SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 OR [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___to___ Commission file number 0-15325 INFORMIX CORPORATION (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 94-3011736 (I.R.S. Employer Identification No.) 4100 Bohannon Drive, Menlo Park, CA 94025 (Address of principal executive office) 415-926-6300 (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 (Title of each class) 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. [ X ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 28, 1997 was approximately $2,616,000,000. Shares of Common Stock held by each officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 28, 1997, Registrant had outstanding 151,163,317 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE (to be deemed filed only to the extent specifically incorporated herein by reference and not otherwise excluded by law): PART III: Parts of the Proxy Statement to be used in conjunction with Registrant's Annual Stockholders Meeting to be held May 22, 1997. _______________________________________________________________________ INFORMIX CORPORATION 1996 ANNUAL REPORT ON FORM 10-K Table of Contents PART I Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K Signatures _______________________________________________________________________ FORWARD LOOKING STATEMENTS This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward- looking statements as a result of certain factors described herein and in other documents. Readers should pay particular attention to the risk factors described in the section of this Report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." Readers should also carefully review the risk factors described in the other documents the Company files from time to time with the Securities and Exchange Commission, specifically the Quarterly Reports on Form 10-Q to be filed by the Company in 1997 and any Current Reports on Form 8-K filed by the Company. _______________________________________________________________________ PART I ITEM 1. BUSINESS BACKGROUND The Company is a multinational supplier of high-performance, parallel processing database technology for open systems. The Company's products also include applications development tools for creating client/server production applications, decision-support systems, ad-hoc query interfaces, and software that allows information to be shared from personal computers to mainframes within the corporate computing environment. In addition to software products, the Company offers training, consulting, and post-contract support to its customers. The principal geographic markets for the Company's products are in North America, Europe, Asia/Pacific, Japan, and Latin America. Customers include large-, medium- and small-sized corporations in the manufacturing, financial services, telecommunications, retail/wholesale, hospitality and government services sectors. The Company was initially incorporated in California in 1980 and was reincorporated in Delaware in August 1986. Unless the context requires otherwise, the terms "Company" and "Informix" refer to Informix Corporation and its subsidiaries. The Company maintains its executive offices at 4100 Bohannon Drive, Menlo Park, California 94025. Its telephone number is (415) 926-6300. All of the Company's database products developed since 1983 support Structured Query Language ("SQL"), an industry standard created by IBM. The Company's core database management software runs on the UNIX(R) , Windows(TM) and Windows/NT(TM) operating systems, and certain networks composed of computers running these operating systems. The Company's customers consist primarily of end-users, application vendors, original computer equipment manufacturers ("OEMs") and distributors. The Company markets its products directly to end-users through its sales force and indirectly to end-users through application vendors, OEMs and distributors. The Company markets its products worldwide and has operating subsidiaries in 37 foreign countries. In February 1996, the Company acquired Illustra Information Technologies, Inc. ("Illustra"), a United States based provider of object-relational database systems and tools for managing complex data, such as audio, video, text and images. Approximately 12,700,000 shares of the Company's common stock were issued to acquire all of the outstanding shares of Illustra stock. An additional 2,300,000 shares were reserved by the Company for future issuance in connection with the assumption of Illustra's outstanding stock options and warrants. The transaction was accounted for as a pooling of interests. In December 1996, the Company announced the availability of a new product based on the Illustra technology named INFORMIX(R) -Universal Server. INFORMIX- Universal Server combines the object relational technology developed by Illustra with the core database technology based on Informix's Dynamic Scalable Architecture(TM) giving customers the ability to manage all kinds of data throughout their enterprises. PRODUCTS Database Servers and Connectivity Products Database Servers The Company offers a full line of relational database servers. The Company's principal servers include: INFORMIX-Universal Server, a new, enterprise capable, fully- extensible object relational database server based on Informix's Dynamic Scalable Architecture. This product became available in December 1996. INFORMIX-Universal Server allows customers to intelligently manage traditional datatypes alongside new kinds of data, such as audio, video, text and images. This extensibility is obtained through the use of DataBlade(R) modules - reusable, plug-in object extensions - which expand the general purpose capabilities of INFORMIX-Universal Server to provide data storage and management functionality for non-traditional datatypes. Customers can select prebuilt DataBlade modules (available from the Company and many other companies) or design their own DataBlade modules with the INFORMIX-DataBlade Developer's Kit to accommodate their unique data management requirements. DataBlade modules available from the Company include: INFORMIX-Spatial, INFORMIX-TimeSeries, INFORMIX-Video Foundation and INFORMIX-Web. INFORMIX-OnLine Dynamic Server(TM) , a high performance, enterprise capable online transaction processing database server. This product is based on the Company's Dynamic Scalable Architecture and features parallel data processing capability, replication and connectivity options built into its core. INFORMIX-OnLine Workgroup Server, a database management system designed specifically for workgroups. This product is based on the Company's Dynamic Scalable Architecture and comes bundled with Netscape FastTrack Server. This product became available in the third quarter of 1996. INFORMIX-OnLine Extended Parallel Server, a high-performance, scalable database server which extends the Company's Dynamic Scalable Architecture to loosely coupled, "shared nothing" computing architectures, including clusters of symmetric multiprocessing systems and massively parallel processing systems. Connectivity Products The Company's principal connectivity products include: INFORMIX-Enterprise Gateway(TM) Manager, a connectivity tool allowing applications running on UNIX, Microsoft Windows or Windows 95 to access data sources via loadable gateway drivers. The Company offers gateway drivers for Oracle and Sybase databases. Drivers for additional data sources are available from various third parties. INFORMIX-Enterprise Gateway with DRDA, a UNIX-based connectivity tool allowing interoperability to IBM databases such as DB2, DB2/VM and DB2/400 from Windows and UNIX clients. INFORMIX-Gateway with DRDA allows applications built with Informix application development tools to access and modify information in Distributed Relational Database Architecture(TM) -compliant database management systems. INFORMIX-ESQL for C and COBOL, embedded SQL products which permit developers to take advantage of SQL technology while building applications in C or COBOL. INFORMIX-CLI, a library of low level functions that provide high performance direct access to Informix databases from applications built in C or other third generation languages. INFORMIX-CLI is compliant with Microsoft's ODBC specifications. INFORMIX-Universal Web Connect(TM) , a tool that provides high performance connectivity between Web servers and databases. INFORMIX- Universal Web Connect enables Web developers to create "intelligent" web applications that dynamically deliver multimedia rich, tailored Web pages to users. Database Tools The Company offers a variety of database application development tools designed to allow users to build applications. The Company's principal database tools include: INFORMIX-NewEra(TM) , a graphical, object-oriented development environment designed for creating enterprise-wide multi-tier client/server database applications. INFORMIX-NewEra features a fourth- generation object-oriented programming language, reusable class libraries, application partitioning, and flexible application deployment, and supports open connectivity to Informix and non-Informix databases. INFORMIX-NewEra is currently available for Microsoft(R) Windows(TM) and OSF Motif(TM). INFORMIX-4GL, a character-based development environment, which includes a fourth-generation programming language with full screen- building, report entry and SQL database input/output capabilities. The INFORMIX-4GL product family is comprised of three core products: INFORMIX-4GL Compiled, INFORMIX-4GL Rapid Development System and INFORMIX-4GL Interactive Debugger. INFORMIX-SQL, a package of five interactive tools for creating character-based applications. INFORMIX-SQL consists of a forms package, a report writer, an interactive SQL editor, a menu builder and an interactive schema editor. INFORMIX-MetaCube(TM) , a high-performance on-line analytical processing engine that automatically preconsolidates data and provides a multidimensional view of data without the constraints of a two dimensional (row and table) data model. The INFORMIX-MetaCube product family also includes MetaCube Explorer, an adhoc decision support tool for end users, MetaCube Warehouse Manager, a graphical tool for administering the "metadata" describing a database in a logical, user- friendly view, MetaCube Scheduler for batch processing, MetaCube Queryback for running queries in the background, MetaCube Aggregator for creating and maintaining aggregates in a data warehouse, MetaCube for Excel which enables data warehouse analysis in an Excel spreadsheet environment, and MetaCube for the Web which brings MetaCube analysis capabilities to intranets. Maintenance, Consulting and Services The Company maintains field-based and centralized corporate technical staffs to provide a comprehensive range of assistance to its customers. These services include pre- and post- sales technical assistance, consulting, product and sales training and technical support services. Consultants and trainers provide services to customers to assist them in the use of the Company's products and the design and development of applications that utilize the Company's products. The Company provides post-sales support to its customers on an optional basis for annual fees which generally range from 10% to 18% of the license fees paid by the customer. These support services usually include product updates. The Company also has several Information Superstores. These Superstores provide customers with a dedicated environment in which they can plan, prototype and test information technology investments using the expertise of Company specialists and partners. The typical customer spends approximately one week on-site. The SuperStores provide customers with the real world information they need to make informed business decisions and mitigate the risk associated with making a significant technology purchase. The Company now has SuperStores located in Ashford UK; Denver, Mexico City, Munich, Paris, Sydney and Tokyo. MARKETING AND CUSTOMERS The Company distributes its products through the channels of direct end-user licensing, OEMs, application vendors addressing specific markets and distributors. The Company has chosen a multiple channel distribution strategy to maintain broad market coverage and product availability. The Company, therefore, has generally avoided exclusive relationships with its licensees and other resellers of its products. Discount policies and reseller licensing programs are intended to support each distribution channel with a minimum of channel conflict. The Company also provides a financing option to customers in connection with the license of software. At December 31, 1996, the Company's sales, marketing and support staff totaled 1,427 regular employees in the North America region; 122 regular employees in the Latin America region, 947 regular employees in the Europe, Middle East and Africa regions, 344 regular employees in the Asia/Pacific region and 99 regular employees in Japan. LICENSING End-User Licensing The Company licenses its products to large companies and government entities through its direct sales force, and to certain of these companies, as well as smaller end-users, through its telemarketing sales force. The Company believes that the common core technology of its database management system products, based on standard operating systems and the SQL database language, helps it sell into major corporations and government agencies that wish to standardize their diverse computing environments. As a result, certain of these end-user organizations have entered into general purchasing agreements with the Company which offer volume discounts. Application Vendor Licensing Since its inception, the Company has licensed application vendors to distribute its products. A typical application vendor develops an application product (e.g., an insurance agency management system) using one of the Company's products and then licenses the resultant application software to its customers in the target market. The application vendor customer purchases a license for use of the Company's product to develop an applications program. Depending on the application program developed, it may include a run-only license, a full version license or even multiple product licenses. Application vendors develop applications using a wide array of application development tools, including products from the Company, such as INFORMIX-NewEra, INFORMIX-4GL and INFORMIX-SQL, as well as products offered by third parties. Applications developed using the Company's products are generally portable across various brands of computers and different operating systems. The Company has specialized programs to support the application vendor distribution channel. Under these programs, the Company provides to selected application vendors a combination of marketing development services, consulting and technical marketing support and discounts. OEM Licensing The Company's products are also marketed with the assistance of the sales forces of its OEM customers who have concluded that "solution selling" of a combination of software and hardware to their respective customers enhances the sales of their computer equipment. The Company believes that the compatibility and range of applications for its products is significant to this distribution channel. Distributor Licensing The Company has established a network of full service international distributors who provide local service and support, as well as the Company's products, to their respective national markets. Distributors are used to supplement the Company's direct sales force and enable the Company to sell its products and services in countries where the Company has not established a direct sales force. PRODUCT DEVELOPMENT The computer software industry is highly competitive and rapidly changing. Consequently, the Company dedicates considerable resources to research and development efforts to enhance its existing product lines and to develop new products to meet new market opportunities. Most of the Company's current software products and accompanying documentation have been developed internally; however, the Company has acquired certain software products from others and plans to do so again in the future. Major product releases resulting from research and development projects in 1996 included the release of INFORMIX-Universal Server, the release of INFORMIX-OnLine WorkGroup Server and new releases of INFORMIX-OnLine Dynamic Server and INFORMIX-OnLine Extended Parallel Server. Current product development is focused toward: Improvement and enhancement of current products and new products, with particular emphasis on parallel computer architecture, user-defined database extensions, Web technology integration, graphical desk top and system administration. Improvements to the Company's products to provide greater speed and support for larger numbers of concurrent users. Adaptation of new products to the broad range of computer brands and operating systems the Company currently supports and adaptation of current products to new brands of computers and operating systems which represent attractive market opportunities for the Company's products. There can be no assurance that the Company's product development efforts will be successful or that any new products will achieve significant market acceptance. As of December 31, 1996, the Company had 967 regular employees engaged in research and development. During fiscal 1994, 1995 and 1996, the Company expended $77.9 million, $103.1 million and $148.6 million, respectively, on research and development, representing approximately 17%, 14% and 16% of revenues for such periods. Also during fiscal 1994, 1995 and 1996, the Company capitalized costs in accordance with Statement of Financial Accounting Standards No. 86 of $13.6 million, $17.5 million and $28.4 million, respectively. See Item 7 of this Annual Report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - - Research and Development Expenses." COMPETITION The Company faces intense competition in the market for relational database management system software products. Companies in this market compete primarily on the basis of price/performance characteristics, name recognition, and technical support, training and consulting services. With respect to product performance, the Company believes that the principal competitive factors include: Application development productivity (the speed with which applications can be built). Database performance (the speed at which database storage and retrieval functions are executed). 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. Increasingly, the ability to manage complex data and solve more complex business problems based on such data. The Company believes that the technical advantages of its products, its approach to sales and marketing, its relations with application vendors, OEMs and distributors and its customer service and support contribute to its ability to compete in this market. The chief competition faced by the Company is currently provided by Oracle Corporation, Sybase, Inc., IBM Corporation and Microsoft Corporation. Several of the Company's current competitors have greater financial, technical and marketing resources than the Company. To the extent that market acceptance for personal computer oriented technologies increases at the expense of UNIX or other non-PC platforms, this could result in greater price pressure on certain of the Company's database products and services. The availability and market acceptance of Microsoft Corporation's Windows NT operating system may increase the competition faced by the principal operating system platforms on which the Company's products operate and may result in greater price pressure on certain of the Company's database products and services. Also, new or enhanced products introduced by existing or future competitors could have an adverse effect on the Company's business. Existing and future competition or changes in the Company's product or service pricing structure or product or service offerings could result in an immediate reduction in the prices of the Company's products or services. If this were to result in significant price declines, the effects of which were not offset by any resulting increases in sales volume of the Company's products or services, the Company's business, results of operations and financial condition would be adversely affected. PRODUCT PROTECTION The Company relies on a combination of trade secret, copyright and trademark laws, license agreements and technical measures to protect its rights in its software products. Like many software companies, the Company has no patents to date, although it has several applications pending. The Company maintains trademark and service mark registrations in the United States and numerous other foreign jurisdictions. The Company's products are generally licensed to end-users on a "right-to-use" basis pursuant to a license that restricts the use of the products for the customer's internal business purposes. The Company also relies on "shrink-wrap" licenses. The Company's "shrink-wrap" license includes a prominently displayed notice informing the end-user that, by opening the product packaging, the end-user agrees to be bound by the Company's license agreement printed on the package. Copyright and trade secret protection for source and object code version of software products may be unavailable in certain foreign countries. In addition, "shrink-wrap" licenses may be wholly or partially unenforceable under the laws of certain jurisdictions. The Company protects the human readable, source code version of its products as a trade secret and an unpublished copyrighted work. The Company has licensed the source code of its products to certain customers under certain circumstances, and for restricted uses. In addition, the Company has entered into source code escrow agreements with a number of its customers that generally require release of source code to the customer in the event there is a bankruptcy or similar proceeding by or against the Company, the Company ceases to do business or the Company ceases to support the product. In the event of a release of the source code to a customer, the customer is required to maintain its confidentiality and, in general, to use the source code solely for internal business purposes or for the purpose of providing maintenance and support to its customers, and, in certain circumstances, to embedding it in customer products. The Company believes that, because of the rapid pace of technological change in the computer software industry, patent, trade secret and copyright protection are less significant than factors such as the knowledge, ability and experience of the Company's personnel, new product introduction, frequent product enhancement, name recognition and ongoing product maintenance. EMPLOYEES As of December 31, 1996, the Company and its subsidiaries had 4,491 regular employees worldwide, including 2,939 in sales, marketing and support; 967 in research and development; 89 in operations and 496 in administration and finance. Competition in recruiting personnel in the database software industry is intense. The Company believes that its future success will depend on its continued ability to attract and retain highly skilled sales, consulting, technical, marketing and management personnel. None of the Company's U.S. employees are represented by a labor union. A small number of employees located outside of the United States are represented by labor unions. The degree of this representation varies from country to country. The Company has experienced no work stoppages. EXECUTIVE OFFICERS Set forth below in alphabetical order are biographical summaries of the current executive officers of the Company. Ronald M. Alvarez, 47, joined the Company in December 1991 as Director of Latin America Operations. He was promoted to Executive Director, Latin America Operations in March 1993, and to Vice President, Latin America in May 1995. He was appointed to his current position of Vice President, Americas Sales in January 1996. Karen Blasing, 40, joined the Company in November 1992 as Director of Financial Planning and Analysis and became Controller in June 1996. From January 1989 to October 1992, Ms. Blasing was a Senior Financial Manager at Oracle Corporation, a provider of information management software and services. Margaret R. Brauns, 42, became Vice President and Treasurer of the Company in November 1992. Ms. Brauns joined the Company as Treasurer in May 1990. D. Kenneth Coulter, 52, joined the Company in February 1988 as Managing Director, UK. From January 1990 to April 1992, Mr. Coulter was Vice President, Europe. He became Senior Vice President, Europe, Middle East and Africa, in April 1992 and was named Senior Vice President, International in January 1996. Mr. Coulter became Executive Vice President, Worldwide Field Operations in November 1996. Ira H. Dorf, 56, joined the Company as Vice President, Human Resources in October 1989. Bruce Golden, 37, joined the Company in February 1996 as Vice President of Business Units and became General Manager, Data Warehouse Business Development Unit in September 1996. From June 1993 to February 1996, he was Vice President of Marketing of Illustra Information Technologies, Inc., a supplier of object-relational database management systems. Prior to Illustra, Mr. Golden was employed by Sun Microsystems, Inc., a computer hardware and software company, for eight years in a variety of positions, his last being Director of Commercial Market Development. James F. Hendrickson, Jr., 57, joined the Company as Vice President, Customer Services in July 1992. In February 1995, Mr. Hendrickson assumed the additional responsibility of Lenexa Site Manager. From 1991 until the time he joined the Company, Mr. Hendrickson was Senior Vice President of Marketing at Image Business Systems. Alan S. Henricks, 46, joined the Company as Executive Vice President and Chief Financial Officer in January 1997. From May 1994 to December 1996, Mr. Henricks was Vice President, Finance and Operations, and Chief Financial Officer of Documentum, Inc., a provider of document management software and services, where he was responsible for all financial functions, as well as MIS, legal and operations. From February 1988 to April 1994, Mr. Henricks was Senior Vice President, Finance and Operations, and Chief Financial Officer, of Borland International, a provider of software development tools. Stephen E. Hill, 38, joined the Company in December 1985, and has served the Company in a variety of strategic planning, development and marketing positions. Mr. Hill currently serves as Vice President, Advanced Technology. Jeffrey V. Hudson, 44, joined the Company in June 1995 as Vice President, Business Development and became Vice President, Business Development and Product Marketing in May 1996. From December 1993 to January 1995, Mr. Hudson was President and Chief Executive Officer of Visioneer Communications, Inc. From June 1989 to December 1993, he was Vice President, Sales, Marketing and Service for Netframe Systems, Inc. Mike Saranga, 59, joined the Company as Senior Vice President, Product Management and Development in May 1993. Prior to joining the Company, Mr. Saranga was employed by IBM for 30 years, most recently as Assistant General Manager of Programming Systems, where Mr. Saranga developed IBM's technical and business strategies for key technologies including client/server, distributed systems and multimedia. David H. Stanley, 50, joined the Company as Vice President, Legal, General Counsel and Assistant Secretary in July 1988. In August 1990, Mr. Stanley was elected to the additional office of Secretary. In March 1995, Mr. Stanley assumed the additional responsibility for corporate services and became Vice President, Legal and Corporate Services, General Counsel and Secretary. Michael R. Stonebraker, 53, joined the Company as Vice President and Chief Technology Officer in February 1996. Dr. Stonebraker cofounded Illustra Information Technologies, Inc., a supplier of object- relational database management systems, in July 1992, and served in a consulting capacity with Illustra as Chief Technology Officer until February 1996. Dr. Stonebraker is professor emeritus of Electrical Engineering and Computer Sciences at the University of California, Berkeley, where he joined the faculty in 1971. Phillip E. White, 54, has been the Company's Chief Executive Officer and a director since January 1989. He has held the additional office of President since August 1990 and of Chairman since December 1992. Mr. White also serves as a director of Adaptec, Inc., a computer input/output technology company, and of Legato Systems, a manufacturer and developer of network storage management software products. Edwin C. Winder, 47, joined the Company in February 1990. Since joining the Company, Mr. Winder has held a variety of executive positions in sales, marketing and customer service. He is currently the Company's Senior Vice President, Japan Operations. ______________ Distributed Relational Database Architecture, Microsoft, Motif, UNIX, Windows and Windows/NT are trademarks of their respective owners. All other names indicated by (R) or (TM) are trademarks of the Company. ITEM 2. PROPERTIES The Company's headquarters and its marketing, finance, Americas sales, administration, customer service and research and development operations are located in five modern buildings in a seven building office park in Menlo Park, California, approximately 30 miles south of San Francisco. The Company leases approximately 214,000 square feet of space in these buildings. The leases for spaces in three of the buildings expire in March 1998. The Company has options to renew each lease for up to two additional five year terms at 95% of the then fair rental value. The leases for space in the other two buildings expire in September 2001. The Company plans on relocating its corporate headquarters to a site in Santa Clara, California approximately 15 miles south of the Company's current headquarters. In November 1996, the Company leased approximately 200,000 square feet of space in a high-rise office building located in Santa Clara. This building is scheduled to be available for occupancy by the Company in April 1998. The lease is for a term of 15 years. Additionally, in January 1997, the Company leased approximately 27 acres of undeveloped commercial real estate adjacent to this leased building for the phased construction of additional office buildings. The term of this lease is two years. At the expiration of the lease the Company is required to either purchase the land for $61,500,000 or find a buyer for the land and, if the net sales proceeds are less than $61,500,000, pay the lessor the difference between the net sales proceeds and $61,500,000. Facility construction on the Santa Clara site will be phased over time based on the Company's utilization needs. The Company intends to fund construction costs through outside financing, the availability of which has not yet been determined. Some of the research and development for the Company's tools products, a portion of the Company's customer service organization, the Company's principal domestic manufacturing facility and the Company's telemarketing organization are located in two modern buildings aggregating approximately 135,000 square feet in Lenexa, Kansas, a suburb of Kansas City. The buildings are owned by a partnership, of which the Company is a 50% partner, and leased by the partnership to the Company under a lease with an initial ten-year term that expires in March 1998. There are two five-year renewal options. Rental under this lease remains fixed through 1998, and then adjusts to prevailing rates for the renewal terms. The Company also leases office space in approximately 56 facilities in the United States and Canada and approximately 60 facilities internationally. The Company believes that its facilities are adequate for its current needs and that suitable additional or substitute space will be available as needed to accommodate the expansion of the Company's operations. ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any legal proceedings, other than ordinary routine litigation incidental to the business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matters to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1996. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market Information The Company's common stock has been traded on the over-the-counter market under the NASDAQ symbol IFMX since the Company's initial public offering on September 24, 1986. The following table sets forth the range of high and low closing prices as reported on the NASDAQ National Market System for the periods indicated. High Low Fiscal 1995* First Quarter $19.63 $14.63 Second Quarter 25.94 17.06 Third Quarter 34.00 25.25 Fourth Quarter 33.00 24.13 Fiscal 1996 First Quarter 35.88 26.38 Second Quarter 26.88 18.38 Third Quarter 30.25 20.31 Fourth Quarter 28.63 17.63 * The prices shown reflect a two-for-one stock split effected in the form of a stock dividend in June 1995. Common Stockholders of Record and Dividends At December 31, 1996, there were approximately 3,400 stockholders of record of the Company's common stock, as shown in the records of the Company's transfer agent. The Company has never paid dividends on its common stock and its present policy is to retain its earnings to finance anticipated future growth. ITEM 6. SELECTED FINANCIAL DATA FINANCIAL OVERVIEW Five-Year Summary (1) (in thousands, except per share data) 1996 1995 1994 1993 1992 (2) Net Revenues $939,311 $714,219 $470,112 $353,115 $283,594 Net Income 97,818 97,644 61,948 54,989 47,782 Net Income per Share (3) 0.63 0.65 0.43 0.40 0.38 Total Assets 903,842 691,146 449,545 328,001 231,459 Long-Term Obligations 2,359 2,846 892 451 1,797 The Company has not paid and does not anticipate paying cash dividends on its common stock. (1) The above information have been restated to reflect the Company's business combination with Illustra Information Technologies, Inc. from its inception date of July 31,1992 through the merger date of February 16, 1996, as a pooling of interests. (2) In 1991, the Company was selected to provide the database component of a decision-support system for the Army National Guard and Army Reserves. In 1992, the Company received $26.8 million for license fees and support as part of this Reserve Component Automation System (RCAS) contract and recorded $21.8 million as license revenue and incurred $3.2 million in operating expenses in 1992. The remaining $5.0 million of service revenue was recognized over the support period. (3) Per-share information applicable to prior periods has been restated to reflect a two-for-one stock split (effected in the form of a stock dividend) which was effective June 26, 1995. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations The Management's Discussion and Analysis of Financial Condition and Results of Operation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward- looking statements as a result of certain factors described herein and in other documents. Readers should carefully review the risk factors described in the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Quarterly Reports on Form 10-Q to be filed by the Company in 1997 and any Current Reports on Form 8-K filed by the Company. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. All information is based on the Company's fiscal calendar. Selected elements of Informix's financial statements are shown below for the last three years as a percentage of revenue and as a percentage change from year to year. % Increase (Decrease) Percent of Net Revenue 1996 1995 Years Ended December 31, Compared Compared 1996 1995 1994 to 1995 to 1994 Licenses 75% 76% 78% 31% 48% Services 25 24 22 33 65 Net revenues 100 100 100 32 52 Cost and Expenses: Cost of software distribution 5 5 5 26 54 Cost of services 15 13 10 58 96 Sales and marketing 45 43 43 39 48 Research and development 13 12 14 40 33 General and administrative 6 7 8 26 45 Merger expenses 1 - - 100 - Total costs and expenses 85 80 80 41 52 Operating income 15 20 20 (6) 53 Net income 10% 14% 13% 0% 58% Operating Results Informix's operating income was affected negatively in 1996 as a result of operating expenses growing more rapidly than revenues, primarily in the North America region as Informix continues to invest heavily in personnel in the areas of sales, marketing and customer service, and research and development and due to integration expenses and fees associated with the acquisition of Illustra Information Technologies, Inc. (Illustra) as a pooling-of-interests in February 1996. In December 1996, Informix began shipping the INFORMIX-Universal Server, based on Informix's proven Dynamic Scaleable Architecture(tm) (DSA) and providing extensibility to handle the broad range of datatypes not managed effectively by traditional relational databases. This product merges the technology of Illustra and Informix. Informix incurred significant marketing expenses in connection with the initial announcement and launch of the Universal Server in 1996. The Company expects selling and marketing expenses in 1997 to be at a level comparable to 1996 both in support of INFORMIX-Universal Server and as Informix continues developing specific market channels and specific products for such channels. These development, integration and marketing expenses and the relatively low operating margins of Illustra have adversely affected Informix's ability to achieve operating margins consistent with 1994 and 1995. In the near term, these development and marketing efforts will continue to negatively affect the Company's operating margins. Revenues The Company derives revenues principally from licensing its software and from providing technical product services to customers. License revenues may involve the shipment of product by the Company or the granting of a license to a customer to manufacture products. Service revenue consists of customer telephone or direct support, update rights for new product versions, consulting, and training fees. The Company's products are sold directly to end-user customers or through resellers, including original equipment manufacturers (OEMs), distributors, and value added resellers (VARs) including application vendors. Prior to 1996, the Company's customer mix had been decreasing in the distributor and hardware OEM channels in favor of the end user and application vendor channels. However, in 1996, this trend shifted towards a higher proportion of OEM sales as the Company has increased the focus on its partnerships with several hardware vendors in order to utilize their sales forces, obtain access to their installed bases in certain industries and benefit from their consulting and systems integration organizations. The increased focus on OEM sales coupled with increases in the other reseller channels resulted in total reseller sales representing half of the Company's 1996 license revenue . The Company estimates that almost half of the licenses sold to these resellers in 1996 were not resold to end users prior to December 31, 1996. If these resellers do not commit to licensing the same level of products for resale to end users in future periods, the Company's future revenues could be adversely affected. The Company sold approximately $55 million of software licenses to certain vendors during 1996 where the Company concurrently committed to acquire goods or services in approximately the same dollar amount. The Company's license sales transactions can be relatively large in size and difficult to forecast both in timing and dollar value. As a result, these transactions have caused fluctuations in net revenues and net income because of the relatively high gross margin on such revenues. As is common in the industry, a disproportional amount of the Company's license revenue is derived from transactions that close in the last few weeks of a quarter. The timing of closing large license agreements also increases the risk of quarter-to-quarter fluctuations. The Company expects that these sorts of transactions and the resulting fluctuations will continue. The overall revenue growth in 1996 compared to 1995 primarily reflects continued acceptance of the Company's server products. The Company's revenues, along with those of the relational database management system (RDBMS) industry as a whole, have shown substantial growth over the last several years. The industry has benefited from trends to downsize from large proprietary computer systems and market acceptance of UNIX(R), Windows(TM), Windows NT(TM) and other open operating environments. The quarterly revenue growth rates and the geographical growth trends rates slowed during the latter half of 1996 and there can be no assurances that growth rates in 1997 will be comparable with those achieved in 1996. Informix's current server product line debuted in the fall of 1994 with INFORMIX-OnLine Dynamic Server for Sequent (DSA) and was expanded to a wide array of Unix-based multi-processor systems in December 1994. This product is now available on Windows/NT operating systems and accounts for a majority of the Company's server sales. In the spring of 1996, the Company introduced a workgroup version of this product named INFORMIX-OnLine Workgroup Server. In fall 1996, the Company released INFORMIX-Online Extended Parallel Server 8.1, designed for very high end use in "loosely-coupled" computer architectures. In late 1996, the first version of INFORMIX-Universal Server was released which was the combination of the INFORMIX-OnLine Dynamic Server product with the Illustra server product. The license revenue growth in 1996 compared to 1995 reflects strong demand for the Company's server products, particularly the Company's flagship database server, INFORMIX-OnLine Dynamic Server(TM). In addition, many Informix partners, including OEM resellers, purchased high volumes of product to resell in anticipation of customer demand. The Company believes that the license revenues derived from its database tool products declined from 1995 to 1996 primarily as a result of competitive product offerings from other companies and an increase in the Company's sales to resellers, which traditionally have concentrated on purchases of database server products. The increase in service revenue was primarily attributable to the continued growth of the Company's installed customer base, and resulting renewal of maintenance contracts and increased consulting revenue. The Company continues to emphasize support services as a source of revenue. As the Company's products become more complex, more support services will be required. The Company intends to satisfy this requirement through internal support, third-party services and OEM support. The contribution margin on service revenue decreased from 48 percent in 1995 to 37 percent in 1996. The decrease resulted from increased costs incurred to expand the support function due to sales increases and the continuing complexity of the products. In addition, sales through the reseller channel where the product has not been resold to end users has not yet resulted in service revenue. Approximately 58 percent, 58 percent and 54 percent of Informix's net revenues were derived from sales to foreign customers in 1996, 1995, and 1994, respectively. The increase in foreign revenues in absolute dollars is primarily attributable to continued international acceptance for Informix's new and existing server products, and the establishment of new subsidiaries and sales offices in Europe, Asia/Pacific, Japan, and Latin America. Over the past few quarters, revenue continued to be stronger in Europe, but weaker in Japan. Informix expects that foreign revenues will continue to provide a significant portion of total revenues. However, changes in foreign currency exchange rates, the strength of local economies, and the general volatility of software markets may result in a higher or lower proportion of foreign revenues in the future. In Europe, Asia/Pacific, and Japan, most revenues and expenses are now denominated in local currencies. The U.S. dollar strengthened in the fourth quarter and for the year against the major European and Asia/Pacific currencies, which resulted in lower revenue and expenses recorded when translated into U.S. dollars, compared with the prior year periods. The Company has also increased its direct presence in Latin America, although a significant percentage of this region's revenue is still denominated in U.S. dollars. Although the effect was not significant in 1996, the Company has experienced significant currency fluctuations in Mexico, and to a lesser extent, other Latin American countries, and expects such fluctuations may occur in the future. The Company's operating and pricing strategies take into account changes in exchange rates over time; however, the Company's results of operations may be significantly affected in the short term by fluctuations in foreign currency exchange rates. The Company enters into forward foreign exchange contracts primarily to hedge the impact of fluctuations in exchange rates on accounts receivable or accounts payable denominated in foreign currencies until such receivables are collected or payables are disbursed. This program involves the use of forward foreign exchange contracts in the primary European and Asian currencies. The Company operates, on a limited basis, in certain countries in Latin America, Eastern Europe, and Asia Pacific where there are limited forward currency exchange markets and thus the Company has limited unhedged transaction exposures in these currencies. The Company does not attempt to hedge the translation to U.S. dollars of foreign denominated revenues and expenses not yet earned or incurred. Informix's distribution markets are organized into three general markets: North America; Europe, which includes the Middle East and Africa; and the Intercontinental Group, consisting of Latin America, Japan, and the Asia/Pacific region. The North America, Europe, and Intercontinental Group organizations contributed 42 percent, 39 percent and 19 percent of Informix's net revenues respectively, in 1996, compared to 42 percent, 38 percent and 20 percent, respectively, in 1995, and 46 percent, 38 percent and 16 percent, respectively, in 1994. In 1996, the American Institute of Certified Public Accountants issued an exposure draft on Software Revenue Recognition that is proposed to supersede the Statement of Position 91-1. The Company is evaluating the exposure draft in relation to its current revenue recognition policy. Certain provisions of the exposure draft differ from the Company's current policy. Adoption of the exposure draft in its final form may significantly affect the revenue recognition practices of Informix and could significantly alter, either favorably or unfavorably, the timing of revenue recorded under the Company's current policy. Cost of Software Distribution (Dollars in Millions) 1996 Change 1995 Change 1994 Manufactured cost of software distribution $ 33.5 28% $ 26.2 54% $ 17.0 Percentage of license revenue 5% 5% 5% Amortization of capitalized software $ 14.6 22% $ 12.0 54% $ 7.8 Percentage of license revenue 2% 2% 2% Cost of software distribution $ 48.1 26% $ 38.2 54% $ 24.8 Percentage of license revenue 7% 7% 7% Software distribution costs consist 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 costs that are no longer realizable. Excluding amortization of previously capitalized software development costs, cost of software distribution as a percentage of license revenue was 5 percent for both 1996 and 1995. In the future, the cost of software distribution as a percentage of revenue may vary depending upon whether the product is reproduced by the Company or by its customers. Amortization of capitalized software increased 22 percent in 1996 compared to 1995 due to the release of several products in the latter half of 1995 and 1996. Amortization expense will continue to rise in absolute dollars in 1997 due to 1996 product releases including INFORMIX-Universal Server. The absolute value of amortization of capitalized software will vary from quarter to quarter as new products are released and other product development costs become fully amortized. Cost of Services (Dollars in Millions) 1996 Change 1995 Change 1994 Cost of services $144.9 58% $ 91.5 96% $ 46.8 Percentage of service revenue 63% 52% 44% Cost of services consists primarily of maintenance, consulting and training expenses. The increase in cost of services in 1996 in absolute dollars and as a percentage of net revenues compared to the prior year is primarily due to the Company's expansion of consulting and support service capabilities as products have become more complex. The increase in cost of services as a percentage of net service revenue is due to increases in support personnel in anticipation of additional consulting revenue as more customers utilize the Company's products in more complex applications. The Company has also subcontracted certain service projects which reduces margins. Sales and Marketing Expenses (Dollars in Millions) 1996 Change 1995 Change 1994 Sales and marketing $418.7 39% $301.9 48% $203.8 Percentage of net revenue 45% 43% 43% The increase in sales and marketing expenses in 1996 in absolute dollars compared to 1995 was a result of the addition of new sales offices and sales personnel worldwide as the Company expanded its worldwide direct sales organizations, the opening of new subsidiaries, higher commission expense associated with the increase in revenues, and increased marketing programs associated with new product launches. As a percentage of net revenues, sales and marketing expenses increased from 43 percent in 1995 to 45 percent in 1996. With the expected continuing expansion in 1997 of worldwide operations, as well as increased sales and marketing expenditures aimed at positioning the Company and its new and existing products in the marketplace, the Company expects that sales and marketing expenses for 1997 will increase. The increase in sales and marketing expense will include depreciation of equipment, and facilities and manpower costs associated with operating the Company's Information SuperStores, which are more fully discussed in "Liquidity and Capital Resources". Research and Development Expenses Informix accounts for its software development expenses in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." This statement requires that, once technological feasibility of a developing product has been established, all subsequent costs incurred in developing that product to a commercially acceptable level be capitalized and amortized ratably over the revenue life of the product. The following table summarizes research and development costs for the prior three years: (Dollars in Millions) 1996 Change 1995 Change 1994 Incurred product development costs $148.6 44% $103.1 32% $ 77.9 Expenditures capitalized 28.4 62% 17.5 29% 13.6 Research and development expenses $120.2 40% $ 85.6 33% $ 64.3 Expenditures capitalized as percent of incurred 19% 17% 17% The increase in research and development expenditures in absolute dollars from year to year is attributed to an increase in staff working on new products and product extensions, including the Company's latest product INFORMIX-Universal Server. The higher capitalization in absolute dollars of product development expenditures from year to year resulted from an increase in the work involved in projects reaching technological feasibility as they neared their release dates. Significant programs currently under development include improvements and enhancements of current products, with particular emphasis on parallel computer architecture, user-defined database extensions, web technology integration, and graphic desktop and systems administration. The Company believes that research and development expenditures are essential to maintaining its competitive position in its primary markets and expects the expenditure levels to continue to constitute a significant percentage of revenues. General and Administrative Expenses (Dollars in Millions) 1996 Change 1995 Change 1994 General and administrative expenses $ 64.2 26% $ 51.1 44% $ 35.4 Percentage of net revenues 6% 7% 8% General and administrative expenses increased in absolute dollars in 1996 compared to 1995 as a result of the continued expansion of the Company's international operations. General and administrative expenses in 1995 increased in absolute dollars compared to 1994 as a result of the continued expansion in international operations as well as the acquisition of several foreign distributors. Merger Expenses In the first quarter of 1996, the Company recorded expenses of approximately $5.9 million as a result of the acquisition of Illustra, which was accounted for as a pooling of interests. These costs consisted primarily of investment banking, legal and accounting fees. Interest Income (Dollars in Millions) 1996 Change 1995 Change 1994 Interest income $ 9.9 22% $ 8.1 103% $ 4.0 Percentage of net revenues 1% 1% 1% The increase in absolute dollars from 1994 to 1995 and 1995 to 1996 results from higher balances of cash and cash equivalents and short-term investments, offset by slightly lower interest rates. Provision for Income Taxes (Dollars in Millions) 1996 Change 1995 Change 1994 Provision for income taxes $ 50.4 (9%) $ 55.2 62% $ 34.1 Effective tax rate 34% 36% 35% Informix's effective tax rates for fiscal years 1996, 1995, and 1994 are less than the combined federal and state statutory rates primarily due to the permanent reinvestment of a portion of the offshore earnings of Informix's lower-taxed Irish operations and the reinstatement of the federal research and development credit. The amount considered permanently invested in the Irish operations may vary from year to year and may affect Informix's effective tax rate. Informix anticipates its fiscal 1997 effective tax rate to remain approximately the same as 1996; however, this rate could change based on a change in the geographic mix of Informix's financial results, the amount of permanent reinvestment of a portion of the 1997 offshore earnings of Informix's lower-taxed Irish operations, the reinstatement of the federal research and development tax credit which is scheduled to expire in 1997 and acquisitions by the Company. Impact of Inflation The effect of inflation on the Company's financial position has not been significant. Liquidity and Capital Resources (Dollars in Millions) 1996 1995 1994 Cash, cash equivalents, and investments $267.7 $263.0 $198.6 Working capital 258.4 252.8 200.8 Cash provided by operations 178.3 158.2 104.1 Cash used in investment activities, excluding investments of excess cash 203.0 125.4 51.9 Cash provided by financing activities 21.5 27.5 0.3 Cash generated by operations provided sufficient resources to fund the Company's headcount growth and capital asset needs in all periods presented. In addition, sufficient cash was generated in 1996 to finance the Company's strong commitment to training and marketing efforts surrounding the acquisition of Illustra and the development and release of INFORMIX-Universal Server. The increases in cash and cash equivalents provided by operations in 1996 compared with 1995 and in 1995 compared with 1994, were primarily attributable to higher income before depreciation and amortization charges. Net accounts receivable increased by $68.6 million in 1996 as compared to December 1995. Days sales outstanding increased from approximately 76 days in December 1995 to 84 days in December 1996. The days sales outstanding ratio is dependent on many factors, including the mix of contract-based revenue with significant OEMs and large corporate and government end-users versus revenue recognized on shipments to application vendors and distributors and the success of the Company's third-party accounts receivable financing programs. The Company has programs whereby third-party financing institutions provide financing for extended credit terms instead of such financing being provided by the Company. The Company at times enhances its cash position through certain financing activities related to its account receivables. Excluding investments of excess cash, net cash and cash equivalents used for investing activities increased in 1996 compared with 1995; the decrease in corporate acquisition activity (the Company acquired 90 percent of the database division of ASCII Corporation in the first quarter of 1995) was offset by investments in property and equipment and in software development costs. In 1996, 1995 and 1994, the Company acquired $148.3 million, $56.5 million and $25.7 million, respectively, of capital equipment consisting primarily of computer equipment, computer software and office equipment. The increase of capital equipment purchases in 1996 resulted from the Company's investments in capital equipment used in sales and product demonstration activities and an effort to improve the level of consulting and support services provided to customers, and to provide technology infrastructure for the Company's growing employee headcount. Informix plans to continue to launch a series of Information SuperStores worldwide which demonstrate and offer the most recent Informix technology advances. Along with the core Informix product line, these locations have tools from leading third-party tools and application vendors installed on a wide variety of hardware platforms. Initial participants include Data General, Hewlett Packard, IBM, NCR, Pyramid, Sequent, Silicon Graphics, and Sun, among others. Engineers from both the Informix Professional Services and the Informix Advanced Technology Group are working with prospects and customers at the SuperStores to create information technology prototypes, such as pilot data warehouses, based on comprehensive, proven methodology. To date, the Company has spent approximately $63 million and has committed to spend approximately an additional $45 million in the acquisition of capital equipment to support the launch of the Information SuperStores The Company expects to make further capital equipment expenditures against these commitments in 1997. The Company's investments in software costs were previously discussed under "Results of Operations." In January 1995, the Company acquired a 90 percent interest in the database division of ASCII Corporation, a distributor of its products in Japan. The Company acquired the remaining 10 percent interest in January 1996. The acquisition was recorded as a purchase. The purchase price of ASCII's database division was approximately $46.0 million, of which approximately $35.4 million has been allocated to intangible assets acquired. In April 1995, the Company acquired an 80 percent interest in the database division of Daou Corporation, a distributor of its products in Korea. The Company acquired the remaining 20 percent in January 1997 for approximately $1 million. The acquisition was recorded as a purchase. The initial purchase price of this business was approximately $4.6 million, and was increased by approximately $3.0 million in January 1997 due to performance incentives outlined in the agreement; a total of approximately $7.0 million has been allocated to intangible assets acquired. The operating results of these distributors subsequent to the acquisition dates have been included in the consolidated results of operations. In February 1996, the Company acquired Illustra, a U.S.-based company that provides dynamic content management database software and tools for managing complex data in the Internet, multimedia/entertainment, financial services, earth sciences, and other markets. Approximately 12.7 million shares of Informix common stock were issued to acquire all outstanding shares of Illustra stock. An additional 2.3 million shares of Informix common stock were reserved for issuance in connection with the assumption of Illustra's outstanding stock options and warrants. The transaction has been accounted for as a pooling of interests and accordingly all of the accompanying financial statements have been restated to reflect the merger as of the beginning of the earliest period presented. Merger expenses of approximately $5.9 million were recorded in the first quarter of 1996. Net cash and cash equivalents provided by financing activities in 1996 and 1995 consisted primarily of proceeds from the sale of the Company's common stock to employees, partially offset by payments on capital leases. Net cash and cash equivalents used in financing activities in 1994 included payments on capital leases and repurchases of the Company's common stock, offset by proceeds from the sale of the Company's common stock to employees. In 1993 and 1994, the Board of Directors authorized the repurchase of up to 8 million shares of the Company's common stock in the open market. As of December 31, 1996, the Company had repurchased 3,580,000 shares with an aggregate cost of approximately $32.1 million on the open market. All repurchased shares were re-issued to partially satisfy requirements under Stock Option and Stock Purchase Plans. In 1996, the Company rescinded the stock repurchase authorization. The Company plans on relocating its corporate headquarters to Santa Clara, California approximately 15 miles to the south of the Company's current headquarters. To facilitate the move, in January 1997, the Company entered into a two year lease for twenty seven acres of undeveloped commercial real estate ("the Real Estate Lease"). Upon termination of the lease term, the Company will have the option to purchase the land, or if such purchase option is not exercised, arrange for the sale of the parcels to an unrelated third party. In the event the latter option is exercised, the Company is required to pay the lessor any difference between the net sales proceeds and the lessor's investment in the parcels, approximately $61.5 million. In order to secure performance of its obligation under the lease, the Company was required to pledge certain cash collateral to the lessor throughout the full term of the lease. Accordingly, in January 1997, the Company deposited $60 million in cash into a non-interest bearing collateral account controlled by an affiliate of the lessor. Interest on these deposits computed at market rates, otherwise due to the Company, have been assigned by the Company to the lessor in order to reduce the gross monthly lease payments due under the lease. The resulting net monthly lease payments will be recognized by the Company as rent expense over the lease term. The real estate lease also includes certain financial performance criteria which must be met by the Company during the lease term. Construction of buildings on the Santa Clara site will be phased over time based on the Company's utilization needs. The Company intends to fund construction costs through outside financing, the availability of which has not been determined. In addition, in November 1996, the Company leased approximately 200,000 square feet of office space in Santa Clara adjacent to the twenty seven acres described above. The lease term is for fifteen years and minimum lease payments amount to $96.0 million over the term. The minimum lease payments are scheduled to increase within a contractual range based on changes in the Consumer Price Index. After giving consideration to the Company's planned financing of construction costs in Santa Clara, the Company expects that current balances of cash, cash equivalents, and short-term investments will be sufficient to fund anticipated levels of operations at least through 1997 and may be used for investments and acquisitions to supplement internal revenue growth and for other corporate purposes. Business Risks Fluctuations in Quarterly Results. The Company's operating results can vary substantially from period to period. The timing and amount of the Company's license revenues are subject to a number of factors that make estimation of operating results prior to the end of a quarter extremely uncertain. The Company has operated historically with little or no backlog and, as a result, license revenues in any quarter are dependent on contracts entered into or orders booked and shipped in that quarter. The Company's operating margins have generally followed a historic pattern, with second half revenues and operating margins being higher than those of the preceding first half. The Company believes that this pattern has been primarily related to customers' capital spending cycles at the end of a calendar year as well as to the Company's selling efforts, influenced by annual sales incentive plans which culminate at the end of the calendar year, which is the end of the Company's fiscal year. Additionally, as is common in the industry, a disproportionate amount of the Company's license revenues are derived from transactions that close in the last few weeks of a quarter. The timing of closing large license agreements also increases the risks of quarter-to-quarter fluctuations and the uncertainty of estimating quarterly operating results. The Company's operating expenditures are guided by projected annual and quarterly revenue levels and are incurred approximately ratably throughout each quarter. As a result, if projected revenues are not realized in the expected period, the Company's operating results for that period would be adversely affected as the operating expenses are relatively fixed in the short term. The Company's revenue generation is also highly dependent on the economic conditions. If the economy were to slow down, existing and potential customers might delay the purchase of the Company's products, which would negatively affect the Company's revenue. Failure to achieve revenue, earnings and other operating and financial results as forecasted or anticipated by brokerage firm analysts or industry analysts could result in an immediate and adverse effect on the market price of the Company's common stock. Further, the Company may not learn of, or be able to confirm, revenue or earnings shortfall until the end of each quarter, which could result in an even more immediate and adverse effect on the trading price of the Company's common stock. Volatility of Informix Stock Prices. The market for the Company's common stock is highly volatile. The trading price of the Company's common stock could be subject to wide fluctuations in response to quarterly variations in operating and financial results, announcements of technological innovations or new products by the Company or its competitors, changes in prices of the Company's or its competitors' products and services, changes in product mix, change in the Company's revenue and revenue growth rates for the Company as a whole or for individual geographic areas, business units, products or product categories, as well as other events or factors. Statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to the market in which the Company does business or relating to the Company specifically have resulted, and could in the future result, in an immediate and adverse effect on the market price of the Company's common stock. In addition, the stock market has from time to time experienced extreme price and volume fluctuations which have particularly affected the market price for the securities of many high technology companies and which often have been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of the Company's common stock. Personnel changes. The Company's future performance will depend to a significant extent on its ability to attract and retain highly skilled sales, consulting, technical, marketing and management personnel. The competition for employees in the database software industry is intense, and the Company expects that such competition will continue for the foreseeable future. From time to time the Company has experienced difficulty in locating candidates with appropriate qualifications. The Company also believes stock options are a critical component for motivating and retaining its key employees. The recent decline in the price of the Company's Common Stock has made stock options previously granted with higher exercise prices less valuable to the Company's current employees and has consequently made it more difficult for the Company to retain its key employees. The failure of the Company to attract and retain key personnel could have an adverse effect on the Company's business, results of operations, financial position and cash flows. Competition. The market for the Company's software products and services is extremely competitive. Some of the Company's current competitors have greater financial, technical and marketing resources than the Company. The industry movement to new operating systems, like Windows NT, access through low-end desktop machines, and access to data through the Internet may cause downward pressure on prices of database and related products. If such downward pressure on prices were to occur, margins would be adversely affected. Also, new or enhanced products introduced by existing or future competitors could have an adverse effect on the Company's business, results of operations and financial condition. Existing and future competition or changes in the Company's product or service pricing structure or product or service offerings could result in an immediate reduction in the prices of the Company's products or services. If significant price reductions in the Company's products or services were to occur and not be offset by increases in sales volume, the Company's business, results of operations and financial condition would be adversely affected. There can be no assurance that the Company will continue to compete successfully with its existing competitors or will be able to compete successfully with new competitors. Technological Change and New Products. The market for the Company's products and services is characterized by rapidly changing technology and frequent new product introductions. The Company's success will depend upon its ability to enhance its existing products and to introduce new products on a timely and cost-effective basis and that meet dynamic customer requirements. There can be no assurance that the Company will be successful in developing new products or enhancing its existing products or that such new or enhanced products will receive market acceptance or be delivered timely to the market. The Company has experienced product delays in the past and may experience delays in the future. Delays in the scheduled availability or a lack of market acceptance of its products or failure to accurately anticipate customer demand and meet customer performance requirements could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, products as complex as those offered by the Company may contain undetected errors or bugs when first introduced or as new versions are released. There can be no assurance that, despite testing, new products or new versions of existing products will not contain undetected errors or bugs that will delay the introduction or commercial acceptance of such products. A key factor in determining the success of the Company will continue to be the ability of the Company's products to interoperate and perform well with existing and future leading, industry-standard application software products intended to be used in connection with relational database management systems. Failure to meet existing or future interoperability and performance requirements of certain independent vendors marketing such applications in a timely manner could adversely affect the market for the Company's products. Commercial acceptance of the Company's products and services could also be adversely affected by critical or negative statements or reports by brokerage firms, industry and financial analysts and industry periodicals concerning the Company, its products, business or competitors or by the advertising or marketing efforts of competitors, or other factors that could affect consumer perception. International Operations. In 1995 and 1996, approximately 58 percent of the Company's net revenues were derived from its international operations. The Company's operations and financial results could be significantly affected by factors associated with international operations such as changes in foreign currency exchange rates and uncertainties relative to regional economic circumstances, as well as by other factors associated with international activities. Most of the Company's international revenue and expenses are denominated in local currencies. Although the Company takes into account changes in exchange rates over time in its pricing strategy, the Company's business, results of operations and financial condition could be materially and adversely affected by fluctuations in foreign currency exchange rates. Integration of Acquired Companies. The Company has completed several acquisitions during the last two years, including the database division of ASCII Corporation in Japan; distributors in Germany, Korea and Malaysia; Stanford Technology Group; and, most recently, Illustra in the United States. The Company may acquire other distributors, companies, products or technologies in the future. There can be no assurance that these acquisitions can be effectively integrated, that such acquisitions will not result in costs and liabilities that could adversely affect the Company's results of operations and financial condition, or that the Company will obtain the anticipated or desired benefits of such acquisitions. Infringement Claims. As the number of software products and software patents in the industry increases, the Company believes that software developers like the Company have and will become increasingly subject to infringement claims with respect to patents, trademarks and other proprietary rights. Such claims, with or without merit, can be time consuming and expensive to defend and could have an adverse effect on the Company's business, results of operations, financial position, and cash flows. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS December 31, December 31, (in thousands, except share and per-share amounts) 1996 1995 (Note) ASSETS Current Assets: Cash and cash equivalents $ 226,508 $ 164,305 Short-term investments 34,512 88,904 Accounts receivable, less allowances for doubtful accounts of $21,429 in 1996 and $12,854 in 1995 254,096 185,452 Deferred taxes 13,329 21,504 Other current assets 29,479 25,924 Total current assets 557,924 486,089 Property and Equipment, at cost Computer equipment 225,336 103,650 Office equipment and leasehold improvements 67,982 49,292 293,318 152,942 Less accumulated depreciation and amortization (106,591) (71,310) 186,727 81,632 Software Costs, less accumulated amortization of $41,559 in 1996 and $18,980 in 1995 54,486 36,866 Deferred taxes 7,775 16,248 Long-term investments 6,639 9,781 Intangible assets 34,693 40,730 Other assets 55,598 19,800 Total Assets $ 903,842 $ 691,146 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 65,446 $ 29,655 Accrued expenses 52,347 34,919 Accrued employee compensation 57,626 49,911 Income tax payable 32,896 41,221 Deferred taxes 1,612 1,612 Deferred revenue 84,102 66,681 Current portion of capital lease obligations 866 769 Other current liabilities 4,671 8,479 Total current liabilities 299,566 233,247 Capital lease obligations, less current portion 1,462 890 Other noncurrent liabilities 897 1,956 Deferred taxes 31,203 24,488 Commitments and contingencies Stockholders' Equity: Preferred stock, par value $.01 per share- - - 5,000,000 shares authorized, none issued Common stock, par value $.01 per share- 350,000,000 shares authorized, issued 150,782,000 and 147,984,000 in 1996 and 1995, respectively 1,508 1,480 Additional paid-in capital 243,564 204,448 Retained earnings 322,805 226,797 Unrealized gain on available-for-sale securities, net of tax 11,690 4,064 Foreign currency translation adjustment (8,853) (6,224) Total stockholders' equity 570,714 430,565 Total Liabilities and Stockholders' Equity $ 903,842 $ 691,146 (Note) Balances at December 31, 1995 have been restated to reflect the Company's business combination with Illustra Information Technologies, Inc. as a pooling-of-interests. See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, (in thousands, except per-share data) 1996 1995 1994 (Note) (Note) Net Revenues Licenses $ 708,035 $ 539,733 $ 364,661 Services 231,276 174,486 105,451 939,311 714,219 470,112 Costs and Expenses Cost of software distribution 48,058 38,165 24,773 Cost of services 144,850 91,540 46,799 Sales and marketing 418,695 301,932 203,816 Research and development 120,211 85,643 64,263 General and administrative 64,239 51,113 35,370 Expenses related to Illustra merger 5,914 - - 801,967 568,393 375,021 Operating income 137,344 145,826 95,091 Interest income 9,868 8,148 3,970 Interest expense (2,617) (1,154) (441) Other income (expense), net 3,614 (12) (2,598) Income before income taxes 148,209 152,808 96,022 Income Taxes 50,391 55,164 34,074 Net Income $ 97,818 $ 97,644 $ 61,948 Net Income Per Common Share $ 0.63 $ 0.65 $ 0.43 Weighted Average Number of Common and Common Equivalent Shares Outstanding: 155,573 150,627 142,782 (Note) Amounts presented above applicable to the prior periods have been restated to reflect the Company's business combination with Illustra Information Technologies, Inc. as a pooling-of-interests. See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, (in thousands) 1996 1995 1994 (Note) (Note) Operating Activities Net income $ 97,818 $ 97,644 $ 61,948 Adjustments to reconcile net income to cash and cash equivalents provided by operating activities: Depreciation and amortization 47,207 28,949 16,581 Amortization of capitalized software 14,626 12,041 7,848 Deferred tax expense 15,188 (593) (624) Provisions for losses on accounts receivable 14,983 8,508 3,831 Foreign currency transaction gain (5,349) (4,609) (1,323) Gain on sales of strategic investments (3,856) - - Loss on disposal of property and equipment 2,393 605 - Changes in operating assets and liabilities: Accounts receivable (86,528) (65,683) (23,527) Other current assets 4,172 (6,659) (1,709) Accounts payable and accrued expenses 59,345 70,882 32,843 Deferred revenue 18,277 17,086 11,613 Net cash and cash equivalents provided by operating activities 178,276 158,171 107,481 Investing Activities Investments of excess cash: Purchases of held-to-maturity securities - (144,517) (124,102) Purchases of available-for-sale securities (152,179) (4,303) (111,923) Maturities of held-to-maturity securities - 83,159 106,513 Maturities of available-for-sale securities 126,137 6,104 - Sales of available-for-sale securities 83,696 27,261 140,866 Purchases of strategic investments (12,737) (1,000) (1,623) Proceeds from sales of strategic investments 7,299 - - Purchase of property and equipment (148,270) (56,500) (25,747) Proceeds from disposal of property and equipment 1,929 288 - Additions to software costs (32,381) (23,977) (15,048) Business combinations, net of cash acquired (4,340) (38,413) (8,799) Other (14,541) (5,757) (721) Net cash and cash equivalents used in investing activities (145,387) (157,655) (40,584) Financing Activities Proceeds from issuance of common stock, net 24,357 27,898 15,836 Principal payments on capital leases (1,025) (442) (1,342) Acquisition of common stock (2,388) - (22,141) Reissuance of treasury stock 578 - 7,915 Net cash and cash equivalents provided by financing activities 21,522 27,456 268 Effect of exchange rate changes on cash and cash equivalents 7,792 4,050 307 Increase in cash and cash equivalents 62,203 32,022 67,472 Cash and cash equivalents at beginning of year 164,305 132,283 64,811 Cash and cash equivalents at end of year $ 226,508 $ 164,305 $ 132,283 (Note) Amounts presented above applicable to the prior periods have been restated to reflect the Company's business combination with Illustra Information Technologies, Inc. as a pooling-of-interests. See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Unrealized Foreign Additional Gain on Currency Common Stock Paid-in Treasury Stock Retained Available-for- Translation (in thousands) Shares Amount Capital Shares Amount Earnings Sale Securities Adjustment Totals Balances at December 31, 1993 133,286 $1,333 $127,176 (266) $ (2,431) $ 84,030 $ - $(2,527) $207,581 Exercise of stock options 1,170 11 3,557 3,568 Sale of stock to employees under employee stock purchase plan 90 1 1,052 1,053 Issuance of stock, net of costs 5,608 55 11,499 11,554 Tax benefits related to stock options 10,062 10,062 Foreign currency translation adjustment 929 929 Acquisition of treasury stock (3) (2,723) (22,139) (22,142) Reissuance of treasury stock 2,989 24,570 (16,655) 7,915 Unrealized gain on available-for-sale securities, net of tax 665 665 Net income 61,948 61,948 Balances at December 31, 1994 140,154 1,400 153,343 - - 129,323 665 (1,598) 283,133 Exercise of stock options 4,377 44 13,712 13,756 Sale of stock to employees under employee stock purchase plan 349 3 6,603 6,606 Issuance of stock, net of costs 2,571 28 7,508 7,536 Tax benefits related to stock options 21,291 21,291 Acquisition of STG 533 5 1,991 (170) 1,826 Foreign currency translation adjustment (4,626) (4,626) Unrealized gain on available-for-sale securities, net of tax 3,399 3,399 Net income 97,644 97,644 Balances at December 31, 1995 147,984 1,480 204,448 - - 226,797 4,064 (6,224) 430,565 Exercise of stock options 2,182 22 13,343 13,365 Sale of stock to employees under employee stock purchase plan 616 6 10,986 10,992 Acquisition of treasury stock - - - (100) (2,388) (2,388) Reissuance of treasury stock - - - 100 2,388 (1,810) 578 Tax benefits related to stock options 14,787 14,787 Foreign currency translation adjustment (2,629) (2,629) Unrealized gain on available-for-sale securities, net of tax 7,626 7,626 Net income 97,818 97,818 Balances at December 31, 1996 150,782 $1,508 $243,564 - $ - $322,805 $11,690 $(8,853) $570,714 (Note) Data presented above applicable to the prior periods has been restated to reflect the Company's business combination with Illustra Information Technologies, Inc. as a pooling-of-interests. See Notes to Consolidated Financial Statements. Note 1 - Summary of Significant Accounting Policies Organization and Operations. Informix Corporation ("the Company") is a multinational supplier of high-performance, parallel processing database technology for open systems. The Company's products also include application development tools for creating client/server production applications, decision-support systems, ad-hoc query interfaces, and software that allows information to be shared transparently from personal computers to mainframes within the corporate computing environment. In addition to software products, the Company offers training, consulting, and post-contract support to its customers. The principal geographic markets for the Company's products are North America, Europe, Asia/Pacific, Japan, and Latin America. Customers include large-, medium- and small-sized corporations in the manufacturing, financial services, telecommunications, retail/wholesale, hospitality, and government services sectors. Use of Estimates. The preparation of financial statements in conformity with general accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Principles of Consolidation. The consolidated financial statements include the accounts of Informix Corporation and its wholly owned subsidiaries. All material intercompany accounts, transactions, and profits have been eliminated in consolidation. Restatement of Prior Year Data. As more fully described in Note 9, in February 1996, Informix merged with Illustra Information Technologies, Inc. (Illustra). The merger has been accounted for as a pooling of interests and the historical consolidated financial statements of Informix for all periods prior to the merger have been restated to include the financial position, results of operations, and cash flows of Illustra. Costs of the merger are included in the consolidated results of operations in 1996. Foreign Currency Translation. For foreign operations with the local currency as the functional currency, assets and liabilities are translated at year-end exchange rates, and statements of income are translated at the average exchange rates during the year. Exchange gains or losses arising from translation of foreign currency denominated assets and liabilities are included as a component of stockholders' equity. For foreign operations with the U.S. dollar as the functional currency, certain assets and liabilities are remeasured at the year-end exchange rates. Statements of income are remeasured at the average exchange rates during the year. Gains and losses resulting from foreign currency remeasurement and realized gains and losses are included in other expense, net. The Company enters into forward foreign exchange contracts primarily to hedge the value of accounts receivable or accounts payable denominated in foreign currencies (mainly European and Asian foreign currencies) against fluctuations in exchange rates until such receivables are collected or such payables are disbursed. The Company operates, on a limited basis, in certain countries in Latin America, Eastern Europe, and Asia Pacific where there are limited forward currency exchange markets and thus the Company has limited unhedged transaction exposures in these currencies. Gains and losses associated with exchange rate fluctuations on forward foreign exchange contracts are recorded currently as income or loss as they offset corresponding gains and losses on the foreign currency denominated assets and liabilities being hedged. The costs of the forward foreign exchange contracts are recorded as other expense, net. See Note 3 of Notes to Consolidated Financial Statements. Revenue Recognition. The Company generally recognizes license revenue from sales of software licenses upon delivery of the software product to a customer. However, for certain computer hardware manufacturers and end-user licensees with amounts payable within twelve months, the Company will recognize revenue at the time the customer makes a contractual commitment for a minimum non-refundable license fee, if such computer hardware manufacturers and end-user licensees meet certain criteria established by the Company. License revenue from resellers (such as distributors and application vendors) and from other computer hardware manufacturers and end users may be recognized at the earlier of either payment of the license fee or the shipment of the software media on a per-unit basis. However, in no case is revenue recognized unless a master or first copy is delivered to the customer. Maintenance contracts generally call for the Company to provide technical support and software updates to customers. Maintenance contract revenue is recognized ratably over the term of the maintenance contract, generally on a straight-line basis. Where maintenance revenue is not separately invoiced, it is unbundled from license fees and deferred for revenue recognition purposes. Other service revenue, primarily training and consulting, is generally recognized at the time the service is performed. The Company's revenue recognition policy is in compliance with the provisions of the American Institute of Certified Public Accountants' Statement of Position 91-1, "Software Revenue Recognition." The Company sold approximately $55 million of software licenses to certain vendors during 1996 where the Company concurrently committed to acquire goods or services in approximately the same dollar amount. These transactions have been accounted for at their fair market value. No single customer accounted for 10 percent or more of consolidated revenues in 1996, 1995 or 1994. Income Taxes. The Company accounts for income taxes in accordance with the provisions of the Financial Accounting Standards Board Statement No. 109 (FAS 109) "Accounting for Income Taxes." Under FAS 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and income tax bases of assets and liabilities, and are measured by applying enacted tax rates and laws to the taxable years in which such differences are expected to reverse. Inventories. Inventories, which consist primarily of software product components, finished software products, and marketing and promotional materials, are carried at the lower of cost (first in, first out) or market value, and are included in other current assets. Software Costs. The Company capitalizes software development costs incurred in developing a product once technological feasibility of the product has been determined. Software costs also include amounts paid for purchased software and outside development on products which have reached technological feasibility. All software costs are amortized as a cost of software distribution either on a straight-line basis over the remaining estimated economic life of the product or on the basis of each product's projected revenues, whichever results in greater amortization. The Company recorded amortization of $14.6 million, $12.0 million, and $7.8 million of software costs in 1996, 1995, and 1994, respectively, in cost of software distribution. Property and Equipment. Depreciation of property and equipment is calculated using the straight-line method over its estimated useful life, generally the shorter of the applicable lease term or three-to- seven years for financial reporting purposes. Businesses Acquired. The purchase price of businesses acquired, accounted for as purchased business combinations, is allocated to the tangible and specifically identifiable intangible assets acquired based on their fair values with any amount in excess of such allocations being designated as goodwill. Intangible assets are amortized over their estimated useful lives, which to date have been five to seven years. The carrying values of goodwill and specified intangible assets are reviewed if the facts and circumstances suggest that they may be impaired. If this review indicates that the asset will not be recoverable, as determined based on the undiscounted cash flows of the acquired business over the remaining amortization period, the Company's carrying value is reduced to net realizable value. There were no writedowns of intangible assets in 1996, 1995 or 1994. As of December 31, 1996 and 1995, the Company had $50.6 million and $48.4 million of intangible assets, with accumulated amortization of $15.9 million and $7.7 million, respectively, as a result of these acquisitions. Net Income per Common Share. Net income per common share is based on the weighted average number of common and dilutive common equivalent shares outstanding during each year. All stock options are considered common stock equivalents and are included in the weighted average computations when the effect is dilutive. Concentration of Credit Risk. The Company designs, develops, manufactures, markets, and supports computer software systems to customers in diversified industries and in diversified geographic locations. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. Other Concentrations. In 1996, the Company derived half of its revenue from software license agreements with resellers including original computer equipment manufacturers (OEMs), distributors and value added resellers (VARs) including application vendors. The Company estimates that slightly less than half of the licenses sold to these resellers in 1996 were not resold to end users prior to December 31, 1996. If these resellers do not commit to licensing the same level of products for resale to end users in 1997, the Company's revenues in future periods could be adversely affected. Cash, Cash Equivalents, Short-Term Investments, and Long-Term Investments. The Company considers liquid investments purchased with a maturity of three months or less to be cash equivalents. The Company considers investments with a maturity of more than three months but less than one year to be short-term investments. Investments with an original maturity of more than one year are considered long-term investments. Short-term and long-term investments are classified as available-for-sale and are carried at fair value. Cash equivalents are carried at amortized cost. The Company invests its excess cash in accordance with its short- term and long-term investments policy, which is approved by the Board of Directors. The policy authorizes the investment of excess cash in government securities, municipal bonds, time deposits, certificates of deposit with approved financial institutions, commercial paper rated A- 1/P-1 (a small portion of the portfolio may consist of commercial paper rated A-2/P-2), and other specific money market instruments of similar liquidity and credit quality. The Company has not experienced any significant losses related to these investments. Securities Held-to-Maturity and Available-for-Sale. Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and the ability to hold the securities until maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, as well as any interest on the securities, is included in interest income. Marketable equity securities and debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for- sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in other expense, net. The cost of securities sold is based on the specific identification method. Interest on securities classified as available-for-sale are included in interest income. There were no material gross realized gains or losses from sales of securities during the year. Fair Value of Financial Instruments. Fair values of cash, cash equivalents, short and long term investments, other assets, and currency forward contracts are based on quoted market price. Reclassifications. Certain previously reported amounts have been reclassified to conform to the current presentation format. Note 2 -Financial Instruments The following is a summary of available-for-sale debt and equity securities: December 31, 1996 Available-for-sale securities (In thousands) Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury Securities $ 61,308 $ - $ (20) $ 61,288 Commercial Paper 15,872 14 (2) 15,884 Municipal Bonds 27,317 10 (48) 27,279 Auctioned Preferred Stock 4,504 - (4) 4,500 Total Debt Securities 109,001 24 (74) 108,951 U.S. Equity Securities 15,404 18,490 - 33,894 $124,405 $18,514 $ (74) $142,845 Amounts included in cash and cash equivalents $ 67,806 $ - $ (6) $ 67,800 Amounts included in short-term investments 34,548 19 (55) 34,512 Amounts included in long-term investments 6,647 5 (13) 6,639 Amounts included in other assets 15,404 18,490 - 33,894 $124,405 $18,514 $ (74) $142,845 The maturity dates of the financial instruments included in long-term investments vary from 1998 to 2026. December 31, 1995 Available-for-sale securities (In thousands) Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury Securities $ 5,608 $ - $ - $ 5,608 Commercial Paper 51,288 146 (88) 51,346 Municipal Bonds 82,096 71 (213) 81,954 Auctioned Preferred Stock 2,506 - (5) 2,501 Total Debt Securities 141,498 217 (306) 141,409 U.S. Equity Securities 6,110 7,500 (831) 12,779 $147,608 $ 7,717 $(1,137) $154,188 Amounts included in cash and cash equivalents $ 42,724 $ - $ - $ 42,724 Amounts included in short-term investments 89,072 137 (305) 88,904 Amounts included in long-term investments 9,702 80 (1) 9,781 Amounts included in other assets 6,110 7,500 (831) 12,779 $147,608 $ 7,717 $(1,137) $154,188 In the fourth quarter of 1995, the Company re-evaluated the initial designation of certain of its investments in debt securities as held-to- maturity based on the Company's current ability and intent to hold such securities to their contractual maturity. As a result, in December 1995, these securities were transferred from held-to-maturity to available- for-sale at their estimated fair value of $125.7 million. The difference between amortized cost of $125.8 million and estimated fair value of these securities at the date of transfer, $0.1 million, was charged to a separate component of stockholders' equity. Note 3 - Derivative Financial Instruments The Company enters into forward foreign exchange contracts primarily to hedge the value of accounts receivable or accounts payable denominated in foreign currencies against fluctuations in exchange rates until such receivables are collected or payables are disbursed. The purpose of the Company's foreign exchange exposure management policy and practices is to attempt to minimize the impact of exchange rate fluctuations on the value of the foreign currency denominated assets and liabilities being hedged. Substantially all forward foreign exchange contracts entered into by the Company have maturities of 360 days or less. The Company's practice is to settle all foreign exchange contracts within ten calendar days of year end and thus there is no material difference between the contract value and the fair value of the contracts at December 31, 1996 and 1995. At December 31, 1996 and 1995, the Company had approximately $168.6 million and $77.2 million of forward foreign exchange contracts outstanding, respectively. The table below summarizes by currency the contractual amounts of the Company's forward foreign exchange contracts at December 31, 1996 and December 31, 1995. FORWARD CONTRACTS At December 31, 1996 (In thousands) Face Value Unrealized Gain/(Loss) Forward currency contracts sold: Deutsche Mark $ 55,815 $ (24) Japanese Yen 41,384 (143) British Pound 16,051 (12) French Franc 8,252 - Malaysian Ringgit 5,914 1 Taiwanese NT 5,609 (2) Italian Lira 4,555 (9) Singapore Dollar 3,600 (8) Holland Guilder 3,558 1 Sweden Krona 2,246 1 Swiss Franc 1,622 1 Portuguese Escudo 1,574 - Other (under $1 million) 2,240 (1) Total $152,420 $ (195) Forward currency contracts purchased: British Pound $ 10,501 $ (192) Deutsche Mark 4,198 6 Other (under $1 million) 1,472 (7) Total $ 16,171 $ (193) Grand Total $168,591 $ (388) FORWARD CONTRACTS At December 31, 1995 (In thousands) Face Value Unrealized Gain/(Loss) Forward currency contracts sold: Deutsche Mark $ 25,356 $ (14) Japanese Yen 21,817 (74) Spanish Peseta 6,178 (4) French Franc 4,807 (7) Singapore Dollars 4,326 6 Italian Lira 2,403 4 British Pound 2,329 22 Malaysian Ringgit 2,287 (2) Dutch Guilder 1,550 1 Portuguese Escudo 1,369 (1) Austrian Schilling 1,361 - Other 3,369 (1) Total $ 77,152 $ (70) Other than the use of forward foreign exchange contracts as discussed immediately above, the Company does not currently invest in or hold any other financial instruments defined as derivative financial instruments by FAS 119. Note 4 - Stock-based Benefit Plans Option Plans Under the Company's 1986 Employee Stock Option Plan, options are granted at fair market value on the date of the grant. Options are generally exercisable in cumulative annual installments over three to five years. Payment for shares purchased upon exercise of options may be by cash or, with Board approval, by full recourse promissory note or by exchange of shares of the Company's common stock at fair market value on the exercise date. Options under the 1986 Plan expired on July 29, 1996, which was 10 years after the date of grant. Additionally, 1,600,000 shares were authorized for issuance under the 1989 Outside Directors Stock Option Plan, whereby non-employee directors are automatically granted non-qualified stock options upon election or re-election to the Board of Directors. At December 31, 1996, 675,000 shares were available for grant under this Plan. In April 1994, the Company adopted the 1994 Stock Option and Award Plan; 8,000,000 shares were authorized for grant under this Plan. Options can be granted to employees on terms substantially equivalent to those described above. The 1994 Stock Option and Award Plan also allows the Company to award performance shares of the Company's common stock to be paid to recipients on the achievement of certain performance goals set with respect to each recipient. At December 31, 1996, 788,783 shares were available for grant under this Plan. In February 1996, on acquisition of Illustra, all of Illustra's outstanding options were converted into options to purchase 2.4 million shares of Informix common stock. All stock options were restated to include Illustra's options under the pooling-of-interests method. There were 172,677 shares available for grant under this Plan at December 31, 1996. Following is a summary of activity for all stock option plans for the three years ended December 31, 1996: Number Options of Shares Price per Share Outstanding at December 31, 1993 15,739,957 $ 0.06 to $13.13 Options granted 4,029,815 0.19 to 14.44 Options exercised (3,627,468) 0.06 to 12.75 Options canceled (1,128,532) 0.06 to 11.88 Outstanding at December 31, 1994 15,013,772 0.06 to 14.44 Options granted and assumed 5,456,927 0.19 to 34.00 Options exercised (3,852,697) 0.19 to 13.88 Options canceled (864,920) 0.06 to 32.75 Outstanding at December 31, 1995 15,753,082 0.06 to 34.00 <CAPTION Weighted Average Price Options granted and assumed 5,850,225 $ 24.3456 Options exercised (2,927,260) 4.6069 Options canceled (1,561,800) 17.1483 Outstanding at December 31, 1996 17,114,247 $ 13.4495 The following table summarizes information about options outstanding at December 31, 1996: Options Outstanding Options Exercisable ______________________________________________________ ____________________________________ Number Weighted-Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise Prices at December 31, 1996 Contractual Life Exercise Price at December 31, 1996 Exercise Price $ 0.0700 - $ 0.6719 2,304,968 6.63 $ 0.3911 2,304,968 $ 0.3911 $ 0.6875 - $ 0.7500 380,100 4.38 $ 0.7447 380,100 $ 0.7447 $ 0.7656 - $ 3.5938 1,731,085 5.08 $ 3.2936 1,730,236 $ 3.2943 $ 3.7188 - $ 7.5000 1,888,065 6.88 $ 6.7008 1,087,165 $ 6.1130 $ 7.5938 - $ 8.6250 1,871,601 6.26 $ 8.6012 1,286,801 $ 8.6017 $ 8.6875 - $10.7813 420,675 6.79 $10.0854 184,300 $10.1559 $10.8750 - $18.2500 2,761,139 8.24 $17.8675 723,415 $17.6530 $18.3750 - $23.1250 2,001,650 9.74 $22.1668 37,750 $20.9894 $23.2500 - $24.1250 2,766,288 9.33 $24.0838 59,116 $23.8057 $24.2500 - $34.7500 988,676 9.08 $30.3152 194,325 $28.4078 $ 0.0700 - $34.7500 17,114,247 7.61 $13.4495 7,988,176 $ 5.8788 In connection with all stock option plans, 18,750,708 shares of common stock were reserved for issuance as of December 31, 1996. At December 31, 1995, 4,898,537 options were exercisable. Employee Stock Purchase Plan The Company also has a qualified Employee Stock Purchase Plan (ESPP) under which 7,600,000 shares of common stock, in the aggregate, have been authorized for issuance. Under the terms of the Plan, employees may contribute, through payroll deductions, up to 10 percent of their base pay and purchase up to 500 shares per quarter (with the limitation of purchases of $25,000 annually in fair market value of the shares). Employees may elect to withdraw from the Plan during any quarter and have their contributions for the period returned to them. Also, employees may elect to reduce the rate of contribution one time in each quarter. The price at which employees may purchase shares is 85 percent of the lower of the fair market value of the stock at the beginning or end of the quarter. The Plan is qualified under Section 423 of the Internal Revenue Code of 1986, as amended. During 1996, 1995, and 1994 the Company issued 616,128 shares, 347,743 shares, and 484,756 shares, respectively, under this Plan. In connection with the Employee Stock Purchase Plan, 650,587 shares were reserved for issuance as of December 31, 1996. Stock Repurchase Authorization The Board of Directors had authorized the purchase of up to 8 million shares of the Company's common stock in the open market to satisfy requirements under Stock Option and Stock Purchase Plans under a stock repurchase plan. In 1996, the Company rescinded the stock repurchase authorization. Stock Based Compensation As permitted under FASB Statement No.123, "Accounting for Stock-Based Compensation" (FASB 123), the Company has elected to continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for stock-based awards to employees. Under APB 25, the Company generally recognizes no compensation expense with respect to such awards. Pro forma information regarding the net income and earnings per share is required by FASB 123 for awards granted or modified after December 31, 1994 as if the Company had accounted for its stock based awards to employees under the fair value method of FASB 123. The fair value of the Company's stock-based awards to employees was estimated using a Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock-based awards to employee have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reasonable single measure of the fair value of its stock-based awards to employees. The fair value of the Company's stock-based awards was estimated assuming no expected dividends and the following weighted-average assumptions: Options ESPP 1996 1995 1996 1995 Expected life (years) 4.5 year 4.5 year .25 year .25 year Expected volatility (percent) .5822 - .6327 .5642 - .6239 .5765 - .9662 .4170 - .7295 Risk-free interest rate (percent) 5.20 - 6.09 5.82 - 7.72 5.01 - 5.85 5.49 - 6.07 For pro forma purposes, the estimated fair value of the Company's stock based awards is amortized over the award's vesting period (for options) and the three month purchase period (for stock purchases under the ESPP). The Company's pro forma information follows (in thousands except for net income per share information): 1996 1995 Net income As reported $ 97,818 $ 97,644 Pro forma $ 77,187 $ 87,696 Net income per share As reported $ 0.63 $ 0.65 Pro forma $ 0.50 $ 0.58 FASB 123 is applicable only to awards granted subsequent to December 31, 1994, therefore its pro forma effect will not be fully reflected until approximately 1998. Calculated under FASB 123, the weighted-average fair value of the options granted during 1996 and 1995 was $13.04 and $10.39 per share, respectively. The weighted average fair value of employee stock purchase rights granted under the ESPP during 1996 and 1995 were $7.47 and $5.27, respectively. Note 5 - 401(k) Plan The Company has a 401(k) plan covering substantially all of its U.S. employees. Under this plan, participating employees may defer up to 15 percent of their pre-tax earnings, subject to the Internal Revenue Service annual contribution limit ($9,500 for 1996). In 1996, the Company matched 50 percent of each employee's contribution up to a maximum of $2,000. The Company's matching contributions to this 401(k) plan for 1996, 1995 and 1994 were $3.8 million, $2.5 million and $1.4 million, respectively. Note 6 - Commitments The Company leases certain computer and office equipment under capital leases having terms of three-to-five years. Amounts capitalized for such leases are included on the consolidated balance sheets as follows: (In thousands) December 31, 1996 December 31, 1995 Computer equipment $ 8,825 $ 7,924 Office equipment 2,474 1,636 11,299 9,560 Less: accumulated amortization 8,985 7,716 $ 2,314 $ 1,844 During 1996 and 1995, the Company financed approximately $1,800,000 and $1,677,000, respectively, of equipment purchases under capital lease arrangements. Amortization with respect to leased equipment is included in depreciation expense. The Company leases certain of its office facilities and equipment under non-cancelable operating leases and total rent expense was $42.4 million, $19.7 million and $17.3 million in 1996, 1995 and 1994, respectively. The Company plans on relocating its corporate headquarters to Santa Clara, California approximately 15 miles to the south of the Company's current headquarters. To facilitate the move, in January 1997, the Company entered into a two-year lease for twenty seven acres of undeveloped commercial real estate ("the Real Estate Lease"). Upon termination of the lease term, the Company will have the option to purchase the land, or if such purchase option is not exercised, arrange for the sale of the parcels to an unrelated third party. In the event the later option is exercised, the Company is required to pay the lessor any difference between the net sales proceeds and the lessor's investment in the parcels, approximately $61.5 million. In order to secure performance of its obligation under the lease, the Company was required to pledge certain cash collateral to the lessor throughout the full term of the lease. Accordingly, in January 1997, the Company deposited $60 million in cash into a non-interest bearing collateral account controlled by an affiliate of the lessor. Interest on these deposits computed at market rates, otherwise due to the Company, have been assigned by the Company to the lessor in order to reduce the gross monthly lease payments due under the lease. The resulting net monthly lease payments will be recognized by the Company as rent expense over the lease term. The real estate lease also includes certain financial performance criteria which must be met by the Company during the lease term. In addition, in November 1996, the Company leased approximately 200,000 square feet of office space in Santa Clara adjacent to the twenty seven acres described above. The lease term is for fifteen years and minimum lease payments amount to $96.0 million over the term. The minimum lease payments increase within a contractual range based on changes in the Consumer Price Index. As of December 31, 1996, the Company has spent approximately $63 million and is contractually obligated to additionally purchase approximately $45 million in various computer equipment related to its Superstores from certain vendors who have concurrently licensed the Company's software. These transactions are consummated at fair market value. Future minimum payments, by year and in the aggregate, under the capital and non-cancelable operating leases as of December 31, 1996, are as follows: Year Ending December 31 Capital Non-Cancelable (In thousands) Leases Operating Leases 1997 $ 1,265 $ 45,941 1998 803 44,591 1999 386 41,244 2000 153 23,438 2001 - 16,396 Thereafter - 88,904 Total payments 2,607 $260,514 Less: amount representing interest 279 Present value of minimum lease payments 2,328 Less current portion 866 $ 1,462 Note 7 - Geographic Information Net revenues, operating income, and identifiable assets for the Company's U.S., European, Asia/Pacific and other foreign operations are summarized below by year: (In thousands) United States Europe Asia/Pacific Other Eliminations Total 1996: Net revenues $471,559 $346,797 $119,757 $ 57,939 $ (56,741) $939,311 Operating income 43,169 72,754 10,554 11,876 (1,009) 137,344 Identifiable assets 699,285 250,773 116,160 45,182 (207,558) 903,842 1995: Net revenues $383,746 $241,009 $ 97,884 $ 44,619 $ (53,039) $714,219 Operating income 96,321 31,313 12,607 6,990 (1,405) 145,826 Identifiable assets 620,966 227,058 85,712 29,445 (272,035) 691,146 1994: Net revenues $261,336 $145,899 $ 50,008 $ 27,948 $ (15,079) $470,112 Operating income 38,708 15,969 31,045 10,322 (953) 95,091 Identifiable assets 387,785 109,939 19,394 16,658 (84,231) 449,545 Sales and transfers between geographic areas are accounted for at prices which the Company believes are arm's length prices, and which in general are in accordance with the rules and regulations of the respective governing tax authorities. Export revenues consisting of sales from the Company's U.S. operating subsidiary to non-affiliated customers were as follows: (In thousands) 1996 1995 1994 Canada $ 7,521 $ 6,216 $ 5,600 Latin America 6,556 6,817 6,641 Asia/Pacific 3,391 7,887 32,820 Other 3,437 1,301 3,015 Total $ 20,905 $ 22,221 $ 48,076 Note 8 - Income Taxes The provision for income taxes applicable to income before income taxes consists of the following: (In thousands) 1996 1995 1994 Currently payable: Federal $ 16,252 $ 43,286 $ 27,150 State 3,219 6,999 4,548 Foreign 11,511 13,181 6,160 30,982 63,466 37,858 Deferred: Federal 19,147 285 (16) State 3,082 523 386 Foreign (2,820) (9,110) (4,154) 19,409 (8,302) (3,784) $ 50,391 $ 55,164 $ 34,074 In 1996, 1995 and 1994, the Company recognized tax benefits related to stock option plans of $14.8 million, $21.3 million and $10.1 million, respectively. Such benefits were recorded as an increase to additional paid-in capital. Income before income taxes consists of the following: <CAPTION (In thousands) 1996 1995 1994 Domestic $ 67,906 $119,136 $ 85,253 Foreign 80,303 33,672 10,769 $148,209 $152,808 $ 96,022 The provision for income taxes differs from the amount computed by applying the federal statutory income tax rate to income before income taxes. The sources and tax effects of the differences are as follows: 1996 1995 1994 (In thousands) Amount Percent Amount Percent Amount Percent Computed tax at federal statutory rate $ 51,873 35.0% $ 53,483 35.0% $ 33,608 35.0% Losses which resulted in no current tax benefit - - - - 908 0.9% Research and development credits (1,457) (1.0%) (1,435) (0.9%) (1,241) (1.3%) State income taxes, net of federal tax benefit 3,972 2.7% 4,846 3.2% 3,171 3.3% Benefit from net earnings of foreign subsidiaries considered to be permanently reinvested in non-U.S. operations (5,625) (3.8%) (3,000) (2.0%) (2,000) (2.1%) Other, net 1,628 1.1% 1,270 0.8% (372) (0.3%) $ 50,391 34.0% $ 55,164 36.1% $ 34,074 35.5% Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1996 and 1995 are as follows: (In thousands) 1996 1995 Deferred Tax Assets: Reserves and accrued expenses $ 9,519 $ 8,600 Deferred revenue 2,717 3,432 Foreign net operating loss carryforwards 9,182 6,964 Domestic net operating loss carryforwards 7,984 7,984 Foreign taxes in excess of taxes at U.S. rate - 3,226 Other 555 646 Total deferred tax assets 29,957 30,852 Valuation allowance for deferred tax assets (908) (908) Net deferred tax assets 29,049 29,944 Deferred Tax Liabilities: Capitalized software 17,704 10,329 Revenue recognition 1,612 1,612 Taxes on unremitted foreign earnings 14,990 3,850 Valuation of investment portfolio 6,454 2,501 Total deferred tax liabilities 40,760 18,292 Net deferred tax assets (liabilities) $(11,711) $11,652 Cumulative undistributed earnings of the Company's Irish subsidiary for which no U.S. income taxes have been provided aggregated approximately $45.9 million at December 31, 1996. These earnings are considered to be permanently reinvested in non-U.S. operations. Additional taxes of approximately $11.5 million would have to be provided if these earnings were repatriated to the U.S. At December 31, 1996, the Company had approximately $23.7 million, $21.0 million and $10.5 million of foreign, federal and state net operating loss carryforwards. The foreign and state net operating loss carryovers expire at various dates beginning in 1998. The federal net operating loss carryovers expire at various dates beginning in 2008. Income taxes paid amounted to $22.7 million, $18.6 million and $22.5 million in 1996, 1995 and 1994, respectively. Note 9 - Business Combinations In January 1995, the Company acquired a 90 percent interest in the database division of ASCII Corporation, a distributor of its products in Japan. The Company acquired the remaining 10 percent interest in January 1996. The acquisition was recorded as a purchase. The purchase price of ASCII's database division was approximately $46.0 million, of which approximately $35.4 million has been allocated to intangible assets acquired. In April 1995, the Company acquired an 80 percent interest in the database division of Daou Corporation, a distributor of its products in Korea. The acquisition was recorded as a purchase. The Company has acquired the remaining 20 percent in January 1997 for approximately $1 million. The initial purchase price of this business was approximately $4.6 million, and was increased by approximately $3.0 million in January 1997 due to performance incentives outlined in the agreement, of which approximately $7.0 million has been allocated to intangible assets acquired. The operating results of these businesses have not been material in relation to those of the Company and are included in the Company's consolidated results of operations from the date of acquisition. In February 1996, the Company acquired Illustra Information Technologies, Inc. (Illustra), a company that provides dynamic content management database software and tools for managing complex data in the Internet, multimedia/entertainment, financial services, earth sciences and other markets. Approximately 12.7 million shares of Informix common stock were issued to acquire all outstanding shares of Illustra common stock. An additional 2.4 million shares of Informix common stock were reserved for issuance in connection the assumption of Illustra's outstanding stock options and warrants. The transaction has been accounted for as a pooling of interests, and accordingly, the consolidated financial statements for all prior periods presented have been restated to include the accounts and operations of Illustra as if the merger was consummated at the beginning of the earliest period presented. Merger fees of approximately $5.9 million were recorded in the first quarter of 1996. The following table presents the separate operating results for Informix Corporation and Illustra for the periods prior to the acquisition date (because the operating results of Illustra for the period January 1, 1996 to the effective date of the merger were immaterial to the combined Company, for the purposes of this table an acquisition date of January 1, 1996 is assumed). Year Ended Year Ended December 31, 1995 December 31, 1994 Net revenues: Informix $708,985 $468,697 Illustra 5,234 1,415 Combined $714,219 $470,112 Net income (loss): Informix $105,333 $ 66,196 Illustra (7,689) (4,248) Combined $ 97,644 $ 61,948 Note 10 - Litigation In the ordinary course of business, various lawsuits and claims are filed against the Company. It is the Company's opinion that the resolution of such litigation will not have a material effect on the Company's financial position, results of operations, or cash flows. Note 11 - Selected Quarterly Financial Data (Unaudited) First Second Third Fourth (In thousands, except per-share data) Quarter Quarter Quarter Quarter 1996: Net revenues $204,021 $226,282 $238,180 $270,828 Gross profit 160,584 178,474 189,003 218,342 Net income 15,891 21,628 26,181 34,118 Net income per share 0.10 0.14 0.17 0.22 1995: Net revenues $148,037 $164,068 $182,701 $219,413 Gross profit 121,893 134,042 150,183 178,396 Net income 17,646 20,184 23,896 35,918 Net income per share 0.12 0.14 0.16 0.23 INFORMIX CORPORATION SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (amounts in thousands) Additions Balance at Charged to Charged to Balance at Beginning Costs and Other End of of Period Expenses Accounts Deductions Period (1) (2) Allowance For Doubtful Accounts Year ended December 31, 1996 $ 12,854 $ 15,329 $ - $ 6,754 $ 21,429 Year ended December 31, 1995 $ 6,049 $ 8,247 $ 261 $ 1,703 $ 12,854 Year ended December 31, 1994 $ 3,181 $ 1,937 $ 1,900 $ 969 $ 6,049 (1) Charged to net revenues (2) Uncollectible accounts written off, net of recoveries (Note) Data at December 31, 1995 and December 31, 1994 have been restated to reflect the Company's business combination with Illustra Information Technologies, Inc. as a pooling-of-interests. REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Stockholders - Informix Corporation We have audited the accompanying consolidated balance sheets of Informix Corporation as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Informix Corporation at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/Ernst & Young LLP San Jose, California February 3, 1997 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors is incorporated herein by reference from the section entitled "Election of Directors" of the Company's proxy statement to be filed pursuant to Regulation 14A for its Annual Stockholders Meeting to be held on May 22, 1997. For information regarding executive officers of the Company, see the information appearing under the caption "Executive Officers" in Part I, Item 1 of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated herein by reference from the section entitled "Executive Compensation" of the Company's proxy statement to be filed pursuant to Regulation 14A for its Annual Stockholders Meeting to be held on May 22, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information regarding security ownership is incorporated herein by reference from the section entitled "Stock Ownership of Certain Beneficial Owners and Management" of the Company's proxy statement to be filed pursuant to Regulation 14A for its Annual Stockholders Meeting to be held on May 22, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is incorporated herein by reference from the sections entitled "Stock Ownership of Certain Beneficial Owners and Management", "Executive Compensation" and "Transactions with Management" of the Company's proxy statement to be filed pursuant to Regulation 14A for its Annual Stockholders Meeting to be held on May 22, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)1. Financial Statements The following financial statements are filed as a part of this Annual Report: Financial Statements Covered by Report of Independent Auditors: Report of Ernst & Young LLP, Independent Auditors Consolidated Financial Statements: Balance Sheets at December 31, 1996 and 1995 Statements of Income for each of the three years in the period ended December 31, 1996 Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1996 Statements of Cash Flows for each of the three years in the period ended December 31, 1996 Notes to Consolidated Financial Statements (except Note 11) Supplementary Financial Data Not Covered By Report of Independent Auditors: Note 11 of Notes to Consolidated Financial Statements (a)2. Financial Statement Schedule The following financial statement schedule is filed as a part of this Annual Report: Financial Statement Schedule Covered By Report of Independent Auditors: Schedule as of and for the three years in the period ended December 31, 1996, as applicable: Schedule II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are omitted because they are not required under the related instructions or are not applicable. (a)3. Exhibits 3.1 (1) Restated Certificate of Incorporation, as amended. 3.2 (1) By-Laws, as amended. 4.1 (2) Amended and Restated Preferred Share Rights Agreement. 10.1 (3) Form of Indemnity Agreement. 10.2 (4) Form of Amended Indemnity Agreement. 10.3 (5) 1989 Directors Stock Option Plan. 10.4 (6) Amendment to the 1989 Directors Stock Option Plan. 10.5 Purchase Agreement dated as of January 6, 1997 between the Company and BPN Leasing Corporation ("BPN"). 10.6 Lease Agreement dated as of January 6, 1997 between the Company and BPN. 10.7 Pledge Agreement dated as of January 6, 1997 between the Company, BPN and Banque Nationale de Paris. 11 Schedule re: Computation of Per Share Earnings. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 24 Power of Attorney (set forth on signature page). 27 Financial Data Schedules. _______________ (1) Incorporated by reference to exhibits to the Form 10-Q of Informix Corporation for the fiscal quarter ended July 2, 1995 (2) Incorporated by reference to exhibits to the Form 8-A/A Registration Statement filed on August 11, 1995. (3) Incorporated by reference to exhibits to the Form S-1 Registration Statement No. 33-8006. (4) Incorporated by reference to exhibits to the Form 10-K of Informix Corporation for the fiscal year ended December 31, 1988. (5) Incorporated by reference to exhibits to the Form S-8 Registration Statement No. 33-31116. (6) Incorporated by reference to exhibits to the Form S-8 Registration Statement No. 33-50608. (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the fourth quarter of the fiscal year ended December 31, 1996. SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, Informix Corporation, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 28, 1997. INFORMIX CORPORATION By: /s/ PHILLIP E. WHITE Phillip E. White, Chairman POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David H. Stanley, Alan S. Henricks and Karen Blasing, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date /s/ Phillip E. White Chairman, President, March 28, 1997 (Phillip E. White) Chief Executive Officer and Director (Principal Executive Officer) /s/ Alan S. Henricks Executive Vice President, and March 28, 1997 (Alan S. Henricks) Chief Financial Officer (Principal Financial Officer) /s/ Albert F. Knorp, Jr. Director March 28, 1997 (Albert F. Knorp, Jr.) /s/ James L. Koch Director March 28, 1997 (James L. Koch) /s/ Thomas A. McDonnell Director March 28, 1997 (Thomas A. McDonnell) /s/ Cyril J. Yansouni Director March 28, 1997 (Cyril J. Yansouni) /s/ Karen Blasing Corporate Controller March 28, 1997 (Karen Blasing) (Principal Accounting Officer