engle served as our acting Corporate Controller from April 1998 until
June 1998. From 1991 until December 1997, Mr. Engle served as a Vice President
and the Corporate Treasurer of Octel. Mr. Engle holds a B.A. in economics from
the University of Missouri and an M.B.A. in international business and corporate
finance from the Columbia University Graduate School of Business.
DIANE L. FRAIMAN has served as our Vice President, Corporate Marketing since
April 1998. From September 1996 to March 1998, Ms. Fraiman served as Vice
President, Marketing Video & Networking Division, at Tektronix, Inc., a producer
of hardware and software networking and video products. From May 1994 to August
1996, Ms. Fraiman was Director of Marketing at Sequent, a manufacturer of large-
scale multiprocessor systems. From 1978 to April 1994, Ms. Fraiman worked in a
variety of positions at Digital Equipment Corporation, a global networking
company, most recently as its Director, Corporate Digital/Microsoft Alliance.
Ms. Fraiman holds a B.S. in biomedical engineering from Vanderbilt University.
JAMES F. HENDRICKSON, JR. has served as our Vice President, Customer
Services, since July 1992 and as our Lenexa (Kansas) Site General Manager since
February 1995. From 1991 until the time he joined us, Mr. Hendrickson was Senior
Vice President of Sales and Support at Image Business Systems, a developer of
document image management software for client/server systems. Mr. Hendrickson
holds a B.S. in mechanical engineering from Stanford University and an M.B.A. in
business and administration from the University of California, Los Angeles.
STEPHEN E. HILL resigned as our Vice President and General Manager, Tools
Business Unit, on December 31, 1998, a position which Mr. Hill had held since
January 1998. Prior to assuming that position, Mr. Hill served as our Vice
President, Advanced Technology since December 1995. Mr. Hill had been employed
with us since 1985 and served in various strategic planning and marketing
positions. Prior to joining us, Mr. Hill held various product development
positions at General Electric Company, a diversified electronics and
manufacturing company, Software Publishing Corporation, a supplier of business
productivity software, and Human Edge Software, a business software company. Mr.
Hill holds a B.S. in electrical engineering from the University of Vermont.
9
DONALD W. HUNT resigned as our Vice President, North American Sales, on
December 31, 1998, a position which Mr. Hunt had held since August 1998.
Previous to August 1998, Mr. Hunt was our Vice President, North America End User
Sales. Mr. Hunt joined us in February 1997 as Vice President and General Manager
responsible for business sales in the Eastern United States and Canada. Prior to
joining us, Mr. Hunt held key positions at both Open Market, a provider of
electronic commerce on the Internet, and Sun Microsystems. At Open Market, he
held the position of Vice President of the Americas, and at Sun Microsystems he
held the position of Director of Independent Software Vendors for North America.
Mr. Hunt's career started at Digital Equipment Corporation, where he held
various sales and marketing management positions. Mr. Hunt holds a B.S. in
business administration from Salem State College, Salem, Massachusetts.
GARY LLOYD has served as our Vice President, Legal and General Counsel since
January 1998 and as our Secretary since February 1998. From November 1997 until
January 1998, Mr. Lloyd served as our interim General Counsel. From March 1994
until October 1997, Mr. Lloyd was with the law firm of Farella Braun & Martel
L.L.P. From 1984 until February 1994, Mr. Lloyd served in a variety of positions
at the Securities and Exchange Commission, most recently as its Assistant
Director, Division of Enforcement. Mr. Lloyd holds a B.A. in political science
and English from Kent State University and a J.D. from Case Western Reserve
University.
LEONARD PALOMINO has served as our Vice President and General Manager,
Datawarehousing since August 1998. From November 1996 to August 1998, Mr.
Palomino served as our Vice President, Enterprise Services. Since January 1991,
Mr. Palomino held various other positions including Vice President, Advanced
Technology Group, Executive Director of Client Services and Director of Client
Services. Prior to joining us, Mr. Palomino held various positions at Century
Analysis, Inc., including Support Manager. Mr. Palomino holds an A.S. in
Computer Science from Spokane Falls College.
WESLEY RAFFEL has served as our Vice President and General Manager,
i.Informix since August 1998. From September 1997 to August 1998, Mr. Raffel
served as our Vice President, North American Field Operations. From January 1996
to January 1997, Mr. Raffel served as Senior Vice President, Sales and
Marketing, and was the acting Chief Executive Officer, of AssureNet Pathways,
Inc., a network security company. From October 1992 to September 1995, Mr.
Raffel was Vice President, Sales, of Global Village Communication, Inc., a
designer of integrated communications products for personal computers. Prior to
joining Global Village, Mr. Raffel held a variety of positions at 3Com, most
recently as its Vice President, Intercontinental Operations. Mr. Raffel holds a
B.A. in general studies from Harvard University and an M.B.A. from the
University of Chicago Graduate School of Business.
STEPHANIE P. SCHWARTZ has served as our Vice President and Controller since
June 1998. Prior to joining us, Ms. Schwartz served as Chief Financial Officer
of Atalla Corporation, a developer of secure on-line transaction automation
systems and subsidiary of Tandem Computers Inc., a position she had held since
October 1996. Since August 1991, Ms. Schwartz served in a variety of positions
at Tandem, a developer of computer and software systems, most recently as its
Director, Business Development, Asia Pacific Division. Ms. Schwartz holds a B.S.
degree in mathematics from the Massachusetts Institute of Technology and an
M.B.A. in finance from Fairleigh Dickenson University.
MICHAEL A. STONEBRAKER has served as our Vice President and Chief Technology
Officer since February 1996. Dr. Stonebraker co-founded Illustra and served in a
consulting capacity with Illustra as its Chief Technology Officer until February
1996. Dr. Stonebraker is a professor emeritus of Electrical Engineering and
Computer Sciences at the University of California, Berkeley, where he joined the
faculty in 1971. Dr. Stonebraker holds a B.S. in electrical engineering from
Princeton University and an M.S. and Ph.D. in computer information and control
engineering from the University of Michigan.
F. STEVEN WEICK has served as our Vice President of Research and Development
since October 1998, and is responsible for all of our core research and
development, including server development, Datablade module engineering, client
and system management development, tools, partner engineering and product
10
management. Mr. Weick joined us in 1997 as Vice President of Server Development.
Prior to joining us, Mr. Weick was Vice President of Engineering for MapInfo
Inc., a business mapping solutions company from 1995 to August 1997. Mr. Weick
led development activities for five years at Tandem Computers, the last three as
Vice President of Communications Hardware and Software Products, and earlier led
the Non-Stop SQL server, compiler and tools development groups. Mr. Weick began
his career at IBM in 1965 as a development engineer; he held numerous positions
at IBM, including: chief architect for database products, consultant to the
corporate technical committee, development manager responsible for DB2, and
program manager for compilers. Mr. Weick holds a B.S. in mathematics from Purdue
University and an M.B.A. from Pepperdine University.
ITEM 2. PROPERTIES
Our headquarters and 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. We currently
lease approximately 214,000 square feet of space in these buildings. The leases
for spaces in two of the buildings expire in September 2001. The leases for
space in the remaining three of the buildings expire in March 2003. In addition,
we lease space totaling approximately 33,000 square feet in two nearby
buildings. These leases expire in May 2003 and October 2000.
In addition, certain of our research and development facilities, a portion
of our customer service organization, our principal domestic manufacturing
facility and our telemarketing organization are located in a 135,000 square foot
facility in Lenexa, Kansas. The buildings are leased to us under a lease
expiring in April 2003, subject to renewal for up to two additional five-year
terms. We leased the Lenexa, Kansas facility from a partnership of which we held
a 50% partnership interest. In the first quarter of 1998 we sold our interest in
49.9% of the partnership to the other partner.
Some of the research and development operations for our products and a
portion of customer service and sales training are located in Oakland,
California. We lease approximately 130,000 square feet at this site, and the
lease expires in May 2003. We also lease 47,276 square feet in Portland, Oregon,
primarily for our research and development group. The lease on approximately
one-half of this space expires on October 31, 2003. The lease on the remaining
space expires in March 2000.
In December 1998, through the acquisition of Red Brick, we assumed the lease
obligations for a number of facilities in North America, London and Tokyo.
Disposition efforts are currently underway for all of these facilities. We also
lease office space, principally for sales and support offices, in a number of
facilities in the United States, Canada and outside North America. We believe
that our current facilities are adequate to meet our needs through the next
twelve months.
11
ITEM 3. LEGAL PROCEEDINGS
ACTIONS ARISING UNDER FEDERAL AND STATE SECURITIES LAWS
Beginning on or about April 16, 1997, over 20 complaints alleging violations
of the federal securities laws were filed against us, (in some cases) Ernst &
Young LLP ("Ernst & Young"), our former independent accountants and certain of
our current and former officers and directors in the United States District
Court for the Northern District of California. Most of the complaints have been
filed as purported class actions by individuals who allege that they are
individual investors who purchased our common stock during a purported class
period; the alleged class periods vary among the complaints. 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 related non-class action, TEACHERS' RETIREMENT SYSTEM OF LOUISIANA AND
STATE BOARD OF ADMINISTRATION OF FLORIDA V. INFORMIX CORPORATION ET AL., has
been consolidated with IN RE INFORMIX CORPORATION SECURITIES LITIGATION for all
pre-trial purposes. The LOUISIANA and FLORIDA plaintiffs request a total of
$10.173 million in damages. Another related individual complaint, BERMAN V.
INFORMIX CORPORATION, has also been consolidated.
On or about March 19, 1998, another 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 our
securities in February 1996 in connection with our February 1996 acquisition of
Illustra pursuant to an Agreement and Plan of Reorganization. This matter has
been consolidated with IN RE INFORMIX CORPORATION SECURITIES LITIGATION. The
WILLIAMS complaint, like the previously-filed federal complaints, alleges that
we and certain of our former officers and/or directors, and our independent
auditors, issued false or misleading statements regarding our reported financial
results and business prospects.
The existing federal court complaints allege that we, Ernst & Young and the
other named defendants issued or caused to be issued false or misleading
statements in our filings with the Commission, press releases, statements to
securities analysts and other public statements regarding our financial results
and business prospects. In particular, the plaintiffs allege, among other
things, that the defendants overstated our revenue and earnings during the time
period by improperly recognizing revenue from sales of software licenses. All of
these actions allege that the false and misleading statements violate section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. The complaints further allege that the named current and former
officers and directors sold our common stock while in the possession of adverse
material nonpublic information. The complaints, in general, do not specify the
amount of damages that plaintiffs seek.
The District Court has appointed a mediator to conduct settlement
negotiations in an effort to resolve the consolidated federal class action and,
possibly, some or all of the other private securities litigation in which we are
involved. Several meetings to discuss settlement have been held, and the
mediator's efforts are continuing. At this time, we do not know: (i) what the
outcome of the mediation will be; (ii) whether there will be a settlement of
some or all of the securities litigation in which we are involved; or (iii) in
the event of a settlement, what our contribution to the settlement will be.
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. The Superior Court
has consolidated these actions into DAYANI V. INFORMIX CORPORATION ET AL. The
amended complaint in DAYANI is identical to its federal court counterpart,
except that it alleges claims under California law. The Superior Court case is
proceeding on a coordinated basis with its federal court counterpart.
12
DERIVATIVE ACTIONS
We also were named as a nominal defendant in eight derivative actions,
purportedly brought on our behalf, filed in the Superior Court of the State of
California, County of San Mateo. 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
Informix, engaged in abuses of their control of Informix, were unjustly enriched
by their sales of our 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 current or former officers named in the class action cases, and
Albert F. Knorp, Jr., James L. Koch, Thomas A. McDonnell and Cyril J. Yansouni,
our non-management directors. The plaintiff seeks unspecified damages on our
behalf from each of the defendants. Because of the nature of derivative
litigation, any recovery in the action would inure to our benefit.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
In addition, in July 1997, the Securities and Exchange Commission issued a
formal order of investigation of Informix and certain unidentified individuals
associated with Informix with respect to non-specified accounting matters,
financial reports, other public disclosures and trading activity in our
securities. We are cooperating in the investigation and are providing all
information requested by the Commission. We have produced documents and other
information and are facilitating the testimony before the Commission of certain
current and former officers and employees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the
fourth quarter of fiscal 1998.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Our 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 our Common Stock for the periods indicated.
HIGH LOW
--------- ---------
FISCAL YEAR ENDING DECEMBER 31, 1998:
Fourth Quarter............................................................................... $ 9.88 $ 3.81
Third Quarter................................................................................ 7.75 3.50
Second Quarter............................................................................... 10.06 6.22
First Quarter................................................................................ 8.81 5.09
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
At December 31, 1998, there were approximately 4,100 stockholders of record
of our Common Stock, as shown in the records of our transfer agent.
DIVIDEND POLICY
We have never declared or paid cash dividends on our Common Stock. We expect
to retain future earnings, if any, for use in the operation of our business and
do not anticipate paying any cash dividends on our Common Stock in the
foreseeable future. The holders of our 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 $1.2 million, based on the 23,300 shares
of Series B Preferred outstanding at December 31, 1998. As of December 31, 1998,
aggregate accrued, but unpaid, dividends of approximately $2.6 million 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 our election and subject to certain conditions, in shares of Common
Stock. In addition, the Certificate of Designation of the Series B Preferred
prohibits us from paying any dividend or other distribution on any security
ranking junior to the Series B Preferred.
In the first quarter of 1999, we paid $1.3 million to the Series B Preferred
stockholders as a result of certain contractual provisions under our
Registration Rights Agreement with the Series B Preferred stockholders. This
amount was recognized in fiscal 1998 as an additional dividend to the Series B
Preferred stockholders.
The Series B Preferred is convertible at the election of the holders into
shares of Common Stock. The currently outstanding Series B Preferred was
originally issued on November 19, 1997. The Series B Preferred will
automatically convert into Common Stock three years following the date of its
issuance. Each share of Series B Preferred, which has a face value of $1,000, is
convertible into (i) shares of Common Stock at a per share price equal to the
lowest of (A) the average of the closing bid prices for the Common Stock for the
22 trading days immediately prior to the 180th day following the initial
issuance date of the Series B Preferred, (B) 101% of the average of the closing
bid prices for the Common Stock for the 22 trading days ending five trading days
prior to the date of actual conversion or (C) 101% of the lowest closing bid
price for the Common Stock during the five trading days immediately prior to the
date of actual conversion and (ii) warrants to acquire that number of shares of
Common Stock equal to 20% of the shares determined pursuant to item (i). The
exercise price for these warrants is $7.84 per share. The
14
conversion price of the Series B Preferred is subject to modification and
adjustment upon the occurrence of specified events.
RECENT SALES OF UNREGISTERED SECURITIES
We have issued and sold the following unregistered securities during the
period covered by this report which have not previously been reported in our
quarterly reports on Form 10-Q:
On November 25, 1998, pursuant to a Subscription Agreement dated August 12,
1997, as amended on November 17, 1997, the holder of a warrant to purchase up to
80,000 shares of our Series A-1 Convertible Preferred Stock (the "Series A-1
Preferred") exercised the warrant and we sold 80,000 shares of our Series A-1
Preferred for aggregate gross proceeds of $20,000,000. The Series A-1 Preferred
was convertible into shares of Common Stock at any time after issuance and the
holder immediately converted all of the Series A-1 Preferred into 4,642,525
shares of Common Stock.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act of 1933, as amended, ("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
our securities with existing security holders where no commission or other
renumeration is paid or given directly or indirectly for soliciting such
exchange. The 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 us, to information about the Registrant.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL OVERVIEW
FIVE-YEAR SUMMARY
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998(1) 1997(2) 1996* 1995* 1994*
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues............................. $ 734,983 $ 663,892 $ 734,540 $ 636,547 $ 451,969
Net income (loss)........................ 57,718 (356,867) (73,565) 38,600 48,293
Preferred stock dividend................. (3,478) (301) -- -- --
Value assigned to warrants............... (1,982) (1,601) -- -- --
Net income (loss) applicable to common
stockholders........................... $ 52,258 $(358,769) $ (73,565) $ 38,600 $ 48,293
Net income (loss) per common share:
Basic.................................. $ 0.31 $ (2.36) $ (0.49) $ 0.27 $ 0.35
Diluted................................ $ 0.30 $ (2.36) $ (0.49) $ 0.26 $ 0.34
Total assets............................. 615,305 563,244 881,998 682,445 447,769
Long-term obligations.................... 3,313 6,311 2,359 2,846 892
Retained earnings (accumulated
deficit)............................... $(220,426) $(278,144) $ 78,723 $ 154,098 $ 115,668
- ------------------------
* Financial data for such fiscal year reflect the information from the
Company's restated financial statements.
(1) In fiscal 1998, we recorded restructuring-related adjustments that increased
operating income by $10.3 million and, in connection with our acquisition of
Red Brick in December 1998, recorded a charge to operations of $2.6 million
for in-process research and development which had not yet reached
technological feasibility and had no alternative future uses.
(2) In fiscal 1997, we 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.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE
EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF INFORMIX, WHICH INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING
THOSE SET FORTH UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS," "BUSINESS" AND
ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
RESULTS OF OPERATIONS
The following table and discussion compares the results of operations for
the years ended December 31, 1998, 1997 and 1996.
YEARS ENDED
DECEMBER 31,
------------------
1998 1997 1996
---- ---- ----
PERCENT OF NET
REVENUES
------------------
Net revenues:
Licenses.................................................. 52% 57% 68%
Services.................................................. 48 43 32
Total net revenues...................................... 100 100 100
Cost and expenses:
Cost of software distribution............................. 5 10 6
Cost of services.......................................... 21 25 20
Sales and marketing....................................... 37 63 56
Research and development.................................. 20 21 16
General and administrative................................ 10 13 9
Write-off of goodwill and long-term assets................ -- 5 --
Write-off of acquired research and development............ -- 1 --
Restructuring charges..................................... (1) 16 --
Merger expenses........................................... -- -- 1
Total expenses.......................................... 92 154 108
Operating income (loss)..................................... 8 (54) (8)
Net income (loss)........................................... 8% (54)% (10)%
Our operating results for fiscal 1998 improved over the prior year due to
revenue growth of 11% and a reduction in operating expenses of 34%. The growth
in consolidated revenues was primarily derived in North America as sales
increased by 18% in this region during fiscal 1998, while Latin America and
Europe experienced revenue growth of 7% and 6%, respectively, during the same
period. Revenues in Asia/Pacific in fiscal 1998, while consistent with fiscal
1997 when translated into U.S. dollars, actually increased 16% on a
constant-currency basis. In an effort to keep operating expenses in line with
revenues, and as a result of our restructuring initiated in fiscal 1997, we
reduced total operating expenses as a percent of net revenues from 154% in
fiscal 1997 to 92% in fiscal 1998. The most significant cost-cutting efforts
were achieved in sales and marketing as we were able to reduce these
expenditures, as a percentage of net revenues, from 63% in fiscal 1997 to 37% in
fiscal 1998. In total dollars, sales and marketing expenses decreased from
$417.2 million in fiscal 1997 to $268.5 million in fiscal 1998, or 36%. We
believe that research and development is essential to maintaining our
competitive position in our primary markets and as a result increased research
and development expenditures by 5% in fiscal 1998. Revenue growth combined with
lower operating costs resulted in operating income of $61.1 million for fiscal
1998 compared to an operating loss of $355.7 million in fiscal 1997.
16
REVENUES
We derive revenues from licensing software and providing post-license
technical product support and updates to customers and from consulting and
training services.
LICENSE REVENUES. License revenues may involve the shipment of product by
us or the granting of a license to a customer to manufacture products. Our
products are sold directly to end-user customers or through resellers, including
OEMs, distributors and value added resellers (VAR's).
License revenues for fiscal 1998 increased slightly to $383.5 million from
$378.2 million in fiscal 1997. We believe that this modest increase in license
revenues reflected a number of factors which affected us during fiscal 1998,
including an overall decrease in revenue growth rates in the RDBMS industry
worldwide, continued uncertainty in the Asia/Pacific economies and financial
markets as well as changes to our European management.
License revenues declined by 25% to $378.2 million for fiscal 1997 from
$502.7 million for fiscal 1996. We believe that this decrease was primarily
attributable to slowing growth in the market for RDBMS products and customer
uncertainty about our financial condition at that time. In addition, we
experienced a significant turnover in senior management sales positions during
fiscal 1997, which adversely affected sales.
Our increased focus on reseller channels in fiscal 1996 resulted in a
significant build-up of licenses that had not been resold or utilized by the
resellers. As discussed in Note 1 to our Consolidated Financial Statements for
the year ended December 31, 1998, revenue from license agreements with resellers
is recognized as earned by us when the licenses are resold or utilized by the
reseller and all of our related obligations have been satisfied. Amounts
received from customers and financial institutions in advance of revenue being
recognized are recorded as a liability in "advances from customers and financial
institutions" in our Consolidated Financial Statements. Advances in the amount
of $121.1 million and $180.0 million had not been recognized as earned revenue
as of December 31, 1998 and 1997, respectively. During the year ended December
31, 1998, we received $11.4 million in customer advances and recognized revenue
from resellers with previously recorded customer advances of $66.1 million.
Included in the $66.1 million recognized were $61.7 million of licenses which
were resold or utilized by the reseller and $4.4 million related to contractual
reductions in customer advances. Contractual reductions result from settlements
between us and resellers in which the customer advance contractually expires or
a settlement is structured wherein the rights to resell our products terminate
without sell through or deployment of the software.
As of December 31, 1998, we had reached structured settlements with three
resellers with remaining rights to resell a total of $25.7 million of our
products. In accordance with the settlements, the minimum future reduction in
customer advances totals $18.4 million and $7.3 million for the years ended
December 31, 1999 and 2000, respectively.
In order to properly recognize revenue on arrangements where the reseller
has duplication rights, we rely on accurate and timely reports from resellers of
the quantity of licenses that have been resold or utilized. In instances where a
reseller does not submit a timely report, we accrue royalty revenue through the
end of the reporting period provided we have vendor specific historical
information. From time to time, late or inaccurate reports are identified or
corrected for a variety of reasons, including resellers updating their reports
or as a result of our proactive activities such as audits of the resellers'
royalty reports. As a result, revenue from these late or updated reports, which
was not previously accrued, is recognized in the period during which the reports
are received. Such revenue amounted to approximately $6.0 million for fiscal
1998. We expect that the late or inaccurate reporting of resale or utilization
of licenses by resellers and the resulting fluctuations will continue for the
foreseeable future.
Our license transactions can be relatively large in size and difficult to
forecast both in timing and dollar value. As a result, license transactions have
caused fluctuations in net revenues and net income
17
(loss) because of the relatively high gross margin on such revenues. As is
common in the industry, a disproportionate amount of our 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. We expect that these types of transactions and
the resulting fluctuations in revenue will continue.
SERVICE REVENUES. Service revenues are comprised of maintenance, consulting
and training revenues. Service revenues increased 23% to $351.4 million for
fiscal 1998 from $285.7 million for fiscal 1997. Service revenues also increased
23% in fiscal 1997 as compared to $231.8 million for fiscal 1996. Service
revenues accounted for 48%, 43% and 32% of total revenues in fiscal 1998, 1997
and 1996, respectively. The increase in service revenues, both in absolute
dollars and as a percentage of total revenues, is attributable primarily to
higher initial year maintenance fees and the renewal of maintenance contracts in
connection with our installed customer base. As our products continue to grow in
complexity, more support services are expected to be required. We intend to
satisfy this requirement through internal support, third-party services and OEM
support.
Consulting and training revenues remained flat at $97.9 million for fiscal
1998 as compared to $97.6 million in fiscal 1997. Consulting and training
revenues increased 34% to $97.6 million in fiscal 1997 from $72.8 million in
fiscal 1996. The growth in the consulting and training practice in fiscal 1997
was driven by increased demand for consulting services primarily in North
America and in Europe. In addition, some significant large consulting contracts
were executed in fiscal 1997 and contributed to the significant increase of
consulting revenues compared to the prior year.
COST OF SOFTWARE DISTRIBUTION
1998 CHANGE 1997 CHANGE 1996
--------- ----------- --------- ----------- ---------
(DOLLARS IN MILLIONS)
Total cost of software distribution...................... $ 35.4 (44)% $ 63.0 35% $ 46.8
Percentage of license revenues........................... 9% 17% 9%
Cost of software distribution consists primarily of: (1) manufacturing and
related costs such as media, documentation, product assembly and purchasing
costs, freight, customs and third party royalties; and (2) amortization of
previously capitalized software development costs and any write-offs of
previously capitalized software.
Cost of software distribution decreased to $35.4 million in fiscal 1998 from
$63.0 million and $46.8 million in fiscal 1997 and fiscal 1996, respectively.
Cost of software distribution as a percentage of license revenue was 9%, 17% and
9% in fiscal 1998, 1997 and 1996, respectively. The decrease in fiscal 1998,
both in absolute dollars and as a percentage of license revenue, was primarily
caused by a write-down in fiscal 1997 of $14.7 million to net realizable value
of certain of our database tool products related to our acquisition of
CenterView Software, Inc. in the first quarter of fiscal 1997, a decrease in
third party software royalties, the write-off of certain unused application
software in the second quarter of fiscal 1997 and a reduction in labor,
materials and shipping costs. Amortization of capitalized software remained
relatively flat at $20.7 million in fiscal 1998 compared to $21.4 million in
fiscal 1997 and increased 47% in fiscal 1997 as compared to $14.6 million for
fiscal 1996. The increase in amortization of capitalized software in fiscal 1997
over fiscal 1996 was due primarily to the release of our object-relational
Universal Data Option product in the fourth quarter of fiscal 1996. The
amortization of capitalized software will vary from period to period as new
products are released and other products become fully amortized.
18
COST OF SERVICES
1998 CHANGE 1997 CHANGE 1996
--------- ------------- --------- ------------- ---------
(DOLLARS IN MILLIONS)
Cost of services.................................................. $ 155.3 (7)% $ 166.9 15% $ 144.9
Percentage of service revenues.................................... 44% 58% 62%
Cost of services consists primarily of maintenance, consulting and training
expenses. Cost of services for fiscal 1998 decreased by 7% to $155.3 million as
compared to $166.9 million in fiscal 1997 and decreased as a percentage of net
service revenues to 44% for fiscal 1998 compared to 58% for fiscal 1997. These
decreases were primarily attributable to decreases of 11% in average headcount
for fiscal 1998 over the same period in 1997 as well as improved efficiency and
better control of outsourced expenses. Cost of services increased 15% to $166.9
million for fiscal 1997 from $144.9 million for fiscal 1996. Cost of services
decreased as a percentage of net 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. We believe that the
increased margins during fiscal 1997 were attributable principally to more
efficient delivery of services.
SALES AND MARKETING EXPENSES
1998 CHANGE 1997 CHANGE 1996
--------- ----------- --------- ------------- ---------
(DOLLARS IN MILLIONS)
Sales and marketing expenses...................................... $ 268.5 (36)% $ 417.2 1% $ 413.7
Percentage of net revenues........................................ 37% 63% 56%
Sales and marketing expenses consist primarily of salaries, commissions,
marketing programs and related overhead costs. Sales and marketing expenses
decreased 36% to $268.5 million for fiscal 1998 from $417.2 million for fiscal
1997. Sales and marketing expenses increased less than 1% to $417.2 million for
fiscal 1997 from $413.7 million for fiscal 1996. As a percentage of net
revenues, sales and marketing expenses decreased to 37% in fiscal 1998 from 63%
in fiscal 1997 and 56% in fiscal 1996. The decrease in sales and marketing
expenses in fiscal 1998 in absolute dollars and as a percentage of net revenues,
as compared to fiscal 1997 was primarily the result of a significant reduction
in average sales and marketing headcount worldwide. 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 our restructuring.
RESEARCH AND DEVELOPMENT EXPENSES
1998 CHANGE 1997 CHANGE 1996
--------- ----------- --------- ----------- ---------
(DOLLARS IN MILLIONS)
Incurred product development expenditures......................... $ 164.9 2% $ 161.1 8% $ 148.6
Expenditures capitalized.......................................... 18.6 (15) 21.8 (23 ) 28.4
Research and development expenses................................. 146.3 5 139.3 16 120.2
Expenditures capitalized as a percentage of incurred.............. 11% 14% 19%
Research and development expenses consist primarily of salaries, project
consulting and related overhead costs for product development. Research and
development expenses increased 5% to $146.3 million for fiscal 1998 from $139.3
million for fiscal 1997. The increase in research and development expenses in
absolute dollars for fiscal 1998 is attributable primarily to increases in
salary and benefits and a
19
15% decrease in the amount of product development expenditures capitalized in
fiscal 1998 compared to fiscal 1997. This decrease in capitalized expenditures
is attributable to the fact that, during the first half of fiscal 1997, a large
portion of expenditures incurred were on products that had reached technological
feasibility but had not yet been commercially released. Research and development
expenses increased 16% to $139.3 million for fiscal 1997 from $120.2 million for
fiscal 1996. The increase in research and development expenses for fiscal 1997
from fiscal 1996 is attributable principally to an increase in headcount, which
occurred during the early part of fiscal 1997, working on new products and
product extensions. The higher capitalization in absolute dollars of product
development expenditures in fiscal 1996 compared to fiscal 1997 also resulted
from an increase in the work involved on products that had already reached
technological feasibility as they neared their release dates.
GENERAL AND ADMINISTRATIVE EXPENSES
1998 CHANGE 1997 CHANGE 1996
--------- ----------- --------- ------------- ---------
(DOLLARS IN MILLIONS)
General and administrative expenses................................... $ 76.1 (13)% $ 87.5 36% $ 64.4
Percentage of net revenues............................................ 10% 13% 9%
General and administrative expenses consist primarily of finance, legal,
information systems, human resources, bad debt expense and related overhead
costs. General and administrative expenses decreased 13% to $76.1 million for
fiscal 1998 from $87.5 million for fiscal 1997 and increased 36% to $87.5
million from $64.4 million for fiscal 1996. The decrease in fiscal 1998 in
absolute dollars and as a percentage of net revenues was primarily the result of
a reduction in bad debt expense due to our efforts to better manage both the
amount and credit risk of our accounts receivable balances, offset by increases
in legal and other professional service fees, consulting fees and average
headcount. The increase in fiscal 1997 when compared to fiscal 1996 was
primarily due to the expansion of our international operations and incremental
legal expenses resulting from the stockholders' litigation and auditing expenses
relating to the restatement of our financial statements.
WRITE-OFF OF GOODWILL AND OTHER LONG-TERM ASSETS
During the first quarter of 1997, our Japanese subsidiary experienced a
significant sales shortfall and operating losses. Accordingly, we evaluated the
ongoing value of the subsidiary's long-lived assets (primarily computer and
other equipment) and goodwill. Based on this evaluation, we determined that the
subsidiary's assets had been impaired and wrote them down by $30.5 million to
their estimated fair values. Fair value was determined by using estimated future
discounted cash flows and/or resale market quotes as appropriate.
WRITE-OFF OF ACQUIRED RESEARCH AND DEVELOPMENT
On December 31, 1998, we acquired Red Brick Systems, Inc. ("Red Brick"), a
provider of scalable decision support solutions for data warehousing, data
marts, OLAP and data mining, in a transaction which has been accounted for as a
purchase. We issued approximately 7.6 million shares of our Common Stock to
acquire all of the outstanding shares of Red Brick common stock. We also
reserved an additional 2.5 million shares of our Common Stock for issuance in
connection with the assumption of Red Brick's outstanding stock options and
warrants.
The purchase price was allocated to the fair value of the acquired assets
and assumed liabilities based on their fair values at the date of acquisition.
The total purchase price of $55.8 million included the issuance of stock and the
assumption of stock options (together $35.9 million, net of issuance costs),
direct acquisition costs of $1.0 million, accrued merger and integration costs
of $7.9 million and liabilities assumed of $11.0 million. Of the total purchase
price, $2.6 million was allocated to in-process research and development expense
that had not yet reached technological feasibility and has no alternative future
uses, $7.8 million was allocated to cash and short-term investments,
approximately $10.2 million was allocated to other tangible assets, $7.4 million
was allocated to capitalized software, $4.7 million was allocated to the
20
acquired workforce and $23.1 million was allocated to goodwill. Goodwill,
capitalized software and the acquired workforce are intangible assets which will
be amortized over their estimated lives, which average five years.
The following two in-process research and development projects were acquired
in the acquisition of Red Brick:
RED BRICK WAREHOUSE ("WAREHOUSE")--a high-performance, client/server RDBMS
software product specifically designed for data warehousing, data mart, data
mining, and OLAP applications. Warehouse has been Red Brick's core product and,
as of December 31, 1998 (the "Valuation Date"), was being sold as version 5.1,
which was released in January 1998. The next version, scheduled for release in
mid-1999, is currently under development and is expected to bring a
substantially new feature set, with web enablement being the most important.
This feature will open Warehouse to environments based on intranet and Internet
technology, thereby substantially extending the usefulness of the product. At
the time of acquisition, the Warehouse project was estimated to be approximately
40% complete and the total cost to complete the project was estimated at $4.0
million.
RED BRICK FORMATION ("FORMATION")--an ETML (Extract, Transfer, Move, Load)
product which was originally released as version 1.3 in September 1998 (the
current version as of the Valuation Date). Formation is considered to be in the
early stages of its product life cycle. New features and functionality are
currently under development and will be added in subsequent releases. Version
1.5, scheduled for release in May 1999, is expected to add international
functionality to the product, thereby allowing Formation to be sold via foreign
sales channels. In the fall of 1999, the expected release of version 1.6 is
expected to add more competitive features to the product, including the ability
to run on dispersed networks as well as an enhancement of the "Move" capability
in ETML which has been unaddressed in most competing products. These new
features constitute a significant improvement to Formation. At the time of
acquisition, the Formation project was estimated to be approximately 30%
complete and the total cost to complete the project was estimated at $4.0
million.
The fair value of the in-process technology was based on a discounted cash
flow model, similar to the traditional Income Approach. The Income Approach
involves five steps: (1) the annual after-tax cash flows the asset will generate
over its remaining useful life are estimated; (2) these cash flows are converted
to their present value equivalents using a required rate of return which
accounts for the relative risk of not realizing the annual cash flows and for
the time value of money; (3) the residual value, if any, of the asset at the end
of its remaining useful life is estimated; (4) the estimated residual value is
converted to its present value equivalent; and (5) the present value of the
estimated annual after-tax cash flows is added to the present value of the
residual value to obtain an estimate of the asset's fair value. The discount
rate used in discounting the estimated cash flows is based on the risks
associated with achieving such estimated cash flows upon successful completion
of the acquired projects. Associated risks include the inherent difficulties and
uncertainties in completing each project and thereby achieving technological
feasibility, and risks related to the impact of potential changes in market
conditions and technology.
In developing cash flow estimates, revenues were forecasted based on
relevant factors, including aggregate revenue growth rates for the business as a
whole, characteristics of the potential market for the technology and the
anticipated life of the underlying technology. Projected annual revenues for the
Warehouse and Formation projects were assumed to increase from product release
through 2000, decline slightly in 2001 and decline significantly in 2002 which
is estimated to be the end of the in-process technology's economic life. Cost of
software distribution and services, sales and marketing expense, research and
development expense and general and administrative expense were estimated as a
percentage of revenues throughout the forecast period. Gross profit was assumed
to be between 74% and 80% for both the Warehouse project and the Formation
project.
As certain other assets contribute to the cash flow attributable to the two
projects, returns to these other assets or capital charges were calculated and
deducted from the after-tax operating income to isolate the cash flow solely
attributable to the two projects. Accordingly, returns were deducted for working
21
capital, fixed assets (i.e. property and equipment) and the workforce in place.
Informix then discounted the estimated cash flows attributable to Warehouse and
Formation using a 18.0% discount rate.
The fair value of the in-process research and development was allocated as
approximately $2.0 million and $0.6 million to the Warehouse and Formation
projects, respectively.
The acquisition of Red Brick was a tax-free reorganization under the
Internal Revenue Code. Therefore, the charge for in-process research and
development and amortization of acquired intangible assets is not deductible for
income tax purposes.
In February 1997, we acquired all of the outstanding capital stock of
CenterView Software, Inc. ("CenterView"), a privately-owned company which
developed and sold software application development tools. The aggregate
purchase price paid was approximately $8.7 million, which included cash and
direct acquisition costs. The transaction was accounted for as a purchase and,
based on an independent appraisal of the assets acquired and liabilities
assumed, the purchase price was allocated to the net tangible and intangible
assets acquired including developed software technology, acquired workforce,
in-process technology, and goodwill. The in-process technology, which, based on
the independent appraisal, was valued at $7 million, had not reached
technological feasibility at the date of acquisition and had no alternative
future uses in other research and development projects. Consequently, its value
was charged to operations in the first quarter of fiscal 1997, the period in
which the acquisition was consummated. The remaining identifiable intangible
assets are being amortized over three to five years.
The in-process research and development project acquired in the acquisition
of CenterView consisted of the client/server software, "Data Director," that
combines the functionality of high-end client/server tools with the price and
openness of visual programming environments. 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. As of
the date of acquisition, Data Director Version 2.1 was considered developed
technology while Data Director Versions 3.0 and 4.0 were considered in-process
technology which had not reached technological feasibility and did not have any
alternative future uses. Data Director 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, with commercial release to occur approximately
two to three months after first customer introduction of the product. The
expected aggregate costs to complete both Data Director Versions 3.0 and 4.0
were approximately $12.6 million.
The fair value of the in-process technology was based on projected cash
flows which were discounted based on the risks associated with achieving such
projected cash flows upon successful completion of the acquired projects.
Associated risks include the inherent difficulties and uncertainties in
completing each project and thereby achieving technological feasibility, and
risks related to the impact of potential changes in market conditions and
technology. In developing cash flow projections, revenues were forecasted based
on relevant factors, including aggregate revenue growth rates for the business
as a whole and for the database application development market, product family
revenues, the aggregate size of the database application development market,
anticipated product development and product introduction schedules, product
sales cycles, and the estimated life of the underlying technology.
Projected annual revenues for the Data Director in-process development
projects were assumed to increase from product release through 1999, decline
slightly in 2000 and decline significantly in 2001, which was estimated to be
the end of the in-process technology's economic life. Gross profit was assumed
to be 90% throughout the technology life cycle based on percentages estimated in
Informix's aggregate business model. Estimated operating expenses, income taxes
and capital charges to provide a return on other acquired assets were deducted
from gross profit to arrive at net operating income. Operating expenses were
estimated as a percentage of revenue and included general and administrative
expenses, sales and marketing expenses and development costs to maintain the
technology once it achieved technological feasibility.
The net cash flows of the in-process research and development projects were
discounted to their present values using a discount rate of 20%. This discount
rate approximated the overall rate of return for the acquisition of CenterView
as a whole and reflected the inherent uncertainties surrounding the
22
successful development of the in-process research and development projects and
the uncertainty of technological advances.
We are currently selling two versions of Data Director, one for Visual Basic
applications and the other for Web applications.
RESTRUCTURING CHARGES
In June and September 1997, we approved plans to restructure our operations
to bring expenses in line with forecasted revenues and substantially reduced our
worldwide headcount and modified operations to improve efficiency. Accordingly,
we recorded restructuring charges totaling $108.2 million for fiscal 1997. The
significant components of these restructuring changes were severance and
benefits, write-off of assets, and facility charges. Severance and benefits
represented the reduction of approximately 670 employees, primarily sales and
marketing personnel, on a worldwide basis. Temporary employees and contractors
were also reduced. Write-off of assets included the write-off or write-down in
carrying value of equipment as a result of our decision to reduce the number of
Information Superstores throughout the world, as well as the write-off of
equipment associated with headcount reductions. The equipment subject to the
write-offs and write-downs consisted primarily of computer servers,
workstations, and personal computers that were no longer utilized in our
operations. Facility charges included early termination costs associated with
the closing of certain domestic and international sales offices.
During fiscal 1998, adjustments of $10.3 million were recorded to the
results of operations. These adjustments, which appear as a credit to
restructuring charges in our Consolidated Statement of Operations for the year
ended December 31, 1998, were due primarily to adjusting the estimated severance
and facility components of the fiscal 1997 restructuring charge to actual costs
incurred. We have substantially completed actions associated with our
restructuring except for subleasing or settling our remaining long-term
operating leases related to vacated properties. The terms of these operating
leases expire at various dates through 2003. Accrued restructuring costs
totaling $5.8 million remained as a liability in our Consolidated Financial
Statements as of December 31, 1998, of which $5.2 million related to facility
charges. (See Note 13 to our Consolidated Financial Statements.)
INTEREST INCOME
Interest income for fiscal 1998 was $11.4 million as compared to $5.6
million and $9.9 million for fiscal 1997 and 1996, respectively. The increase in
fiscal 1998 in comparison to fiscal 1997 resulted from an increase in the
average interest-bearing cash and short-term investment balances in fiscal 1998
due to increased sales and operating income as well as approximately $2.4
million in interest income related to income tax refunds received during fiscal
1998. The reduction in interest income from fiscal 1996 to fiscal 1997 was due
to a reduction in the average interest-bearing cash and short-term investment
balances in fiscal 1997.
INTEREST EXPENSE
Interest expense decreased to $5.8 million for fiscal 1998 from $9.4 million
and $12.5 million for fiscal 1997 and 1996, respectively. Interest expense for
fiscal 1998 consists primarily of interest charges related to payments on
capital leases. Interest expense for fiscal 1997 and fiscal 1996 related to
interest charges incurred in connection with financing of customer accounts
receivable, in addition to interest charges related to payments on capital
leases. We did not enter into any accounts receivable financing transactions in
fiscal 1998.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, decreased to a net other expense of $4.6
million for fiscal 1998 from net other income of $10.5 million and $2.9 million
for fiscal 1997 and 1996, respectively. Other income (expense), included $4.8
million of foreign currency transaction losses and $8.0 million of foreign
currency transaction gains in fiscal 1998 and fiscal 1997, respectively.
Approximately $7.5 million of the $8.0 million of foreign currency transaction
gains recognized in fiscal 1997 resulted primarily from a change in our
23
foreign currency denominated intercompany accounts payable and accounts
receivable balances arising from the restatement of our 1996, 1995 and 1994
financial statements. Other components of other income (expense) included $8.1
million and $3.9 million of net gains on the sale of long-term investments in
fiscal 1997 and fiscal 1996, respectively, as well as the downward adjustment of
$4.5 million to the carrying value of certain investments in fiscal 1997.
INCOME TAXES
In fiscal 1998, income tax expense resulted primarily from foreign
withholding taxes and taxable earnings in certain foreign jurisdictions. We have
provided a valuation allowance for the net deferred tax assets that are
dependent on future taxable income. The expected tax expense of $21.7 million,
computed by applying the federal statutory rate of 35% to the income before
income taxes, was offset primarily by a $13.8 million decrease in the valuation
allowance and a $4.4 million net foreign tax benefit.
In fiscal 1997, income tax expense resulted primarily from foreign
withholding taxes and taxable earnings in certain foreign jurisdictions. The
expected tax benefit computed by applying the federal statutory rate to the loss
before income taxes was substantially offset by a corresponding increase in the
valuation allowance for net deferred tax assets. We have provided a valuation
allowance for the net deferred tax assets in excess of amounts recoverable
through carryback of net operating losses. Accordingly, the net deferred tax
asset at December 31, 1997 of $34 million was provided for anticipated IRS tax
refunds, which were received during fiscal 1998.
QUARTERLY OPERATING RESULTS
FIRST
QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------ -------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year ended December 31, 1998
Net revenues..................................... $ 160,999 $ 174,201 $ 185,211 $ 214,572
Gross profit..................................... 113,741 128,430 138,175 163,943
Net income (loss)................................ $ 1,811 $ 12,315 $ 19,018 $ 24,574
Preferred stock dividend......................... (603) (624) (589) (1,663)
Value assigned to warrants....................... (1,594) (388) -- --
------------ -------------- ------------- --------------
Net income (loss) applicable to common
stockholders................................... $ (386) $ 11,303 $ 18,429 $ 22,911
------------ -------------- ------------- --------------
------------ -------------- ------------- --------------
Net income (loss) per common share:
Basic.......................................... $ (0.00) $ 0.07 $ 0.11 $ 0.13
------------ -------------- ------------- --------------
------------ -------------- ------------- --------------
Diluted........................................ $ (0.00) $ 0.07 $ 0.10 $ 0.13
------------ -------------- ------------- --------------
------------ -------------- ------------- --------------
Year ended December 31, 1997
Net revenues..................................... $ 149,902 $ 182,527 $ 150,184 $ 181,279
Gross profit..................................... 79,616 124,042 97,898 132,393
Net income (loss)................................ $ (144,161) $ (111,377) $ (110,523) $ 9,194
Preferred stock dividend......................... -- -- -- (301)
Value assigned to warrants....................... -- -- -- (1,601)
------------ -------------- ------------- --------------
Net income (loss) applicable to common
stockholders................................... $ (144,161) $ (111,377) $ (110,523) $ 7,292
------------ -------------- ------------- --------------
------------ -------------- ------------- --------------
Net income (loss) per common share:
Basic.......................................... $ (0.95) $ (0.73) $ (0.73) $ 0.05
------------ -------------- ------------- --------------
------------ -------------- ------------- --------------
Diluted........................................ $ (0.95) $ (0.73) $ (0.73) $ 0.04
------------ -------------- ------------- --------------
------------ -------------- ------------- --------------
In the first quarter of fiscal 1997, we experienced a substantial shortfall
in license revenues compared to forecasts, resulting in a substantial loss for
the quarter. The shortfall in revenue was due to slow growth in demand for RDBMS
products as well as our inability to close a number of sales transactions that
24
management anticipated would close by the end of the quarter, especially in
Europe. As a result of the shortfall in license revenues for this quarter, we,
in the second and third quarters of fiscal 1997, initiated two internal
restructurings of our operations intended to reduce operating expenses and
improve our financial condition. These restructurings included reductions in
headcount and leased facilities and the downsizing, elimination or conversion
into solutions labs of our planned Information Superstores. Costs associated
with the restructurings totaled approximately $108.2 million and had a material
adverse impact on our results of operations for fiscal 1997 "See--Restructuring
Charges". Additionally, during fiscal 1997, we had a major restatement for all
of the periods included in the three years ended December 31, 1996, as well as
for the quarter ended March 31, 1997. At that time, our administrative processes
were weak which contributed to the existence of significant weaknesses in our
internal controls. Following these events, customers were concerned about
Informix's viability and, accordingly, our management was concerned about
whether customers would honor their financial obligations to us.
The restructuring activities and the restatement of financial results
impacted the environment in which we operated, and, accordingly, impacted the
estimates and assumptions used by management in the preparation of our financial
statements. As of December 31, 1997, we made certain estimates including
allowances for uncollectable accounts receivable based on the probability of
collections, estimates for product returns associated with ongoing customer
uncertainty about our financial condition and contingencies associated with
continuing issues related to fiscal 1997. These estimates, in the ordinary
course of business, change as a result of management actions and environmental
changes.
During the last quarter of fiscal 1997 and the first two quarters of fiscal
1998, we took a number of actions to help restore customer confidence regarding
the ongoing viability of Informix. These actions included: (i) generating a
total of $63.3 million from an offering of Series B Preferred Stock and the
exercise of warrants related to outstanding Series A-1 Preferred Stock and
increasing the balance of cash, cash equivalents and short term investments;
(ii) visits to key customers by senior management to reinforce our customers'
confidence in us, (iii) signing significant new contracts with existing
customers and winning new customers in a variety of application areas including
data warehousing and Web/content management; (iv) demonstrating continued
ability to generate a meaningful revenue stream; (v) decreasing employee
turnover and increasing the ability to attract new employees and senior
management talent; and (vi) introducing significant new products and increasing
research and development funding. All of these factors contributed to customers
honoring their financial obligations to Informix, while reducing the probability
of product return and collections problems.
Additionally, during the first two quarters of fiscal 1998, the following
actions were taken and improvements made in the quality of our accounts
receivable balances. The actions taken included: (i) centralizing European
credit and collections for most countries and outsourcing this function to a
professional credit and collections firm; (ii) improving our Europe region's
accounts receivable aging from a balance of $8.5 million outstanding greater
than 90 days as of December 31, 1997 to a balance of $3.9 million outstanding
greater than 90 days as of June 30, 1998; and (iii) refining our methodology for
estimating general uncollectible accounts receivable over and above specific
accounts receivable reserves.
The improvement in both our financial condition and the credit and
collections processes which resulted from our actions led to a decrease of risk
such that reserves for product return and bad debts were reduced by $1.7 million
and $5.0 million in the first and second quarters of fiscal 1998, respectively.
As of December 31, 1997, our accrued liabilities included accruals for
certain claims against us. During the first quarter of fiscal 1998, our lawyers
determined that there was no merit to a specific claim for which we had recorded
a liability of $1.9 million. Accordingly, we reversed this $1.9 million accrual
during the first quarter of fiscal 1998. In addition, we reduced an accrued
liability related to another specific claim by $2.0 million and $0.8 million
during the second and third quarters of fiscal 1998, respectively, based on a
legal opinion and a settlement offer.
We recorded restructuring charges of $59.6 million and $49.7 million in the
second and third quarters of fiscal 1997, respectively. The total restructuring
expense decreased by $1.2 million during the fourth quarter of fiscal 1997
primarily due to adjusting the original estimate of the loss incurred on the
sale of
25
land to the actual loss. We recorded restructuring-related adjustments to
decrease restructuring expense by $3.3 million, $1.4 million, $2.6 million and
$3.0 million in the first, second, third, and fourth quarters of fiscal 1998,
respectively, primarily due to adjusting the estimated severance and facility
charges to actual costs incurred.
In the first quarter of fiscal 1997, we recorded a charge of $30.5 million
to write down the carrying values of certain of our Japanese subsidiary's
long-lived assets to their fair values. During the same quarter, we also
recorded a charge of $14.7 million to write down the carrying value of
capitalized software development costs for certain products to their net
realizable values. In connection with our acquisition of Red Brick in December
1998, we recorded a charge to operations in the fourth quarter of fiscal 1998 of
$2.6 million for in-process research and development which had not yet reached
technological feasibility and had no alternative future uses.
We believe the actions taken by management improved our operating
environment and helped restore customer confidence in our company and its
products.
LIQUIDITY AND CAPITAL RESOURCES
AS OF OR FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
Cash, cash equivalents and short-term investments.................................... $ 221.1 $ 155.5 $ 261.0
Working capital (deficit)............................................................ 27.6 (140.2) 3.1
Cash and cash equivalents provided by (used in) operations........................... 27.8 (144.8) (29.4)
Cash and cash equivalents used for investment activities............................. (55.4) (63.1) (145.3)
Cash and cash equivalents provided by financing activities........................... 56.1 115.2 228.7
OPERATING CASH FLOWS. We generated positive cash flows from operations
totaling $27.8 million for fiscal 1998 as compared to cash used in operations of
$144.8 million and $29.4 million for fiscal 1997 and 1996, respectively. This
significant increase in operating cash flows was due primarily to our improved
profitability in fiscal 1998, offset by significant fluctuations in the effect
of restructuring charges and changes in accounts receivable on operating cash
flows. Net income for fiscal 1998 was $57.7 million as compared to net losses of
$356.9 million and $73.6 million for fiscal 1997 and 1996, respectively. We
recorded a net credit for restructuring charges of $10.3 million in fiscal 1998
as compared to restructuring expense for fiscal 1997 of $108.2 million. Net
accounts receivable increased at December 31, 1998 as compared to December 31,
1997, primarily as a result of an increase of $33.3 million in net revenues in
the fourth quarter of fiscal 1998 when compared to the same quarter in fiscal
1997.
INVESTING CASH FLOWS. Net cash and cash equivalents used in investing
activities decreased by approximately $7.7 million for fiscal 1998 compared with
fiscal 1997 due to our emphasis on controlling costs, including capital
expenditures. The decrease was due in large part to a reduction in capital
expenditures to $20.1 million in fiscal 1998 from $31.4 million in fiscal 1997
(net of cash proceeds from the disposal of land, property and equipment of $62.4
million). This decrease was offset by increased investment in fiscal 1998,
totaling $15.1 million, of excess cash generated from profitable operations.
Significant investing activities during the year also included additions to
software costs of $18.6 million.
FINANCING CASH FLOWS. Net cash and cash equivalents provided by financing
activities in fiscal 1998 and fiscal 1997 consist primarily of proceeds from the
sale of our Common Stock and from the issuance of our Series A-1 Preferred Stock
and Series B Preferred Stock.
Proceeds from the sale of our Common Stock represent stock options exercised
and purchases under our Employee Stock Purchase Plan. The proceeds totaled $16.2
million, $9.2 million and $24.4 million for fiscal 1998, 1997 and 1996,
respectively.
During fiscal 1998, we raised net proceeds of $32.9 million through the
exercise of warrants issued in conjunction with our Series A-1 Preferred Stock.
In February 1998, the Series A-1 Preferred Stockholders
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exercised warrants to purchase 60,000 additional shares of Series A-1 Preferred
at $250 per share for net proceeds of $14.1 million. In November 1998, the
Series A-1 Preferred Stockholders exercised their remaining warrants in full to
purchase 80,000 shares of Series A-1 Preferred, resulting in $18.8 million in
net proceeds. These warrants were originally issued in August 1997 in connection
with the sale of the 160,000 shares of Series A-1 Preferred, which resulted in
net proceeds of $37.6 million.
During fiscal 1998, 1997 and 1996, we received $11.5 million, $21.8 million
and $207.2 million, respectively, of advances from customers and financial
institutions. We may receive cash, either from the customer, or from a financial
institution to whom the customer payment streams due under software license
arrangements are sold, prior to the time the license fee is recognized as earned
revenue. If we fail to comply with the contractual terms of the specific license
agreement, we could be required to refund to the customer or the financial
institution the amount received. However, we do not believe the refunds of
amounts received, if any, would have a material effect on our results of
operations, financial position, or cash flows.
OTHER. During fiscal 1997, we assigned our leasehold interest and our
related obligations under an office space lease in Santa Clara, California to an
unrelated third party. The lease term was for fifteen years and minimum lease
payments amount to $96.0 million over the term. We remain contingently liable
for minimum lease payments under the terms of the assignment.
We have several active software development and service provider contracts
with third-party technology providers. These agreements contain financial
commitments by us of $12.4 million, $10.2 million, $7.3 million and $2.7 million
in fiscal 1999, 2000, 2001 and 2002, respectively.
SUMMARY. We believe that our current cash, cash equivalents and short-term
investments balances and cash flows from operations will be sufficient to meet
our working capital