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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-15325
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INFORMIX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3011736
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
4100 BOHANNON DRIVE, MENLO PARK, CA 94025
(Address of principal executive office)
650-926-6300
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
At March 31, 1998, 167,464,942 shares of the Registrant's Common Stock were
outstanding.
Total number of pages: 44.
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FORWARD LOOKING STATEMENTS
THIS QUARTERLY 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 SECTION OF THIS REPORT ENTITLED "BUSINESS RISKS" AND
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.
RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION
Subsequent to the filing with the Commission of its Quarterly Report of Form
10-Q for the quarter ended March 30, 1997, the Company became aware of errors
and irregularities that ultimately affected the timing and dollar amount of
reported earned revenues from license transactions for all annual periods in the
three years ended December 31, 1996, in particular transactions involving
unauthorized or undisclosed arrangements or agreements with resellers. As a
result of its investigation into these errors and irregularities, in August
1997, the Company announced that it would restate its financial results for
fiscal 1996 and 1995. The financial review undertaken by the Company to
determine the extent of the restatement ultimately resulted in the restatement
of the Company's financial results for fiscal 1996, 1995 and 1994 and for the
first quarter of fiscal 1997. The Company publicly disclosed the results of the
restatement in November 1997. See Note B to the Unaudited Consolidated Financial
Statements.
Financial statements and related disclosures contained in this filing
reflect, where appropriate, changes to conform to the restatement.
INDEX
PAGE
-----
Part I. Financial Information.............................................................................. 3
Item 1. Condensed Consolidated Financial Statements (Unaudited).......................................... 3
Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 1998
and March 30, 1997................................................................................. 3
Condensed Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997................... 4
Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 1998
and March 30, 1997................................................................................. 5
Notes to Condensed Consolidated Financial Statements............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 38
Part II. Other Information................................................................................. 39
Item 1. Legal Proceedings................................................................................ 39
Item 2. Changes in Securities and Use of Proceeds........................................................ 41
Item 3. Defaults Upon Senior Securities.................................................................. 41
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 41
Item 5. Other Information................................................................................ 41
Item 6. Exhibits and Reports on Form 8-K................................................................. 42
Signature page............................................................................................. 43
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INFORMIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
--------------------
MARCH 31, MARCH 30,
1998 1997
--------- ---------
(RESTATED)
Net revenues:
Licenses............................................................. $ 89,462 $ 86,393
Services............................................................. 77,720 63,509
--------- ---------
167,182 149,902
Costs and expenses:
Cost of software distribution........................................ 9,833 29,134
Cost of services..................................................... 37,425 41,152
Sales and marketing.................................................. 63,889 131,023
Research and development............................................. 36,619 35,289
General and administrative........................................... 13,531 28,027
Write-off of goodwill and other long-term assets..................... -- 30,473
Write-off of acquired research & development......................... -- 7,000
Restructuring........................................................ (3,252) --
--------- ---------
158,045 302,098
--------- ---------
Operating income (loss)................................................ 9,137 (152,196)
Interest income...................................................... 2,038 1,267
Interest expense..................................................... (1,882) (2,468)
Other income/(expense), net.......................................... (315) 12,036
--------- ---------
Income (loss) before income taxes...................................... 8,978 (141,361)
Income taxes........................................................... 1,900 2,800
--------- ---------
Net income (loss)...................................................... $ 7,078 $(144,161)
Preferred stock dividend............................................. (603) --
Value assigned to warrants........................................... (1,594) --
--------- ---------
Net income (loss) applicable to common stockholders.................... $ 4,881 $(144,161)
--------- ---------
--------- ---------
Net income (loss) per common share:
Basic................................................................ $ 0.03 $ (0.95)
--------- ---------
--------- ---------
Diluted.............................................................. $ 0.03 $ (0.95)
--------- ---------
--------- ---------
Shares used in per share calculation:
Basic................................................................ 160,172 151,049
--------- ---------
--------- ---------
Diluted.............................................................. 168,653 151,049
--------- ---------
--------- ---------
See Notes to Condensed Consolidated Financial Statements.
3
INFORMIX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS)
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 149,208 $ 139,396
Short-term investments............................................................... 16,282 16,069
Accounts receivable, net............................................................. 135,969 142,048
Deferred taxes....................................................................... 13,219 12,249
Other current assets................................................................. 27,045 26,243
---------- ------------
Total current assets................................................................. 341,723 336,005
Property and equipment, net............................................................ 86,913 96,012
Software costs, net.................................................................... 38,826 40,854
Deferred taxes......................................................................... 45,906 56,345
Intangible assets, net................................................................. 7,068 8,277
Other assets........................................................................... 29,834 25,751
---------- ------------
Total assets......................................................................... $ 550,270 $ 563,244
---------- ------------
---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $ 30,845 $ 36,155
Accrued expenses..................................................................... 56,125 64,538
Accrued employee compensation........................................................ 44,309 49,154
Income taxes payable................................................................. 4,442 3,031
Deferred maintenance revenue......................................................... 110,171 100,828
Advances from customers and financial institutions................................... 156,505 180,048
Accrued restructuring costs.......................................................... 17,344 26,597
Other liabilities.................................................................... 8,468 15,802
---------- ------------
Total current liabilities.......................................................... 428,209 476,153
Other liabilities...................................................................... 6,187 6,311
Deferred taxes......................................................................... 20,903 21,716
Stockholders' equity:
Convertible Series A Preferred Stock................................................. -- 2
Convertible Series B Preferred Stock................................................. 1 1
Common stock; par value.............................................................. 1,674 1,526
Additional paid-in capital........................................................... 368,497 347,582
Accumulated deficit.................................................................. (271,066) (278,144)
Unrealized gain/(loss) on available-for-sale securities.............................. 3,207 (767)
Foreign currency translation adjustment.............................................. (7,342) (11,136)
---------- ------------
Total stockholders' equity......................................................... 94,971 59,064
---------- ------------
Total liabilities and stockholders' equity....................................... $ 550,270 $ 563,244
---------- ------------
---------- ------------
See Notes to Condensed Consolidated Financial Statements.
4
INFORMIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED
-------------------------
MARCH 31, MARCH 30,
1998 1997
----------- ------------
(RESTATED)
Operating Activities
Net income (loss)....................................................................... $ 7,078 $ (144,161)
Adjustments to reconcile net income (loss) to net cash and cash equivalents used in
operating activities:
License fees received in advance...................................................... (15,148) (15,277)
Depreciation and amortization......................................................... 12,078 24,897
Amortization of capitalized software.................................................. 4,974 5,484
Write-off of capitalized software..................................................... 771 14,749
Write-off of long term assets......................................................... 742 6,799
Write-off of intangibles.............................................................. -- 20,032
Write-off of acquired research & development.......................................... -- 7,000
Foreign currency transaction loss..................................................... 3,794 5,066
Gains on sales of strategic investments............................................... 47 --
(Gain) loss on disposal of property and equipment..................................... (306) (50)
Provisions for losses on accounts receivable.......................................... -- 11,006
Restructuring charges................................................................. (9,253) 3,642
Stock-based employee compensation..................................................... 461 --
Changes in operating assets and liabilities:
Accounts receivable................................................................. 501 14,284
Other current assets................................................................ (1,670) (9,853)
Other long term assets.............................................................. 10,439 --
Accounts payable and accrued expenses............................................... (30,901) (4,957)
Deferred maintenance revenue........................................................ 8,694 6,825
Other long term liabilities......................................................... (813) --
----------- ------------
Net cash and cash equivalents provided by (used in) operating activities................ (8,512) (54,514)
Investing Activities
Investments of excess cash:
Purchases of available-for-sale securities............................................ (9,500) (10,374)
Maturities of available-for-sale securities........................................... 4,997 9,585
Sales of available-for-sale securities................................................ 4,300 --
Purchases of strategic investments...................................................... -- (1,750)
Purchases of property and equipment..................................................... (1,676) (81,931)
Proceeds from disposal of property and equipment........................................ 327 279
Additions to software costs............................................................. (3,717) (8,104)
Business combinations, net of cash acquired............................................. -- (8,786)
Other................................................................................... 727 (21)
----------- ------------
Net cash and cash equivalents used in investing activities.............................. (4,542) (101,102)
Financing Activities
Advances from customers and financial institutions...................................... -- 19,694
Proceeds from issuance of common stock, net............................................. 6,500 1,617
Proceeds from issuance of preferred stock, net.......................................... 14,100 --
Principal payments on capital leases.................................................... (1,341) (885)
----------- ------------
Net cash and cash equivalents provided by financing activities.......................... 19,259 20,426
----------- ------------
Effect of exchange rate changes on cash and cash equivalents............................ 3,607 (6,238)
----------- ------------
Increase (decrease) in cash and cash equivalents........................................ 9,812 (141,428)
Cash and cash equivalents at beginning of period........................................ 139,396 226,508
----------- ------------
Cash and cash equivalents at end of period.............................................. $ 149,208 $ 85,080
----------- ------------
----------- ------------
See Notes to Condensed Consolidated Financial Statements.
5
INFORMIX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE A--PRESENTATION OF INTERIM FINANCIAL STATEMENTS
All significant adjustments, in the opinion of management, which are normal,
recurring in nature and necessary for a fair presentation of the financial
position and results of the operations of the Company, have been consistently
recorded. The operating results for the interim periods presented are not
necessarily indicative of expected performance for the entire year.
The Company has elected to change from the 4-4-5 week quarterly convention
previously followed to a calendar quarter convention. The change resulted in an
additional two days of operations for the first quarter of 1998 as compared to
the previous year. The impact on the Company's financial statements was to
increase revenue by $17.5 million, or 11 percent. The impact on operating
expenses was immaterial.
NOTE B--RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the filing of its Quarterly Report on Form 10-Q for the
quarter ended March 30, 1997 with the Securities and Exchange Commission, the
Company became aware of errors and irregularities that ultimately affected the
timing and dollar amount of reported earned revenues from license transactions
for all periods in the three years ended December 31, 1996 and the quarter ended
March 30, 1997. The irregularities took numerous forms and were primarily the
result of lack of compliance with or circumvention of the Company's procedures
and controls.
These errors and irregularities included unauthorized and undisclosed
arrangements or agreements between Company personnel and resellers, recognition
of revenue on certain transactions in reporting periods prior to contract
acceptance, the recording of certain transactions that lacked economic substance
and the recording of maintenance revenue as license revenue. The unauthorized
and undisclosed agreements with resellers introduced acceptance contingencies,
permitted resellers to return unsold licenses for refunds, extended payment
terms or committed the Company to assist resellers in selling the licenses to
end-users. Accordingly, license revenue from these transactions that was
recorded at the time product was delivered to resellers should have instead been
recorded at the time all conditions on the sale lapsed. Because of the
pervasiveness of the unauthorized arrangements with resellers in the 1994, 1995
and 1996 accounting periods, the Company concluded that all revenue from license
agreements with resellers in these accounting periods, except for those licenses
sold and billed on a per copy basis, should be recognized only when the licenses
were resold or utilized by resellers and all related obligations had been
satisfied. Amounts received from resellers as prepayments of software license
fees in advance of revenue recognition have been recorded as advances on
unearned license revenue. This revised application of accounting policy has been
followed for all transactions with resellers, other than those licenses sold and
billed on a per-copy basis.
In response to the errors and irregularities discussed above, a number of
conditions which collectively represented a material weakness in the Company's
internal accounting controls were identified. These conditions included a
deterioration in the Company's internal accounting controls at corporate and
regional management levels, and a related failure to stress the importance of
these controls, an inappropriate level of influence, principally by the
Company's sales organization, over the revenue recognition process and an
apparent lack of clarity and consistent understanding within the Company
concerning the application of the Company's revenue recognition policies to
large, complex reseller license transactions. The Company has implemented a plan
to strengthen the Company's internal accounting controls. This plan includes
updating the Company's policies regarding accounting and reporting for large,
complex
6
INFORMIX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
NOTE B--RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
reseller license transactions, developing and conducting educational programs to
implement such policies, changing the Company's corporate and regional
accounting and reporting structure, and re-establishing an internal audit
function reporting to the Company's Board of Directors.
NOTE C--REVENUE RECOGNITION POLICY
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 (SOP 97-2), "Software Revenue Recognition"
which superseded SOP 91-1 and provides guidance on generally accepted accounting
principles for recognizing revenue on software transactions. SOP 97-2 was
amended in February 1998 by Statement of Position 98-4 (SOP 98-4) "Deferral of
the Effective Date of a Provision of SOP 97-2" which deferred for one year the
specification of what was considered vendor specific objective evidence of fair
value for the various elements in a multiple element arrangement. The Company
has adopted the provisions of these SOP's as of January 1, 1998 and as a result,
changed certain business practices. The adoption has, in certain circumstances,
resulted in the deferral of software license revenues that would have been
recognized upon delivery of the related software under preceding accounting
standards. Neither the changes in certain business practices nor the deferral of
certain revenues have resulted in a material impact on the Company's operating
results, financial position or cash flows for the period ended March 31, 1998.
As a result of these changes, the Company now recognizes revenue from sales
of software licenses to end-users upon delivery of the software product to the
customer when there are no significant post-delivery obligations and collection
of the license fee is considered probable. Revenue from license agreements with
resellers, except for those licenses sold and billed on a per-copy basis, is
recognized as earned when the licenses are resold or utilized by the reseller
and all related obligations have been satisfied. The Company provides for sales
allowances on an estimated basis.
In the first quarter of 1998, the Company entered into a material
transaction with an Industrial Manufacturer ("IM"). The Company defines an IM as
a developer who owns and licenses or sells to others a product using the IM's
application embedding one of the Company's products in a manner which renders
the Informix product invisible to the end user. The Company is not obligated to
provide sales support to the IM or support to the end user. The Company believes
that the attributes of the IMs are more like those of end-users than resellers
and has elected to account for these types of transactions entered into
subsequent to December 31, 1997 in a manner similar to end user transactions.
NOTE D--COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement 130 (FAS 130), "Reporting Comprehensive Income." FAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income/(loss) or stockholders' equity. FAS 130 requires unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity to be included in other comprehensive
7
INFORMIX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
NOTE D--COMPREHENSIVE INCOME (CONTINUED)
income. Prior period financial statements have been reclassified to conform to
the requirements of FAS 130.
THREE MONTHS ENDED
--------------------
MARCH 31, MARCH 30,
1998 1997
--------- ---------
(IN THOUSANDS)
Net income (loss)...................................................... $ 7,078 $(144,161)
Other comprehensive income (loss), net of income tax
Unrealized gains (losses) on available-for-sale securities........... 3,974 (3,853)
Foreign currency translation adjustment.............................. 3,794 (297)
--------- ---------
Comprehensive income (loss)............................................ $ 14,846 $(148,311)
--------- ---------
--------- ---------
NOTE E--NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per common share:
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 30,
1998 1997
----------- -----------
(RESTATED)
(IN THOUSANDS EXCEPT
PER SHARE DATA)
Numerator:
Net income (loss)................................................ $ 7,078 $(144,161)
Preferred stock dividend......................................... (603) --
Value assigned to warrants....................................... (1,594) --
----------- -----------
Numerator for basic and diluted net income (loss) per common
share.......................................................... $ 4,881 $(144,161)
----------- -----------
----------- -----------
Denominator:
Weighted average shares 160,172 151,049
Effect of dilutive securities:
Employee stock options........................................... 2,673 --
Series A-1 Convertible Preferred Stock........................... 5,808 --
----------- -----------
Denominator for diluted net income (loss) per common share....... 168,653 151,049
----------- -----------
----------- -----------
Basic net income (loss) per common share......................... $ .03 $ (0.95)
Diluted net income (loss) per common share....................... $ .03 $ (0.95)
----------- -----------
----------- -----------
Weighted average employee stock options to acquire 6,478,268 shares were
outstanding as of March 30, 1997 but were not included in the computation of
diluted earnings per share because the effect was antidilutive. In addition, at
March 31, 1998, 13,215,467 shares of common stock that would have been issued
upon the assumed conversion of the Series B Convertible Preferred Stock at the
beginning of the
8
INFORMIX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
NOTE E--NET INCOME (LOSS) PER SHARE (CONTINUED)
period were also excluded from the computation of diluted earnings per share
because the effect was antidilutive.
NOTE F--STOCKHOLDERS' EQUITY
In December 1997, the Company's Board of Directors authorized a second stock
option repricing which was effective January 9, 1998 (the "Second Repricing
Effective Date") based upon the closing sales price of the Company's Common
Stock as of the Second Repricing Effective Date. Under the terms of the second
repricing, each employee, excluding officers and directors of the Company, could
exchange any option granted and outstanding as of May 1, 1997 for a new option
with an exercise price equal to the closing sales price on the Second Repricing
Date and with terms consistent with those of the original option, except that
options exchanged in the second repricing could not be exercised for a period of
one year from the Second Repricing Effective Date. Employees elected to reprice
3,128,524 options at a price of $5.094, the closing sales price of the Company's
Common Stock on the Repricing Effective Date.
On February 13, 1998 the holders of the Series A-1 Preferred stock exercised
warrants to purchase 60,000 additional shares of Series A-1 Preferred at $250
per share resulting in net proceeds to the Company of $14.1 million. In
addition, pursuant to the Series A-1 Subscription Agreement, the Series A-1
Preferred Stockholder converted 220,000 shares of Series A-1 Preferred into
12,769,908 shares of the Company's Common Stock.
Reconciliation of outstanding shares:
Shares outstanding at December 31, 1997............................. 152,587,051
Shares issued upon exercises of stock options....................... 1,825,484
Shares sold and issued to employees under ESPP...................... 282,499
Shares issued upon conversion of Series A-1 Preferred............... 12,769,908
--------------
Shares outstanding at March 31, 1998................................ 167,464,942
--------------
--------------
NOTE G--RESTRUCTURING CHARGES
In June and again in September 1997, the Company approved plans to
restructure its operations in order to bring expenses in line with forcasted
revenues. In connection with the restructuring, the Company substantially
reduced its worldwide headcount and operations to improve efficiency. The
following analysis
9
INFORMIX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
NOTE G--RESTRUCTURING CHARGES (CONTINUED)
sets forth the significant components of the restructuring charge included in
current liabilities at March 31, 1998:
RESTRUCTURING NON-CASH CASH ACCRUAL BALANCE
EXPENSE COSTS PAYMENTS AT MARCH 31, 1998
------------- ----------- ----------- -----------------
(IN MILLIONS)
Severance & Benefits....................................... $ 19.9 $ -- $ 19.4 $ 0.5
Write-off of Assets........................................ 48.2 48.2 -- --
Facility Charges........................................... 33.0 7.8 8.9 16.3
Other...................................................... 3.8 2.6 0.7 0.5
------ ----- ----- -----
$ 104.9 $ 58.6 $ 29.0 $ 17.3
------ ----- ----- -----
------ ----- ----- -----
Severance and benefits represent the reduction of approximately 670
employees, primarily sales and marketing personnel, on a worldwide basis. As of
March 31, 1998, the Company had completed this component of its restructure
plan. Temporary employees and contractors were also reduced. Write-off of assets
included write-off or write-down in carrying value of equipment as a result of
the Company's decision to reduce the number of Information Superstores
throughout the world, as well as the write-off of equipment associated with
headcount reductions. The equipment subject to write-offs and write-downs
consisted primarily of computer servers, workstations, and personal computers
that are no longer utilized in the Company's operations. These assets were
written down to their fair value less cost to sell. As of March 31, 1998, these
assets have a carrying value of approximately $2.2 million. Facility charges
include early termination costs associated with the closing of certain domestic
and international sales offices.
Total restructuring expense decreased by $1.2 million and by $3.3 million
during the fourth quarter of 1997 and the first quarter of 1998, respectively.
These decreases were primarily due to adjusting the original estimate of the
loss to be incurred on the sale of land to the actual loss (fourth quarter 1997)
and to adjust the estimated severance and facility charges to actual costs
incurred (first quarter 1998).
The Company expects to complete most of the actions associated with its
restructuring by the end of the second quarter of fiscal 1998.
NOTE H--LITIGATION
Commencing in April 1997, a series of class action lawsuits purportedly by
or on behalf of stockholders and a separate but related stockholder action were
filed in United States District Court for the Northern District of California.
These actions name as defendants the Company, certain of its present and former
officers and directors and in some cases, its independent auditors. The
complaints allege various violations of the federal securities laws and seek
unspecified but potentially significant damages. Similar actions were also filed
in California state court and in Newfoundland, Canada.
Stockholder derivative actions, purportedly on behalf of the Company and
naming virtually the same individual defendants and the Company's independent
auditors, were also filed, commencing in August 1997, in California state court.
While these actions allege various violations of state law, any monetary
judgments in the derivative actions would accrue to the benefit of the Company.
10
INFORMIX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
NOTE H--LITIGATION (CONTINUED)
Pursuant to Delaware law and certain indemnification agreements between the
Company and each of its current and former officers and directors, the Company
is obligated to indemnify its current and former officers and directors for
certain liabilities arising from their employment with or service to the
Company. This includes the costs of defending against the claims asserted in the
above-referenced actions and any amounts paid in settlement or other disposition
of such actions on behalf of these individuals. The Company's obligations do not
permit or require it to provide such indemnification to any such individual who
is adjudicated to be liable for fraudulent or criminal conduct. Although the
Company has purchased directors' and officers' liability insurance to reimburse
it for the costs of indemnification for its directors and officers, the coverage
presumes that 100 percent of the costs incurred in defending claims asserted
jointly against the Company and its current and former directors and officers
are allocable to the individuals' defense. With respect to the claims described
above, the Company does not have insurance to cover the costs of its own defense
or to cover any liability for any claims asserted against it. The Company has
not set aside any financial reserves relating to any of the above-referenced
actions.
The pending federal and state securities actions are in the early stages of
discovery. Consequently, at this time it is not reasonably possible to estimate
the damages, or the range of damages, that the Company might incur in connection
with such actions.
In addition, in July 1997, the Securities and Exchange Commission issued a
formal order of investigation of the Company and certain unidentified
individuals associated with the Company with respect to non-specified accounting
matters, public disclosures and trading activity in the Company's securities.
The Company is cooperating with the investigation and is providing all
information subpoenaed by the Commission.
In the ordinary course of business, various other lawsuits and claims are
filed from time to time against the Company. It is the Company's opinion that
the resolution of these disputes or such other litigation will not have a
material effect on the Company's financial position, results of operations or
cash flows.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS 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 1998 AND ANY CURRENT REPORTS ON FORM 8-K
FILED BY THE COMPANY.
As a result of the restatement of the Company's financial statements for the
first quarter of 1997 and the years 1996, 1995 and 1994 as updated in subsequent
filings made by the Company, certain information contained in this item related
to the quarter ended March 30, 1997 has changed from that which appeared in the
Company's originally filed Form 10-Q for that period.
The Company has elected to change from the 4-4-5 week quarterly convention
previously followed to a calendar quarter convention. The change resulted in an
additional two days of operations for the first quarter of 1998 as compared to
the previous year.
References to or comparisons between the same "period" in this Form 10-Q
refer to the Company's first fiscal quarter of the relevant fiscal year.
OVERVIEW
The Company is a leading multinational supplier of information management
software. It derives license revenues principally from licensing its relational
database management systems ("RDBMS") software and derives service revenues from
providing technical product support and product updates and consulting and
training services to customers. The Company's products are sold directly to
end-users and IMs and indirectly through application resellers, original
equipment manufacturers ("OEM") and distributors.
In the first quarter of fiscal 1997, the Company experienced a substantial
shortfall in license revenues compared to forecasts, resulting in a substantial
loss for that quarter. The shortfall in revenue was due to slow growth in demand
for RDBMS products as well as the Company's inability to close a number of sales
transactions that management anticipated would close by quarter's end,
particularly in Europe.
As a result of the shortfall in license revenues for the first quarter of
fiscal 1997, the Company, in the second quarter and again in the third quarter
of fiscal 1997, initiated an internal restructuring of its operations intended
to reduce operating expenses and improve the Company's financial condition.
These restructurings included selective reductions in headcount and leased
facilities and the downsizing, elimination or conversion into solution labs of
the Company's planned Information Superstores. Costs associated with the
restructurings totaled approximately $104.9 million and had a material adverse
effect on the Company's results of operations for fiscal 1997. In addition, in
1997, the Company issued newly designated series of Preferred Stock in two
financing transactions which resulted in aggregate net proceeds of $87.6 million
to the Company (excluding a $1.0 million fee paid to a financial advisor of the
Company in connection with the sale of the Series B Preferred) In February 1998,
the Company issued an additional 60,000 shares of its Series A-1 Convertible
Preferred Stock (the "Series A-1 Preferred") pursuant to the partial exercise of
a warrant to purchase shares of Series A-1 Preferred (the "Series A-1 Warrant")
which warrant was issued in connection with the sale of the Company's Series A
Convertibe Preferred Stock in August 1997. The partial exercise of the Series
A-1Warrant resulted in net proceeds of $14.1 million to the Company. At March
31, 1998 the Series A-1 Warrant remained exercisable for up to 80,000 shares of
Series A-1 Preferred at a puchase price of $250 per share. In December 1997, the
Company entered into a senior secured credit facility agreement with available
proceeds of up to $75.0 million, of which the Company was
12
eligible to borrow $40.6 million at March 31, 1998, based on certain eligibility
criteria. See "--Liquidity and Capital Resources."
In August 1997, the Company announced that it had become aware of errors and
irregularities that affected the timing and the dollar amount of reported earned
revenues from license transactions for all annual periods in the three years
ended December 31, 1996. These errors and irregularities included unauthorized
and undisclosed arrangements or agreements between Company personnel and
resellers, recognition of revenue on certain transactions in reporting periods
prior to contract acceptance, the recording of certain transactions that lacked
economic substance and the recording of maintenance revenue as license revenue.
The unauthorized and undisclosed agreements with resellers introduced acceptance
contingencies, permitted resellers to return unsold licenses for refunds,
extended payment terms or committed the Company to assist resellers in selling
the licenses to end-users. Accordingly, license revenues from these transactions
that were recorded at the time product was delivered to resellers should have
instead been recorded at the time all conditions to the sale lapsed. Because of
the pervasiveness of the unauthorized arrangements with resellers in the 1994,
1995 and 1996 accounting periods, the Company concluded that all revenue from
license agreements with resellers, except for those licenses sold and billed on
a per copy basis, should be recognized only when the licenses were resold or
utilized by resellers and all related obligations had been satisfied. In
addition, amounts received from resellers or financial institutions as
prepayments of software license fees in advance of revenue recognition should be
recorded as advances on unearned license revenue. The financial review
undertaken by the Company resulted in the restatement of the Company's financial
results for fiscal 1996, 1995 and 1994 and for the first quarter of fiscal 1997.
The Company publicly disclosed the results of the restatement in November 1997.
The nature of the Company's business in 1992 and 1993 was such that there
was not a material amount of revenues recorded under prepaid software license
transactions conducted with resellers during these years. Additionally, as a
result of the Company's extended procedures, there were no material errors or
irregularities identified affecting revenues recognized prior to the third
quarter of 1994. The Company concluded based on those circumstances that it was
not necessary to restate the financial statements for 1992 and 1993.
In connection with the errors and irregularities discussed above, a number
of conditions which collectively represented a material weakness in the
Company's internal accounting controls were identified. These conditions
included a deterioration in the Company's accounting controls at corporate and
regional management levels, and a related failure to stress the importance of
these controls, an inappropriate level of influence, principally by the
Company's sales organization, over the revenue recognition process and an
apparent lack of clarity and consistent understanding within the Company
concerning the application of the Company's revenue recognition policies to
large, complex reseller license transactions. To address the material weakness
represented by these conditions, the Company is implementing a plan to
strengthen the Company's internal accounting controls. This plan includes
updating the Company's revenue recognition policies regarding accounting and
reporting for large, complex reseller license transactions, developing and
conducting educational programs to help implement such policies, changing the
Company's corporate and regional accounting and reporting structure and
re-establishing the internal audit function reporting to the Company's Board of
Directors.
The restatement resulted in substantial reductions in total revenues and net
income for fiscal 1996, 1995 and 1994. For the quarter ended March 31, 1997, the
restatement resulted in an increase in revenues of $16.2 million from $133.7
million as originally reported to $149.9 million. The restatement had a material
adverse effect on the Company's financial condition, most notably evidenced by
substantial reductions in retained earnings and working capital. At March 30,
1997, after giving effect to the restatement, the Company's working capital
decreased $252.0 million from $101.9 million as originally reported to a deficit
of $150.1 million. The substantial reduction in working capital at March 30,
1997 reflects substantial operating losses and the addition of "advances from
customers and financial institutions" as a current liability on the Company's
balance sheet. Such advances totaled $239.3 million at
13
March 30, 1997. At March 31, 1998, the Company's working capital deficit
decreased to $86.5 million. The reduction in the deficit reflects the Company's
restructuring and cost containment efforts both of which resulted in a reduction
in cash used by operations of $46 million in the quarter ended March 31, 1998
compared to a similar period in the prior year. In addition, the liability for
"advances from customers and financial institutions" decreased to $156.5 million
at March 31, 1998.
The Company's public announcement of the pending restatement, delays in
reporting operating results for the second and third quarters of fiscal 1997
while the restatement was being compiled, threatened de-listing of the Company's
Common Stock from the Nasdaq National Market as a result of the Company's
failure to satisfy its public reporting obligations, corporate actions to
restructure operations and reduce operating expenses, and customer uncertainty
regarding the Company's financial condition adversely affected the Company's
ability to sell its products in fiscal 1997 in addition, since the beginning of
1997, the Company and its competitors have experienced substantially slower
growth in the market for RDBMS products. The financial restatement has now been
completed, its results have been publicly disclosed and the Company is current
with respect to its public reporting obligations. In addition, the Company
believes that it has effectively controlled its operating expenses and
significantly improved its financial condition. Nevertheless, adverse market
conditions, including significant competitive pressures in the Company's markets
and ongoing customer uncertainty about the Company's financial condition and
business prospects, may continue to have an adverse effect on the Company's
ability to sell its products and results of operations.
14
RESULTS OF OPERATIONS
The following table sets forth operating results as a percentage of net
revenues for the three-month periods ended March 31, 1998 and March 30, 1997 (as
restated), respectively.
PERCENT OF NET
REVENUES
---------------------
THREE MONTHS ENDED
---------------------
MARCH 31, MARCH 30,
1998 1997
--------- ---------
Net revenue:
Licenses......................... 54% 58%
Services......................... 46% 42%
--- ---
Total Net Revenue.............. 100% 100%
Cost and expenses:
Cost of software distribution.... 6% 19%
Cost of services................. 22% 28%
Sales and marketing.............. 38% 87%
Research and development......... 22% 24%
General and administrative....... 9% 19%
Write-off of goodwill and long
term assets.................... -- 20%
Write-off of acquired research
and development................ -- 5%
Restructuring charges............ (2)% --
--- ---
Total operating expenses....... 95% 202%
--- ---
Operating income (loss)............ 5% (102)%
--- ---
Interest income.................... 1% 1%
Interest expense................... (1)% (1)%
Other income/(expense), net........ -- 8%
--- ---
Income (loss) before tax........... 5% (94)%
Income taxes....................... (1)% 2%
--- ---
Net income (loss).................. 4% (96)%
--- ---
--- ---
Informix's operating results for the quarter ended March 31, 1998 increased
significantly from the same period of the prior year due to a 12% increase in
revenue and a 48% decrease in operating expenses.
REVENUES
The Company derives revenues from licensing its software and providing
post-license technical product support and updates to customers and from
consulting and training services. License revenues may involve the shipment of
product by the Company or the granting of a license to a customer to manufacture
products. Service revenues consist of customer telephone or direct support,
product update rights, consulting, and training fees.
LICENSE REVENUES
The Company's products are sold directly to end-user customers and IMs or
through resellers, including OEMs, distributors and value added resellers
(VAR's). In 1996, the Company increased its focus on its reseller channels in
order to focus on partnerships with several hardware vendors to utilize their
sales forces, obtain access to their installed base of customers, and benefit
from their consulting and systems integration organizations. This increased
focus on reseller channels resulted in a significant
15
build-up of licenses that had not been resold or utilized by such resellers.
Unsold licenses in the amount of $156.1 million and $239.3 million have not been
recognized as earned revenue as of March 31, 1998 and March 30, 1997,
respectively.
License revenues were $89.5 million and $86.4 million for the periods ended
March 31, 1998 and March 30, 1997, respectively. This represented an approximate
four percent increase. With the exception of one transaction with an IM, there
were no transactions greater than $2.5 million in the quarter ended March 31,
1998.
The Company's license transactions can be relatively large in size and
difficult to forecast both in timing and dollar value. As a result, these
transactions have caused fluctutations in net revenues and net income (loss)
because of the relatively high gross margin on such revenues. As is common in
the industry, a disproportional amount of the Company's license revenue is
derived from transactions that close in the last weeks or days of a quarter. The
timing of closing large license agreements also increases the risk of
quarter-to-quarter fluctuations. The Company expects that these types of
transactions and the resulting fluctuations will continue.
SERVICE REVENUES
The increase in service revenue in absolute dollars over the same period in
1997 was attributable primarily to the continued growth of the Company's
installed customer base, and the attendant renewal of maintenance contracts and
increased consulting revenue. As the Company's products grow in complexity, more
support services are expected to be required. The Company intends to satisfy
this requirement through internal support, third-party services and OEM support.
The gross margin on service revenue increased from 36% in the first quarter of
1997 to 52% in the first quarter of 1998.
Service revenue continues to grow faster than license revenue and as a
result, service revenue represents a larger percentage of total revenues than in
the prior year comparable period. The Company continues to emphasize support
services as a source of revenue and the growth achieved in absolute dollars
versus the prior year quarter reflects the continued growth in the Company's
installed base.
GEOGRAPHIC DISTRIBUTION
During the first quarter ended March 31, 1998, Informix's net revenues from
sales to foreign customers was 49% of total revenue as compared to 55% of the
total revenue during the same period in 1997. Foreign sales decreased
insignificantly from $82.2 million in the quarter ended March 30, 1997 to $81.9
million in the quarter ended March 31, 1998. Sales in Europe and Asia/Pacific
decreased 2% and 5%, respectively, while sales in Latin America increased 20%
over the same period in 1997.
The decrease in European sales from the prior year quarter was partially due
to the disruption of the sales organization caused by management changes which
took place in 1997. The decrease in Asia/Pacific sales was primarily the result
of the impact of fluctuations in foreign currency exchange rates. Revenues for
the Asia/Pacific region increased by approximately 10% for the quarter ended
March 31, 1998 as compared to the same period in the prior year on a constant
currency basis.
Substantially all of the Company's Latin American revenue is U.S. dollar
denominated. In Europe, Asia/Pacific, and Japan, most revenues and expenses are
denominated in local currencies. The U.S. dollar strengthened in the first
quarter of 1998 against the major European and Asia/Pacific currencies, which
resulted in lower revenue and expenses recorded when translated into U.S.
dollars, as compared with the same period in 1997.
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. Changes in foreign currency exchange rates, the strength
16
of local economies, and the general volatility of software markets may result in
a higher or lower proportion of foreign revenues as a percentage of total
revenues in the future.
COST OF SOFTWARE DISTRIBUTION
FIRST QUARTER FIRST QUARTER PERCENTAGE
1998 1997 CHANGE
--------------- --------------- -------------
(DOLLARS IN MILLIONS)
Manufactured cost of software distribution.......... $ 4.1 $ 8.9 (54)%
Percentage of license revenue..................... 5% 10%
Amortization of capitalized software................ $ 4.9 $ 5.5 (11)%
Percentage of license revenue..................... 5% 6%
Write down to net realizable value.................. $ 0.8 $ 14.7 (95)%
Percentage of license revenue..................... 1% 18%
Total cost of software distribution................. $ 9.8 $ 29.1 (66)%
Percentage of license revenue..................... 11% 34%
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.
The manufactured cost of software distribution as a percentage of license
revenue decreased significantly in the first quarter of 1998 compared to the
same period in 1997. This decrease was primarily caused by a decrease of $2.1
million in third party software royalties as well as a reduction in labor costs
of approximately $.9 million and a reduction of shipping and material costs of
$.5 million each. These cost reductions resulted from the continued conversion
to electronic media. In the future, the cost of software distribution as a
percentage of revenue may vary depending upon sales levels, the cost of third
party software that is bundled with the Company's products and whether the
product is reproduced by the Company or by customers.
Amortization of capitalized software costs begin in the quarter following
the commercial release of the product. The amortization of capitalized software
decreased to 5% of license revenues in the first quarter of 1998 compared to 6%
in the first quarter of 1997. The absolute value of amortization of capitalized
software will vary slightly quarter to quarter as new products are released and
other products become fully amortized.
In addition, due to the Company's acquisition of Centerview Software, Inc in
February 1997 and the announcement of its revised tool strategy, and in
accordance with Financial Accounting Standards Board Statement No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed," a net realizable value test performed on certain of the Company's
tool products resulted in a write-down of $14.7 million of previously
capitalized software costs in the first quarter of 1997.
COST OF SERVICES
Cost of services consists primarily of maintenance, consulting and training
expenses. Costs of services for the first quarter of 1998 decreased by 9% as
compared to the same period in 1997. This decrease was primarily attributable to
an 18% reduction in headcount over the same period in 1997 as well as improved
efficiency and better control of outsourced expenses. In the future, the Company
expects that cost of services as a percentage of net service revenue will
continue to approximate the rate incurred in the first quarter of 1998.
17
SALES AND MARKETING EXPENSES
The decrease in sales and marketing expenses in the first quarter of 1998,
in absolute dollars, as compared to the first quarter of 1997 was primarily the
result of a significant reduction of sales and marketing personnel worldwide.
Over the twelve-month period ending March 31, 1998, the headcount for sales and
marketing personnel decreased from 2,009 to 1,177 or 41%, which accounts for the
majority of the decrease both in percentage decline and absolute dollars spent.
In addition, depreciation expense charged to Sales and Marketing decreased
approximately $3.7 million versus the prior year quarter in connection with the
Company's reassessment of its Superstores concept. The Company's decision to
abandon the Superstores concept coupled with other cost cutting measures
resulted in significant charges for restructuring in the second and third fiscal
quarters of 1997. The decrease of costs as a percentage of revenue reflects the
Company's success in applying cost containment measures to bring expenses in
line with forecasted revenues.
RESEARCH AND DEVELOPMENT EXPENSES
The following table summarizes research and development costs for the
periods ended March 31, 1998 and March 30, 1997:
FIRST QUARTER FIRST QUARTER PERCENTAGE
1998 1997 CHANGE
--------------- --------------- -------------
(DOLLARS IN MILLIONS)
Incurred product development expenditures........... $ 40.3 $ 41.6 (3)%
Expenditures capitalized............................ 3.7 6.3 (41)%
----- -----
Research and development expense.................... $ 36.6 $ 35.3 4%
----- -----
----- -----
Expenses capitalized as a percentage of incurred
expenses.......................................... 9% 15%
Product development expenditures declined in absolute dollars by 3% in the
first quarter of 1998 compared to the same period in 1997. The proportion of
capitalized product development expenditures as a percentage of total incurred
expenses decreased in the first quarter of 1998. The decrease is attributable to
the fact that during the first quarter of 1997, a large portion of expenditures
incurred were on products that had reached technological feasibility, but had
not yet been commercially released. The Company expects the proportion of work
on capitalized projects for the remainder of 1998 to remain relatively stable
compared to the first quarter of 1998.
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,
database application tools 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 remain a significant percentage of revenues.
The Company's product development efforts are expected to continue to
require substantial investments by the Company, and there can be no assurance
that the Company will have sufficient resources to make the necessary
investments. In addition, 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.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased in absolute dollars in the
first quarter of 1998 compared to the same period in 1997 due primarily to the
implementation of the Company's restructuring plan which resulted in lower
facility and other general and administrative expenses and a reduction in bad
18
debt expense of $11.0 million. This reduction reflects the Company's efforts to
better manage both the amount and quality of its accounts receivable balances.
In addition, headcount in general and administration decreased 14% from 489 at
March 30, 1997 to 420 at March 31, 1998.
WRITE-OFF OF GOODWILL AND LONG-TERM ASSETS
In accordance with Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long Lived Assets and for Long-Lived Assets to
be Disposed of," the Company records impairment losses on long-lived assets used
in operations when events and circumstances indicate that the assets might be
impaired and the estimated future undiscounted cash flows to be generated by
those assets are less than the assets' carrying amounts. During the first
quarter of 1997, the Company's Japanese subsidiary experienced a significant
sales shortfall and operating losses. Accordingly, the Company evaluated the
ongoing value of the subsidiary's long-lived assets (primarily computer and
other equipment) and related goodwill. Based on this evaluation, the Company
determined that the subsidiary's assets had been impaired and wrote them down by
$30.5 million to their estimated fair values. Fair value was determined by using
estimated future discounted cash flows and/or resale market quotes as
appropriate. The Company did not record any write-off of long-term assets in the
quarter ended March 31, 1998.
WRITE-OFF OF ACQUIRED RESEARCH AND DEVELOPMENT
In February 1997, the Company acquired all of the outstanding capital stock
of Centerview Software, Inc., a privately owned corporation that provides
software tools for application development. The aggregate purchase price was
approximately $8.7 million, which included cash plus direct costs of
acquisition. For financial statement purposes, the acquisition has been
accounted for as a purchase and, based on an independent appraisal of all the
assets acquired and liabilities assumed, the purchase price was allocated to the
specifically identifiable tangible and intangible assets acquired, including
approximately $7 million of purchased research and development which has been
charged to operations in the period the acquisition was consummated--the first
quarter of 1997. The Company did not write-off any acquired research and
development in the quarter ended March 31, 1998.
OTHER INCOME/(EXPENSE), NET
Other income/(expense) for the period ended March 30, 1997 resulted from a
net foreign currency gain of $12.2 million. See "--Foreign Exchange Losses."
PROVISION FOR INCOME TAXES
The income tax expense resulted from taxable earnings and withholding taxes
in certain foreign jurisdictions where the Company is unable to utilize its net
operating loss carryforwards.
FOREIGN EXCHANGE LOSSES
The Company enters into forward foreign exchange contracts 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. This program involves the use of forward
foreign exchange contracts in the primary European and Asian currencies. The
Company has limited unhedged transaction exposures in certain secondary
currencies in Latin America, Eastern Europe, and Asia Pacific because there are
limited forward currency exchange markets in these currencies.
In addition, in the quarter ended March 31, 1998, the Company initiated a
program whereby it enters into forward foreign currency exchange contracts to
hedge no more than 80% of anticipated net income of foreign subsidiaries for up
to a maximum of one year in the future. The Company's outstanding forward
exchange contracts used to hedge anticipated net income are marked to market.
This hedging activity did not have a material impact on the Company's results of
operations.
19
The restatement of the consolidated financial statements for the quarter
ended March 30, 1997 resulted in a change in the Company's foreign currency
denominated intercompany accounts receivable and accounts payable balances. As a
result, certain foreign currency forward contracts were no longer effective as
hedges. Transaction gains and losses realized due to fluctuations in foreign
currency exchange rates that were only partially offset by gains and losses on
forward foreign currency exchange contracts and the gains and losses on the
forward exchange contracts resulted in a net foreign currency gain of $12.2
million in the quarter ended March 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 30,
1998 1997
----------- -----------
(DOLLARS IN MILLION)
Cash, cash equivalents, and short-term investments..................... $ 165.5 $ 120.4
Working capital deficit................................................ (86.5) (150.1)
Cash and cash equivalents used by operations........................... (8.5) (54.5)
Cash and cash equivalents used for investment activities, excluding
investments in excess cash........................................... (4.5) (101.1)
Cash and cash equivalents provided by financing activities............. 19.3 20.4
OPERATING CASH FLOWS
Cash used by operations decreased significantly to $8.5 million for the
quarter ended March 31, 1998 from $54.5 million in the same period in 1997 due
primarily to the Company's efforts to reduce operating expenses.
Net accounts receivable decreased by $6.1 million in the first quarter ended
March 30, 1998 as compared to the fourth quarter of 1997. Days sales outstanding
increased from approximately 71 days in December 1997 to 73 days in March 1998.
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.
INVESTING CASH FLOWS
Excluding investments of excess cash, net cash and cash equivalents used in
investing activities decreased in the first quarter of 1998 compared to the same
period in 1997 due in large part to the Company's emphasis on increasing its
working capital position. In the first quarter of 1998, the Company acquired
$1.7 million of capital equipment as compared to $20.4 million during the same
period in 1997. The decrease of capital equipment purchases in the first quarter
of 1998 resulted from the Company's reduction in employee headcount, the related
cost containment program and the Company's decision to downsize, eliminate or
convert its Superstores into solution labs managed by the Company's consulting
practice. In the future, the Company anticipates the actual level of capital
spending will be dependent on a variety of factors, including the Company's
business requirements and general economic conditions.
In January 1997, the Company entered into a two year land lease which
required a pledge of $61.5 million in cash be placed into a non-interest bearing
collateral account controlled by an affiliate of the lessor. In April 1997, the
Company exercised its option to purchase the land for $61.5 million with the
intent to arrange for the sale of the parcels to unrelated third parties. The
$61.5 million is reflected in the "purchases of land and property and equipment"
line of the cash flow statement. The land sales closed in the fourth quarter of
fiscal 1997.
The Company's investments in software costs were previously discussed under
"Results of Operations."
20
FINANCING
Net cash and cash equivalents provided by financing activities in the first
quarter of 1998 consist primarily of proceeds from the sale of the Company's
common stock to employees, and the purchase of 60,000 additional shares of
Series A-1 Preferred Stock at $250 per share for net proceeds to the Company of
$14.1 million.
The Company's programs with third-party financing institutions in the first
quarter of 1997 provided financing for extended credit terms instead of such
financing being provided by the Company. This was the primary source of net cash
and cash equivalents provided by financing activities in the first quarter of
1997. Cash received from customers and third-party financial institutions in
advance of revenue being recognized is reflected in the Statement of Cash Flows
under "Advances from Customers and Financial Institutions" as a financing
activity. The Company no longer enters into third-party financing arrangements
involving the sale of its receivables. See "Business Risks--Need for Additional
Financing: Customer Financing and Working Capital Deficit."
BUSINESS RISKS
THIS REPORT, INCLUDING THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS FORWARD-LOOKING
STATEMENTS AND OTHER PROSPECTIVE INFORMATION RELATING TO FUTURE EVENTS. THESE
FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THE FOLLOWING:
UNCERTAIN IMPACT OF RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the filing with the Commission of its Quarterly Report of Form
10-Q for the quarter ended March 30, 1997, the Company became aware of errors
and irregularities that ultimately affected the timing and dollar amount of
reported earned revenues from license transactions for all annual periods in the
three years ended December 31, 1996, in particular transactions involving
unauthorized or undisclosed arrangements or agreements with resellers. As a
result of its investigation into these errors and irregularities, in August
1997, the Company announced that it would restate its financial results for
fiscal 1996 and 1995. The financial review undertaken by the Company to
determine the extent of the restatement ultimately resulted in the restatement
of the Company's financial results for fiscal 1996, 1995 and 1994 and for the
first quarter of fiscal 1997. The Company publicly disclosed the results of the
restatement in November 1997.
The errors and irregularities identified in connection with the Company's
investigation and the restatement included unauthorized and undisclosed
arrangements or agreements between Company personnel and resellers, recognition
of revenue on certain transactions in reporting periods prior to contract
acceptance, the recording of certain transactions that lacked economic substance
and the recording of maintenance revenue as license revenue. The unauthorized
and undisclosed agreements with resellers introduced acceptance contingencies,
permitted resellers to return unsold licenses for refunds, extended payment
terms or committed the Company to assist resellers in selling the licenses to
end-users. Accordingly, license revenues from these transactions that were
recorded at the time product was delivered to resellers should have instead been
recorded at the time all conditions to the sale lapsed. Because of the
pervasiveness of the unauthorized arrangements with resellers in the 1994, 1995
and 1996 accounting periods, the Company concluded that all revenue from license
agreements with resellers, except for those licenses sold and billed on a per
copy basis, should be recognized only when the licenses were resold or utilized
by resellers and all related obligations had been satisfied. In addition,
amounts received from resellers or financial institutions as prepayments of
software license fees in advance of revenue recognition should be recorded as
advances on unearned license revenue. The financial review undertaken by the
Company resulted in the restatement of the Company's financial results for
fiscal 1996, 1995 and 1994 and for the first quarter of fiscal 1997. The Company
publicly disclosed the results of the restatement in November 1997.
21
As a result of the restatement, total revenues were reduced from amounts
previously reported by $204.8 million from $939.3 million as originally reported
to $734.5 million, by $77.7 million from $714.2 million as originally reported
to $636.5 million and by $18.1 million from $470.1 million as originally
reported to $452.0 million for fiscal 1996, 1995, and 1994, respectively. The
restatement also resulted in an increase in revenues of $16.2 million from
$133.7 million as originally reported to $149.9 million for the first quarter of
fiscal 1997. In addition, the restatement resulted in a reduction in net income
of $171.4 million from $97.8 million as originally reported to a loss of $73.6
million for fiscal 1996; a reduction in net income of $59.0 million from $97.6
million as originally reported to $38.6 million for fiscal 1995; and a reduction
in net income of $13.6 million from $61.9 million as originally reported to
$48.3 million for fiscal 1994. The restatement had a material adverse effect on
the Company's financial condition, most notably evidenced by the elimination of
retained earnings and working capital. At December 31, 1996, after giving effect
to the restatement, the Company's working capital decreased $255.3 million from
$258.4 million as originally reported to $3.1 million. At December 31, 1997, the
Company had a working capital deficit of $140.2 million and at March 31, 1998,
the Company had a working capital deficit of $86.5 million. The substantial
reductions in working capital at December 31, 1997 and 1996 reflect substantial
operating losses and the addition of "advances from customers and financial
institutions" as a current liability on the Company's balance sheet. Such
advances totaled $180.0 million at December 31, 1997 and $239.5 million at
December 31, 1996. At March 31, 1998, such advances totaled $156.5 million. See
"--Working Capital Deficit."
In connection with the errors and irregularities discussed above, a number
of conditions which collectively represented a material weakness in the
Company's internal accounting controls were identified. These conditions
included a deterioration in the Company's accounting controls at corporate and
regional management levels, and a related failure to stress the importance of
these controls, an inappropriate level of influence, principally by the
Company's sales organization, over the revenue recognition process and an
apparent lack of clarity and consistent understanding within the Company
concerning the application of the Company's revenue recognition policies to
large, complex reseller license transactions. To address the material weakness
represented by these conditions, the Company is implementing a plan to
strengthen the Company's internal accounting controls. This plan includes
updating the Company's revenue recognition policies regarding accounting and
reporting for large, complex reseller license transactions, developing and
conducting educational programs to help implement such policies, changing the
Company's corporate and regional accounting and reporting structure and
re-establishing the internal audit function reporting to the Company's Board of
Directors. Such implementation is expected to require substantial management
attention. See "-- Dependence on Key Personnel; Personnel Changes; Ability to
Recruit Personnel."
The Company's public announcement of the pending restatement, delays in
reporting operating results for the second and third quarters of fiscal 1997
while the restatement was being compiled, threatened de-listing of the Company's
Common Stock from the Nasdaq National Market as a result of the Company's
failure to satisfy its public reporting obligations, corporate actions to
restructure operations and reduce operating expenses, and customer uncertainty
regarding the Company's financial condition adversely affected the Company's
ability to sell its products in fiscal 1997. In addition, since the beginning of
fiscal 1997, the Company and its competitors in the RDBMS industry have
experienced substantially slower growth in the market for RDBMS products. The
financial restatement has now been completed, its results have been publicly
disclosed, and the Company is current with respect to its public reporting
obligations. In addition, the Company believes that it has effectively
controlled its operating expenses and significantly improved its financial
condition. Nevertheless, adverse market conditions, including significant
competitive measures in the Company's markets and ongoing customer uncertainty
about the Company's financial condition and business prospects may continue to
have an adverse effect on the Company's ability to sell its products and results
of operations. See "--Fluctuations in Quarterly Results; Seasonality."
22
NEED FOR ADDITIONAL FINANCING
During fiscal 1997, the Company experienced substantial short-term liquidity
problems as its cash, cash equivalents and short term investments declined to a
quarter-end low of $104.4 million at June 29, 1997 from $261.0 million at
December 31, 1996. The Company raised net proceeds of $37.6 million in August
1997 and $50.0 million (excluding a $1.0 million fee paid to a financial advisor
of the Company) in November 1997 in separate financing transactions in which the
Company issued newly authorized series of convertible Preferred Stock. In the
fourth quarter of 1997, the Company raised aggregate net proceeds of $59.3
million through the sale of real property it had purchased earlier in the year.
As a result of such financing activities during the second half of 1997, the
Company's cash, cash equivalents and short term investments increased to $155.5
million at December 31, 1997. In addition, in the first quarter of fiscal 1998,
the Company raised aggregate net proceeds of $14.1 million in connection with
the partial exercise of a warrant to acquire additional shares of the Company's
convertible Preferred Stock. The Company believes that these actions have
substantially improved its financial condition since early 1997. Nevertheless,
adverse market conditions, including continued slower growth rates in the
markets for RDBMS products or on-going customer uncertainty about the Company's
financial condition and business prospects, could continue to have an adverse
effect on license revenues and results of operations. In addition, recent
instability in the Asian-Pacific economies and financial markets, which
accounted for approximately 12% and 13% of the Company's total revenues for the
years ended December 31, 1997 and 1996, respectively, and 11% of the Company's
total revenues for the quarter ended March 31, 1998, respectively, has created
further uncertainty concerning the Company's revenues, cash flows and results of
operations.
In December 1997, Informix Software, Inc., a Delaware corporation and the
Company's principal operating subsidiary ("Informix Software"), entered into a
Senior Secured Credit Agreement with a syndicate of commercial banks, including
BankBoston, N.A. as administrative agent and Canadian Imperial Bank of Commerce
as syndication agent, providing for a revolving credit facility of up to $75
million (the "Credit Facility"). The actual amount available under the Credit
Facility, for either direct borrowings or issuances of letters of credit, is
based on 80% of the eligible domestic accounts receivable and 50% of the
eligible foreign accounts receivable, which are measured on a revolving basis.
Accounts receivable for an account debtor are ineligible for purposes of the
Credit Facility when (a) such account receivable is outstanding for longer than
60 days, (b) the account debtor or any other person obligated to make payment
thereon asserts any defense, offset, counterclaim or other right to avoid or
reduce the amount of the account receivable, but only to the extent the lenders
reasonably determine a valid defense, offset, counterclaim or other right exists
and then only to the extent of such right, (c) the account debtor or other
person required to make payment thereon is insolvent, subject to bankruptcy or
receivership proceedings or has made an assignment for the benefit of creditors
or whose credit standing is unacceptable to the lenders, and the lenders have so
notified the Company (d) the account debtor is a lender under the Credit
Facility, (e) 30% or more of the accounts receivable of any account debtor is
deemed ineligible because such accounts are outstanding for longer than 60 days
thus rendering all the accounts receivable of that debtor ineligible, and (f)
the lender reasonably deems not to qualify an account receivable as eligible and
provides a reasonably detailed written explanation to the Company. Under the
Credit Facility, foreign accounts receivable that are backed by a letter of
credit issued or confirmed by a financial institution approved by the lenders
are deemed to be domestic accounts receivable. As a result, the aggregate amount
available under the Credit Facility will vary from time to time based on the
amount and eligibility of the Company's receivables. As of March 31, 1998, no
borrowings were outstanding under the Credit Facility, the Company's accounts
receivable totalled $136.0 million and its borrowing base was approximately
$40.6 million.
The purpose of the Credit Facility is to provide the Company working capital
and finance general corporate purposes. The term of the Credit Facility is two
years. Amounts outstanding under the Credit Facility bear interest at a premium
over one of two alternative variable rates selected by the Company. The "Base
Rate" equals the greater of (i) the rate of interest announced by BankBoston,
N.A. as its "base rate"
23
and (ii) the Federal Funds Effective Rate plus 1/2 of 1% per year. The "Adjusted
LIBOR Rate" equals (i) the London Interbank Offered Rate divided by (ii) one
minus the applicable reserve requirement under Regulation D of the Federal
Reserve Board. The maximum premium over the Base Rate is 1.25%, and the maximum
premium over the LIBOR Rate is 2.50%, subject to downward adjustment based on
the Company's realizing certain financial thresholds. The Credit Facility is
secured by all of the assets of Informix Software and the capital stock of the
Company's subsidiaries that are domiciled in the United States, including
Informix Software. The availability of the Credit Facility is also subject to
the Company's compliance with certain covenants, including financial covenants
requiring the Company to (a) maintain a ratio of 1.25 to 1.00 in respect of the
sum of cash and accounts receivable to the difference of current liabilities
less deferred and unearned revenues, (b) maintain quarterly revenues of $150.0
million through June 1998 and $160.0 million thereafter, (c) maintain quarterly
operating loss of no more than $10.0 million through the quarter ending March
31, 1998 and a quarterly operating profit of at least $10 million for the
quarter ending June 30, 1998 and a quarterly operating profit of at least $15
million thereafter. (d) maintain, for the quarter ending June 30, 1998 and each
quarter thereafter, a positive quarterly cash flow consisting of operating
income which does not include any restated revenue resulting from the Company's
November 1997 restatement of its financial statements, capitalized software
costs, capital expenditures or cash outlays in respect of accrued expenses
arising from restructuring charges (but which income figure does take into
account depreciation and amortization expenses), (e) maintain an interest
coverage ratio of 1.25 to 1.00 in respect of quarterly operating cash flow to
interest expense plus scheduled amortization of debt, (f) refrain from making
additional investments in fixed or capital assets, in any fiscal year, in excess
of $15.0 million, plus any carry forward amount, which carry forward amount
cannot exceed $5.0 million and (g) refrain from entering into any merger,
consolidation, reorganization or other transaction resulting in a fundamental
change. At March 31, 1998, the Company was in compliance with all financial
covenants under the Credit Facility.
There can be no assurance that amounts raised in connection with the
Preferred Stock financing and real property sales transactions described above
and amounts available under the Credit Facility will be sufficient to cover the
Company's working capital needs or that the Company will not require additional
debt or equity financing in the future. In addition, there can be no assurance
that additional debt or equity financing will be available, if and when needed
or that, if available, such financing could be completed on commercially
favorable terms. Failure to obtain additional financing, if and when needed,
could have a material adverse effect on the Company's business, results of
operations and financial condition. To the extent the terms of any available
financing are materially unfavorable to the Company, such a financing could
impair the Company's ability to obtain additional financing in the future, to
implement its business plan, or to engage in various corporate transactions,
including potential acquisitions of the Company. See "--Working Capital
Deficit," "--Risks Associated with Preferred Stock Financings," "--Antitakeover
Protections" and "Description of Capital Stock--Preferred Stock."
Prior to January 1, 1998, the Company often arranged for non-recourse
financing through the sale of customer accounts receivable to third-party
financial institutions. The Company had traditionally relied on a limited number
of financial institutions for most of the customer financings it arranged. The
terms of the Credit Facility prevent the Company from selling accounts
receivable with an aggregate face value in excess of $20 million during any
twelve month period. The Company does not expect to enter into third-party
financing arrangements involving the sale of its receivables on a going forward
basis. See "--Working Capital Deficit."
WORKING CAPITAL DEFICIT
The restatement of the Company's financial statements has had a material
adverse effect on the Company's financial condition, most notably evidenced by
substantial reductions in retained earnings and working capital. At December 31,
1996, after giving effect to the restatement, the Company's working capital
totaled $3.1 million, compared to $258.4 million as originally reported. At
December 31, 1997, the
24
Company had a working capital deficit of $140.2 million. The substantial
reduction in working capital, as restated, at December 31, 1996 reflects net
losses in fiscal 1996 of $73.6 million and the addition of $239.5 million of
"advances from customers and financial institutions" as a current liability on
the Company's balance sheet. The working capital deficit at December 31, 1997
reflects net losses of $356.9 million for the year ended December 31, 1997,
$180.0 million in advances from customers and financial institutions as of such
date, and substantial uses of cash as a result of the Company's internal
restructuring, which commenced in the second quarter of 1997. At March 31, 1998,
the Company had a working capital deficit of $86.5 million.
"Advances from customers and financial institutions" reflects amounts
previously received from customers or in connection with accounts receivable
financing transactions with third party financial institutions in advance of
revenue being recognized. Prior to the restatement, these amounts were
improperly recognized as earned but have now been designated as advances. A
substantial majority of such revenues arose in connection with license
agreements between the Company and hardware partners, distributors and other
resellers. In connection with the review of its historical financial results,
the Company determined that sufficient post-contractual contingencies existed in
connection with certain reseller license arrangements so as to preclude
recognizing revenue. In addition, the Company concluded that informal or
otherwise undisclosed arrangements with a number of resellers have resulted or
could result in significant concessions or allowances that were not accounted
for when revenue was originally reported as earned. Although the Company's
license agreements provide for a non-refundable fee payable by the customer in
single or multiple installments at the beginning or over the term of the license
arrangements, amounts received by the Company under its license agreements could
be subject to refund in the event the Company fails to satisfy certain
post-signing obligations. At March 31, 1998 approximately $20 million of such
amounts received from customers were subject to commercial disputes, several of
which have proceeded to litigation. Of the $20 million subject to commercial
disputes, $5.0 million has been reflected on the balance sheet as accrued
expenses, and the Company believes that the remainder is properly booked as
advances from customers and financial institutions as the Company believes the
likelihood of refund is remote. Any such refunds, were they to occur, would not
have a material effect on the Company's results of operations as revenue has not
been recognized on such transactions.
The Company has abandoned its plans to construct a new headquarters facility
and in December 1997 sold the real property it had purchased earlier in the
year, raising aggregate net proceeds of approximately $59.3 million. In August
1997 and November 1997, the Company sold and issued newly designated series of
Preferred Stock in two separate financing transactions, raising aggregate net
proceeds of approximately $87.6 million (excluding a $1.0 million fee paid to a
financial advisor of the Company in connection with the sale of the Series B
Preferred.) In addition, in the fourth quarter of 1997, the Company entered into
the Credit Facility. In the first quarter of fiscal 1998, the Company raised
aggregate net proceeds of $14.1 million in connection with the exercise of a
warrant to acquire additional shares of the Company's Convertible Preferred
Stock. Although these financing transactions have improved the Company's working
capital position, in the event the Company continues to maintain a substantial
working capital deficit, such a deficit could materially impair the Company's
ability to sell its products as a result of customer uncertainty about the
Company's financial condition. See "--Uncertain Impact of Restatement of
Financial Statements" and "--Need for Additional Financing."
FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY
The Company's quarterly operating results have varied significantly in the
past and may vary significantly in the future depending upon a number of
factors, many of which are beyond the Company's control. These factors include,
among others, (i) customer uncertainty about the Company's financial condition
and business prospects, (ii) market demand for the Company's software, including
changes in industry growth rates for the Company's products, (iii) changes in
pricing policies by the Company or its competitors, including aggressive price
discounting to encourage volume purchases by customers, (iv) the
25
size, timing and contractual terms of significant orders, the effects of which
may be exacerbated by aggressive price discounting, (v) the timing of the
introduction of new products or product enhancements by the Company or its
competitors, (vi) budgeting cycles of customers and potential customers, (vii)
changes in the mix of revenues attributable to domestic and international sales,
and (viii) seasonal trends in technology purchases and other general economic
conditions. In particular, the Company's quarterly results may be adversely
affected by the industry's historical practice of aggressively discounting the
price of its products to encourage volume purchasing by customers. In the event
the Company experiences substantial pricing pressure with respect to one or more
large transactions in any given quarter, such revenue could result in a
substantial shortfall in revenues. The Company has operated historically with
little or no backlog and has generally recognized a substantial portion of its
revenues in the last weeks or days of a quarter. As a result, license revenues
in any quarter are substantially dependent on orders booked and shipped in the
last weeks or days of that quarter. In addition, the sales cycle for the
Company's products is relatively long and may vary depending on a number of
factors, including the size of the transaction and the level of competition the
Company encounters in its selling activities. Due to the foregoing factors,
quarterly revenues and operating results are not predictable with any
significant degree of accuracy. In the event of any downturn in potential
customers' businesses, the domestic economy in general, or in international
economies where the Company derives substantial revenues, planned purchases of
the Company's products may be deferred or canceled, which could have a material
adverse effect on the Company's business, operating results, and financial
condition. Because the Company's operating expenses are based on anticipated
revenue levels and because a high percentage of the Company's expenses are
relatively fixed, delays in the recognition of revenues from even a limited
number of license transactions could cause significant variations in operating
results from quarter to quarter and could cause net income to fall significantly
short of anticipated levels. In the quarters ended September 28, 1997 and June
29, 1997, costs associated with the Company's internal restructuring,
aggregating $109.4 million, had a material adverse effect on results of
operations. The total restructuring charges decreased by $1.2 million during the
fourth quarter of fiscal 1997 primarily due to adjusting the original estimate
of the loss to be incurred on the sale of land to the actual loss. The total
restructuring charges decreased by $3.3 million during the first quarter of 1998
primarily due to adjusting the original estimate of severance and facility
charges to actual costs incurred. Management continues to evaluate the Company's
cost structure in light of projected revenues and cash-flows, both of which are
variable and uncertain. There can be no assurance that the Company will not be
required to undertake additional restructuring activities in the future, which
would have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company's business has experienced and is expected to continue to
experience seasonality. International revenues comprise a significant percentage
of the Company's total revenues, and the Company may experience additional
variability in demand associated with seasonal buying patterns in foreign
markets. In particular, the Company's third quarter tends to reflect the effects
of summer slowing of international business activity, particularly in Europe. In
addition, variability and seasonality in the Company's business may result from
customer capital spending cycles, which tend to peak in the Company's fourth
quarter, and the Company's sales incentive plans for sales personnel, which are
measured on a calendar year basis. See "--Competition; Pricing Risks" and
"--International Operations; Currency Fluctuations."
LITIGATION
ACTIONS ARISING UNDER FEDERAL AND STATE SECURITIES LAWS
Beginning on or about April 16, 1997, a total of 24 complaints alleging
violations of the federal securities laws were filed against the Company, Ernst
& Young LLP, the Company's independent auditors and certain Named Individual
Defendants (listed below) in the United States District Court for the Northern
District of California. Of the 24 complaints, 22 have been filed as purported
class actions by
26
individuals who allege that they are individual investors who purchased the
Company's Common Stock during the purported class period; the alleged class
periods in the different complaints vary according to the date on which the
complaints were filed. The complaints name some or all of the following current
and former officers and directors of the Company as defendants: Phillip E.
White, Howard H. Graham, David H. Stanley, Ronald M. Alvarez, Karen Blasing, D.
Kenneth Coulter, Ira H. Dorf, Stephen E. Hill, Myron (Mike) Saranga, Steven R.
Sommer, Michael R. Stonebraker and Edwin C. Winder (the "Named Individual
Defendants"). On August 20, 1997, the District Court entered an order
consolidating all of the separately-filed class actions pending at that time,
designating the action as IN RE INFORMIX CORPORATION SECURITIES LITIGATION, and
designating as "related cases" all cases brought under the federal securities
laws then pending and any that may be filed after that date. A consolidated
amended class action complaint was filed on April 6, 1998. As required by the
provisions of the Exchange Act, as amended by the Private Securities Litigation
Reform Act of 1995, the Court has designated the lead plaintiffs in the federal
action and has appointed lead plaintiffs' counsel.
Two related non-class actions, TEACHERS' RETIREMENT SYSTEM OF LOUISIANA ET
AL. V. INFORMIX CORPORATION ET AL. and STATE BOARD OF ADMINISTRATION OF FLORIDA
V. INFORMIX CORPORATION ET AL., have been consolidated with IN RE INFORMIX
CORPORATION SECURITIES LITIGATION for all pre-trial purposes. The LOUISANA and
FLORIDA plaintiffs request a total of $10.173 million in damages. An amended
consolidated complaint was filed by the LOUISIANA and FLORIDA plaintiffs on
April 3, 1998.
The existing federal court complaints allege that the Company, the Named
Individual Defendants and Ernst & Young issued false or misleading statements in
the Company's filings with the Commission, press releases, statements to
securities analysts and other public statements regarding its financial results
and business prospects. The alleged class period in the amended consolidated
complaints extends from February 7, 1995 through November 18, 1997. In
particular, plaintiffs allege that defendants overstated the Company's revenue
and earnings during the time period by improperly recognizing revenue from sales
of software licenses. All of these actions allege that the defendants' false and
misleading statements violate section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder. The complaints further allege that the Named Individual
Defendants sold the Company's Common Stock while in the possession of adverse
material non-public information. The existing complaints, in general, do not
specify the amount of damages that plaintiffs seek.
On or about March 19, 1998, a complaint alleging securities and common law
fraud and misrepresentation causes of action was filed in the United States
District Court for the Northern District of California. This complaint,
captioned WILLIAMS V. INFORMIX CORPORATION, ET AL., alleges both individual and
class claims on behalf of former securities holders of Illustra Information
Technologies, Inc. ("Illustra") who exchanged their Illustra securities for
securities of the Company in February 1996 in connection with the Company's
February 1996 acquisition of Illustra pursuant to an Agreement and Plan of
Reorganization (the "Illustra Agreement"). This matter has been consolidated
with IN RE INFORMIX CORPORATION SECURITIES LITIGATION. The WILLIAMS complaint,
like the previously-filed federal complaints, alleges that the Company and
certain of its former officers and/or directors, and its independent auditors,
issued false or misleading statements regarding the Company's reported financial
results and business prospects. Defendants are scheduled to file a response to
the consolidated, amended complaint on June 16, 1998.
Three purported securities class actions containing allegations similar to
the federal actions were filed in the Superior Court of the State of California,
County of San Mateo between May 19, 1997 and August 25, 1997. Those actions,
captioned RILEY V INFORMIX CORPORATION ET AL., DAYANI V. INFORMIX CORPORATION ET
AL., AND GOLDSTEIN V. WHITE ET AL., contained factual allegations nearly
identical to the allegations set forth in the federal court complaints. The
Superior Court has consolidated these actions into the DAYANI case, and has
appointed lead plaintiffs' counsel. By stipulation, plaintiffs filed a
consolidated, amended complaint on December 23, 1997. The state court
consolidated, amended complaint names as defendants the Company, Ernst & Young
and the Named Individual Defendants. The claims in the consolidated amended
state complaint arise under California securities, fraud and unfair business
practices statutes.
27
The state court consolidated, amended complaint alleges that the defendants
issued false financial statements which were not prepared in conformity with
Generally Accepted Accounting Principles for fiscal years 1996, 1995 and 1994,
materially overstating the Company's revenue. Plaintiffs allege that defendants
recorded as revenue approximately $300 million from software license sales which
should not have been recorded because INTER ALIA, revenue was recognized on
sales to resellers before end-users were identified; revenue was recognized in
circumstances where customers had rights of return or cancellation; and the
Company recognized revenue from barter transactions in which the Company
allegedly exchanged software licenses for products that had no value to the
Company. Plaintiffs further allege that while the Company's stock price was
artificially inflated due to the overstatement of revenue, the defendants used
the Company's stock to make corporate acquisitions, and the Named Individual
Defendants sold stock while in possession of material adverse non-public
information. The alleged class period in the state court consolidated, amended
complaint is February 7, 1995 through November 18, 1997.
Defendants filed demurrers to the state court consolidated, amended
complaint on February 13, 1998. Defendants base their demurrers to the
consolidated, amended complaint in this action on the grounds that certain of
the individual defendants made no actionable statements during the alleged class
period, the Company did not engage in any market activity during the alleged
class period, the plaintiffs did not actually rely upon any of the alleged false
and misleading statements, the California statutory unfair business practices
claims are inapplicable to securities transactions, and the consolidated,
amended complaint fails to plead the alleged fraud with sufficient
particularity. The hearing on defendants' demurrers is set for May 29, 1998. The
Company will not file an answer in this action unless the Court overrules the
pending and any subsequent demurrers. Further, the Company is not in a position
to state its factual defenses to the consolidated, amended complaint until the
Court rules upon the pending and any subsequent demurrers.
DERIVATIVE ACTIONS
The Company also was named as a nominal defendant in eight derivative
actions, purportedly brought on its behalf, filed in the Superior Court of the
State of California, County of San Mateo. The cases have been consolidated under
the caption IN RE INFORMIX CORPORATION DERIVATIVE LITIGATION, and the Court has
appointed lead plaintiff's counsel in the consolidated actions. The
consolidated, amended complaint alleges that, based upon the facts alleged in
the federal and state securities class actions, defendants breached their
fiduciary duties to the Company, engaged in abuses of their control of the
Company, were unjustly enriched by their sales of the Company's Common Stock,
engaged in insider trading in violation of California law and published false
financial information in violation of California law. The consolidated, amended
complaint names as defendants Ernst & Young, the Named Individual Defendants and
Albert F. Knorp, Jr., James L. Koch, Thomas A. McDonnell and Cyril J. Yansouni,
non-management directors of the Company. The plaintiff seeks unspecified damages
on the Company's behalf from each of the defendants. On December 18, 1997,
plaintiffs served their first amended, consolidated derivative complaint.
The Company, on whose purported behalf the derivative action is asserted,
and the individual defendants and Ernst & Young, against whom the claims are
alleged, filed demurrers to the consolidated derivative complaint on February 6,
1998. The Company's demurrer in this action is based upon the fact that the
plaintiff did not make demand on the Company's board prior to filing the
derivative action as is required by governing Delaware law. In addition, the
Company's current and former officers and directors have brought demurrers to
the consolidated, amended complaint on the grounds that plaintiffs fail to plead
any of their claims with sufficient particularity and that certain of
plaintiffs' California statutory causes of action do not apply, by their terms,
to officers and directors of a Delaware corporation. On April 1, 1998, the Court
sustained Informix's demurrer based upon the plaintiffs' failure to make demand.
The Court has given plaintiffs leave to amend their complaint. In addition, the
Court has kept on its calendar the defendants' demurrers based upon the lack of
merit in plaintiffs' substantive claims. That hearing is set for May 29, 1998.
The Company will not file an answer in this action unless the Court
28
overrules the pending or any subsequent demurrers. Further, the Company is not
in a position to state its factual defenses to the consolidated, amended
complaint until the Court rules upon the pending demurrers. Because of the
nature of derivative litigation, any recovery in the action would inure to the
benefit of the Company.
INDEMNIFICATION AGREEMENTS AND LIABILITY INSURANCE
Pursuant to Delaware law, the Company's Certificate of Incorporation, its
Bylaws and the indemnification agreements between the Company and each of its
current and former officers and directors, the Company is obligated to indemnify
its current and former officers and directors for certain liabilities arising
from their employment with or service to the Company. These indemnification
obligations require the Company to indemnify its current and former officers and
directors for any suit or other proceeding, threatened or actual, whether civil,
criminal, administrative, investigative, appellate or any other type of
proceeding, that arises as a result of any act or omission in the indemnitee's
capacity as an officer or director of the Company to the fullest extent
permitted under Delaware or any other applicable law. The indemnification
extends to any and all expenses (including but not limited to attorneys' fees
and costs, and any other out-of-pocket expense) and/or liabilities of any type
(including but not limited to judgments, fines, excise taxes or penalties under
the Employee Retirement Income Security Act ("ERISA"), and amounts paid in
settlement) reasonably incurred in connection with the investigation, defense,
settlement or appeal of such proceedings. The obligation to provide
indemnification does not apply if the indemnitee is adjudicated to be liable for
fraudulent or criminal conduct.
The Company has purchased directors' and officers' liability insurance to
reimburse it for the costs incurred in connection with its indemnification
obligations described above. For the period from August 1996 to August 1997, the
period in which most of the claims against the Company and certain of its
directors and officers were asserted, the Company had in place three directors
and officers liability insurance policies (the "1996 and 1997 D&O Policies"),
each providing $5 million in coverage for an aggregate of $15 million. The
primary policy and first excess policy were issued by Lloyds of London. The
second excess policy was issued by Admiral Insurance Company. The insurance
carriers have taken the position that litigation filed after the policy periods
of the 1996 and 1997 D&O Policies but arising from the same facts and
circumstances as claims filed during the period from August 1996 to August 1997,
"relates back" to the 1996 and 1997 D&O Policies. Thus, the issuance carriers
assert that actions filed after August 1997 do not implicate coverage under the
Company's D&O insurance policies for the period August 1997 to August 1998 (the
"Current D&O Policies"). The Current D&O Policies provide aggregate coverage of
$20 million, subject to various exclusions, including claims relating to the
restatement of the Company's financial statements. The 1996 and 1997 D&O
Policies provide that 100 percent of the costs incurred in defending claims
asserted jointly against the Company and its current and former officers and
directors are allocable to the individuals' defense and, thus, are covered by
the policy. However, the 1996 and 1997 D&O Policies do not provide any separate
coverage for the Company. Moreover, the Company does not have separate insurance
to cover the costs of its own defense or to cover any liability for any claims
asserted against it. The Company has not currently set aside any financial
reserves relating to any of the above-referenced actions.
ILLUSTRA ESCROW
In January 1997, pursuant to the Illustra Agreement, Informix made a claim
to certain shares held in an escrow fund. In response, the Illustra shareholders
have claimed that the Company wrongfully caused these shares to be retained in
escrow, thereby harming the Illustra shareholders. The Illustra securities
holders have filed a demand for arbitration with the private arbitration service
agreed upon by the parties to the Illustra Agreement; however, at present, no
litigation or arbitration proceedings have been commenced with respect to the
Illustra escrow. In March 1998, a complaint was filed against the Company
29
on behalf of former Illustra shareholders alleging securities and common law
fraud and misrepresentation causes of actions. See "--Actions Arising Under
Federal and State Securities Laws."
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
In addition, in July 1997, the Commission issued a formal order of
investigation of the Company and certain unidentified individuals associated
with the Company with respect to non-specified accounting matters, financial
reports, other public disclosures and trading activity in the Company's
securities. The Company is cooperating with the investigation and is providing
all information subpoenaed by the Commission. The Company is in the process of
producing documents and a number of current and former officers have been
testifed to appear before the Commission.
GENERAL
The pending federal and state securities actions are in the early stages of
discovery. Consequently, at this time it is not reasonably possible to estimate
the damages, or the range of damages, that the Company might incur in connection
with such actions. The uncertainty associated with substantial unresolved
litigation can be expected to have an adverse impact on the Company's business.
In particular, such litigation could impair the Company's relationships with
existing customers and its ability to obtain new customers. Defending such
litigation will likely result in a diversion of management's time and attention
away from business operations, which could have a material adverse effect on the
Company's results of operations. Such litigation may also have the effect of
discouraging potential acquirors from bidding for the Company or reducing the
consideration such acquirors would otherwise be willing to pay in connection
with an acquisition.
DEPENDENCE ON KEY PERSONNEL; PERSONNEL CHANGES; ABILITY TO RECRUIT PERSONNEL
The Company's future performance will depend to a significant extent on its
ability to attract and retain highly skilled technical, sales, consulting,
marketing and management personnel. In particular, the Company is dependent upon
a number of key management and technical personnel, including Robert J.
Finocchio, Jr., the Company's Chairman, President and Chief Executive Officer,
Jean-Yves F. Dexmier, the Company's Executive Vice President and Chief Financial
Officer, and Myron (Mike) Saranga, the Company's Senior Vice President, Product
Management and Development. Mr. Finocchio and Mr. Dexmier have only recently
joined the Company, and of the officers and key employees, only Mr. Finocchio is
bound by an employment agreement, the terms of which are nonetheless at-will.
The loss of the services of one or more of the Company's executive officers or
key employees could have a material adverse effect on the Company's business,
results of operations and financial condition.
Since the beginning of 1997, a number of senior management personnel and
other key employees have departed the Company, and to date, the Company has been
able to replace most but not all of the positions that have been vacated. Since
the first quarter of 1997, the Company has experienced a significant number of
voluntary resignations and has taken selective actions to reduce the number of
employees in certain functional areas. The Company had approximately 3,486
regular employees at March 31, 1998, compared to approximately 4,632 at March
30, 1997. Voluntary attrition has remained high across all functional areas. In
particular, in fiscal 1997, the Company experienced high attrition rates in its
product development group and has had difficulty attracting replacement
development personnel. The competition for employees in the software industry is
intense, and the Company expects that such competition will continue for the
foreseeable future. The Company has experienced difficulty in locating
candidates with appropriate qualifications and believes that recent financial
and business developments at the Company have made recruitment more difficult.
In November 1997, the Company implemented an option repricing program in an
effort to retain existing employees and, following further declines in the price
of its Common Stock, announced a second repricing in December 1997, which was
effective in January 1998. There can be no assurance that such programs will be
effective in retaining existing
30
employees. There can be no assurance that the Company will be successful in
attracting, training and retaining qualified personnel, and the failure to do
so, particularly in key functional areas such as product development and sales,
could have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, new employees hired by the
Company generally require substantial training in the use and implementation of
the Company's products and in the Company's procedures. As a result, substantial
employee turnover could have an adverse effect on results of operations in
future quarters.
RISKS ASSOCIATED WITH PREFERRED STOCK FINANCINGS
In August 1997, the Company raised net proceeds of $37.6 million through the
issuance of a newly designated Series A Convertible Preferred Stock (the "Series
A Preferred"). In November 1997, the Company raised an additional $50.0 million
in net proceeds (excluding a $1.0 million fee paid to a financial advisor of the
Company) through the issuance of the Series B Preferred. Simultaneously with the
closing of the Series B Preferred, the holders of the Series A Preferred
exchanged all their outstanding shares of Series A Preferred for the Series A-1
Preferred, having substantially similar rights, preferences and privileges as
the Series A Preferred with the exception of certain amendments, including
revisions to the terms under which such shares become mandatorily redeemable.
While the issuance of the Preferred Stock in these transactions provided the
Company with additional working capital required to fund the Company's
continuing operations, the Company's agreements with the purchasers of the
Series A-1 Preferred and the Series B Preferred contain covenants that could
impair the Company's ability to engage in various corporate transactions in the
future, including financing transactions and certain transactions involving a
change-in-control or acquisition of the Company, or that could otherwise
disadvantage the Company and the holders of its Common Stock. In particular,
acquisitions of the Company may not be affected without the consent of the
holders of the outstanding Preferred Stock or without requiring the acquiring
entity to assume the Preferred Stock or cause such Preferred Stock to be
redeemed. These provisions are likely to make an acquisition of the Company more
difficult and expensive and could discourage potential acquirors. Certain
covenants of the Company, made in connection with the issuance of the Preferred
Stock, may also have the effect of limiting the Company's ability to obtain
additional financing by, for example, providing the holders of Preferred Stock
certain rights of first offer and prohibiting the Company from issuing
additional Preferred Stock without the consent of such holders.
The terms of the financing agreements pursuant to which the Preferred Stock
was issued also include certain penalty provisions that are triggered in the
event the Company fails to satisfy certain obligations. In particular, assuming
the exercise of the Series A-1 Warrant (as such term is defined below) for
80,000 shares of Series A-1 Preferred (which were the maximum number of shares
of Series A-1 Preferred purchasable under the warrant at March 31, 1998) the
holders of the Series A-1 Preferred will become entitled to an annual dividend
of approximately $3.0 million, payable quarterly in cash, in the event the
Company fails to satisfy certain covenants, including the failure to have a
registration statement covering the Common Stock issuable upon conversion of the
Series A-1 Preferred declared effective by the Commission within 180 days of a
registration request from the holders of Series A-1 Preferred (at the time of
this report no shares of A-1 Preferred were outstanding and, accordingly, the
Company had not received such a registration request); the failure to obtain
stockholder approval of the issuance of the Common Stock issuable upon
conversion of the Series A-1 Preferred in the event that such approval becomes
required by the rules of the Nasdaq National Market; and the failure to redeem
any shares of Series A-1 Preferred held by a holder of Series A-1 Preferred who
objects to a change-in-control transaction, if the transaction does not satisfy
certain financial thresholds relating to the market capitalization and trading
volume of any acquiring entity. In the event the Company becomes obligated to
pay such dividends, the holders of the Series A-1 Preferred will become
immediately entitled to designate a number of members of the Company's Board of
Directors corresponding, as a percentage of the total number of members, to the
31
percentage of the Company's outstanding Common Stock held by such holders
(assuming the conversion into Common Stock of the outstanding Series A-1
Preferred). The holders of the Series B Preferred are entitled to receive a
cumulative dividend at an annual rate of 5% of the face value of each share of
Series B Preferred, resulting in an aggregate annual dividend of $2.5 million
based upon the 50,000 shares of Series B Preferred (face value $1,000 per share)
outstanding at March 31, 1998. The dividend is generally payable upon the
conversion of the Series B Preferred or redemption of the Series B Preferred and
may be paid in cash or, at the Company's election and subject to certain
conditions, in shares of Common Stock. In the event the holders of Preferred
Stock become entitled to receive cash dividends or to have their Preferred Stock
redeemed, there can be no assurances that the Company will be able to fund such
a payment or redemption, and even if funding is available, substantial dividend
payments could have a material adverse effect on the Company's business and
financial condition. See "--Need for Additional Financing; Customer Financing,"
"--Antitakeover Protection," and "Description of Capital Stock-- Preferred
Stock."
Both the Series A-1 Preferred and the Series B Preferred are convertible
into shares of the Company's Common Stock based on the trading prices of the
Common Stock during future periods that are described in the respective
financing agreements. The number of shares of Common Stock that may ultimately
be issued upon conversion is therefore presently indeterminate. If, in
accordance with the terms of the financing agreements, the conversion price of
the Preferred Stock is determined during a period when the trading price of the
Common Stock is low, the resulting number of shares of Common Stock issuable
upon conversion of the Preferred Stock could result in substantial dilution to
the holders of Common Stock. In addition, the Company issued to the holders of
the Series A-1 Preferred a warrant to acquire up to an additional 140,000 shares
of Series A-1 Preferred for an aggregate purchase price of $35.0 million (the
"Series A-1 Warrant"). The Series A-1 Warrant was exercised in part in February
1998 for 60,000 shares of Series A-1 Preferred, resulting in $14.1 million in
net proceeds to the Company. In February 1998, all 220,000 shares of Series A-1
Preferred which were then outstanding were converted into 12,769,908 shares of
Common Stock. The Company is also obligated to issue upon conversion of the
Series B Preferred additional warrants to acquire shares of Common Stock equal
to 20% of the total number of shares of Common Stock into which the Series B
Preferred converts; together with an additional increment of warrants to
purchase 200,000 shares of Common Stock (collectively, the "Warrants"). The
Series A-1 Warrant and the Warrants, to the extent exercised, will have a
further dilutive effect.
COMPETITION; PRICING RISKS
The Company faces intense competition in the market for RDBMS software
products. The market for the Company's products is subject to rapid
technological change and frequent new product introductions and enhancements,
and the Company's competitors in the market include several large vendors that
develop and market databases, applications, development tools or decision
support products. The Company's principal competitors include Computers
Associates International, Inc., International Business Machines Corporation
("IBM"), Microsoft Corporation, NCR Corporation/Teradata ("NCR/Teradata"),
Oracle Corporation ("Oracle") and Sybase, Inc. ("Sybase"). Several of the
Company's competitors have significantly greater financial, technical, marketing
and other resources than the Company. As a result, they may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion and
sale of their products than the Company. Any failure by the Company to compete
successfully with its existing competitors or future competitors could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Several of the Company's competitors have announced the development of
enhanced versions of their principal database products that are intended to
improve the performance or expand the capabilities of their existing products.
New or enhanced products by existing competitors or new competitors could result
in greater price pressure on the Company's products. In addition, the industry
movement to new operating
32
systems, like Windows NT, access through low-end desktop computers, and access
to data through the Internet may cause downward pressure on prices of database
software and related products. The bundling of software products for promotional
purposes or as a long-term pricing strategy by certain of the Company's
competitors could also result in reductions in the price the Company may charge
for its products. In addition, the Company's own practices of bundling its
software products for enterprise licenses or for promotional purposes with the
Company's partners also could result in reduction in the price the Company may
charge for its products. In particular, the pricing strategies of competitors in
the industry have historically been characterized by aggressive price
discounting to encourage volume purchasing by customers. If such downward
pressure on prices were to occur, the Company's operating margins would be
adversely affected. Existing and future competition or changes in the Company's
product or service pricing structure or product or service offerings could
result in an immediate reduction in the prices of the Company's products or
services. If significant price reductions in the Company's products or services
were to occur and not be offset by increases in sales volume, the Company's
business, results of 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.
UNCERTAIN GROWTH RATES; TECHNOLOGICAL CHANGE AND NEW PRODUCTS
Over the last several years, the RDBMS industry has expanded at significant
growth rates, due in part to the continuing development of new technologies and
products responsive to customer requirements. Recently, however, both industry
analysts and competitors have predicted that such high growth rates will not be
maintained in future periods. Recent instability in the Asian-Pacific economies
and financial markets, which had previously been cited as a potentially strong
source of revenue growth for relational database software companies, has
introduced additional uncertainty concerning industry growth rates. In the event
industry growth rates should decline for any reason, the markets for the
Company's products would likely be adversely affected, which would have a
negative impact on the Company's business, results of operations, financial
condition and cash flows. See "--Fluctuations in Quarterly Results; Seasonality"
and "International Operations; Currency Fluctuations."
In addition, the market for the Company's products and services is
characterized by rapidly changing technology, changing customer needs, frequent
new product introductions and evolving industry standards that may render
existing products and services obsolete. The life cycles of the Company's
products are difficult to estimate. The Company's growth and future financial
performance will depend upon its ability to enhance its existing products and to
introduce new products on a timely and cost-effective basis that meet dynamic
customer requirements. There can be no assurance that the Company will be
successful in developing new products or enhancing its existing products or that
such new or enhanced products will receive market acceptance or be delivered
timely to the market. The Company's product development efforts are expected to
continue to require substantial investments by the Company, and there can be no
assurance that the Company will have sufficient resources to make the necessary
investments. The Company has experienced product development delays in the past
and may experience delays in the future. In particular, the Company has
experienced high attrition in its product development group in recent months and
has had difficulty attracting qualified replacement development personnel, which
could have an adverse effect on the Company's ability to develop new products or
product enhancements that respond to changing market requirements. 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 determinative factor in the Company's success
will continue to be the ability of the Company's products to operate and
33
perform well with existing and future leading, industry-standard application
software products intended to be used in connection with RDBMS. Failure to meet
in a timely manner existing or future interoperability and performance
requirements of certain independent vendors 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. See "Uncertain Impact of Restatement of Financial
Statements," "--Need for Additional Financing; Customer Financing," "--Working
Capital Deficit" and "--Dependence on Key Personnel; Personnel Changes; Ability
to Recruit Personnel."
In recent years, the types and quantities of data required to be stored and
managed has grown increasingly complex and includes, in addition to conventional
character data, audio, video, text, and three-dimensional graphics in a
high-performance scalable environment. During 1996, the Company invested
substantial resources in developing its ORDBMS product line. The market for
products offering object-relational database functionality is new and evolving,
and its growth depends upon a growing need to store and manage complex data and
on broader market acceptance of the Company's products as a solution for this
need. As a result, there can be no assurance that organizations will choose to
make the transition from conventional RDBMS to ORDBMS. Delays in market
acceptance of object-relational database management products offered by the
Company could have an adverse effect on the Company's results of operations and
financial condition.
INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS
International sales represented approximately 54% of total revenues for both
years ended December 31, 1997 and 1996, and 49% of total revenues for the
quarter ended March 31, 1998. The Company's international 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, political and economic circumstances, as
well as by other factors associated with international activities. In
particular, recent instability in the Asian-Pacific economies and financial
markets, which accounted for approximately 12% and 13% of the Company's total
revenues in the years ended December 31, 1997 and December 31, 1996,
respectively, and 11% of the Company's total revenues in the quarter ended March
31, 1998, could have an adverse effect on the Company's operating results in
future quarters. Most of the Company's international revenue and expenses are
denominated in local currencies. Due to the substantial volatility of currency
exchange rates, among other factors, the Company cannot predict the effect of
exchange rate fluctuations on future operating results. Although the Company
takes into account changes in exchange rates over time in its pricing strategy,
it does so only on an annual basis, resulting in substantial pricing exposure as
a result of foreign exchange volatility during the period between annual pricing
reviews. The Company attempts to reduce this pricing exposure by entering into
forward foreign currency exchange contracts to hedge up to 80% of the forecasted
net income of its foreign subsidiaries of up to one year in the future. In
addition, the sales cycles for the Company's products is relatively long,
depending on a number of factors including the level of competition and the size
of the transaction. Foreign currency fluctuations could, therefore, result in
substantial changes in the financial impact of a specific transaction between
the time of initial customer contact and revenue recognition. As a result of the
foregoing factors, the Company's business, results of operations and financial
condition could be materially and adversely affected by fluctuations in foreign
currency exchange rates. See "--Fluctuations in Quarterly Results; Seasonality."
In addition to the hedging program described above, the Company has
implemented a foreign exchange hedging program consisting of the purchase of
forward foreign exchange contracts, which is intended 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. This
34
program involves the use of forward contracts in the primary European and Asian
currencies. The Company has limited unhedged transaction exposures in certain
secondary currencies in Latin America, Eastern Europe and Asia because there are
limited forward currency exchange markets in these currencies. Notwithstanding
the Company's efforts to manage foreign exchange risk, there can be no
assurances that the Company's hedging activities will adequately protect the
Company against the risks associated with foreign currency fluctuations.
YEAR 2000 RISKS
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance.
The Company has recently commenced a program, to be substantially completed
by the Fall of 1999, to review the Year 2000 compliance status of the software
and systems used in its internal business processes, to obtain appropriate
assurances of compliance from the manufacturers of these products and agreement
to modify or replace all non-compliant products. In addition, the Company is
considering converting certain of its software and systems to commercial
products that are known to be Year 2000 compliant. Implementation of software
products of third parties, however, will require the dedication of substantial
administrative and management information resources, the assistance of
consulting personnel from third party software vendors and the training of the
Company's personnel using such systems. Based on the information available to
date, the Company believes it will be able to complete its Year 2000 compliance
review and make necessary modifications prior to the end of 1999. Software or
systems which are deemed critical to the Company's business are scheduled to be
Year 2000 compliant by the end of 1998. Nevertheless, particularly to the extent
the Company is relying on the products of other vendors to resolve Year 2000
issues, there can be no assurances that the Company will not experience delays
in implementing such products. If key systems, or a significant number of
systems were to fail as a result of Year 2000 problems or the Company were to
experience delays implementing Year 2000 compliant software products, the
Company could incur substantial costs and disruption of its business, which
would potentially have a material adverse effect on the Company's business and
results of operations.
The Company in its ordinary course of business tests and evaluates its own
software products. The Company believes that its software products are generally
Year 2000 compliant, meaning that the use or occurrence of dates on or after
January 1, 2000 will not materially affect the performance of the Company's
software products with respect to four digit date dependent data or the ability
of such products to correctly create, store, process and output information
related to such date data. However, there can be no assurance that the Company
will not subsequently learn that certain of its software products do not contain
all necessary software routines and codes necessary for the accurate
calculation, display, storage and manipulation of data involving dates. In
addition, in certain circumstances, the Company has warranted that the use or
occurrence of dates on or after January 1, 2000 will not adversely affect the
performance of the Company's products with respect to four digit date dependent
data or the ability to create, store, process and output information related to
such data. If any of the Company's licensees experience Year 2000 problems, such
licensees could assert claims for damages against the Company. The Company's
license agreements in most cases limit liability to prevent unlimited exposure
from such claims.
The Company has identified a separate budget of approximately $1.7 million
for investigating and remedying issues related to Year 2000 compliance involving
software or systems used in its internal operations. However, the Company has
only recently initiated its Year 2000 compliance program and there can be no
assurances that the program will be completed on a timely basis and within the
current projected
35
budget. To the extent the costs of implementing the program greatly exceed the
budget, such costs will have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition, the purchasing patterns of customers and potential customers
may be affected by Year 2000 issues. Many companies are expending significant
resources to correct their current software systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase software
products such as those offered by the Company, which could have an adverse
effect on the Company's business, results of operations and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT
The Company's success depends on proprietary technology. To protect its
proprietary rights, the Company relies primarily on a combination of patent,
copyright and trademark laws, trade secrets, confidentiality procedures,
contractual provisions contained in its license agreements and technical
measures. The Company seeks to protect its software, documentation and other
written materials under trade secret and copyright laws, which provide only
limited protection. The Company holds one United States patent and several
pending applications. There can be no assurance that any other patents covering
the Company's inventions will issue or that any patent, if issued, will provide
sufficiently broad protection or will prove enforceable in actions against
alleged infringers.
The Company's products are generally licensed to end-users on a
"right-to-use" basis pursuant to a license that restricts the use of the
products for the customer's internal business purposes. The Company also relies
on "shrink wrap" licenses, which include a notice informing the end-user that,
by opening the product packaging, the end-user agrees to be bound by the
Company's license agreement printed on the package. Despite such precautions, it
may be possible for unauthorized third parties to copy aspects of its current or
future products or to obtain and use information that the Company regards as
proprietary. In particular, the Company has licensed the source code of its
products to certain customers under certain circumstances and for restricted
uses. The Company has also entered source code escrow agreements with a number
of its customers that generally require release of source code to the customer
in the event of the Company's bankruptcy, liquidation or otherwise ceasing to
conduct business. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar or superior technology.
Policing unauthorized use of the Company's software is difficult, and while the
Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States, and
"shrink-wrap" licenses may be wholly or partially unenforceable under the laws
of certain jurisdictions. Litigation may be necessary in the future to enforce
the Company's intellectual property rights, to protect the Company's trade
secrets or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and diversion of
resources and management attention and could have a material adverse effect on
the Company's business, results of operations and financial condition.
The Company is not aware that any of its software product offerings
infringes the proprietary rights of third parties. There can be no assurance,
however, that third parties will not claim infringement by the Company with
respect to its current or future products. The Company expects that software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
36
PRODUCT LIABILITY
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's license agreements may not be effective
under the laws of certain jurisdictions. Although the Company has not
experienced any product liability claims to date, the sale and support of
products by the Company may entail the risk of such claims, and there can be no
assurance that the Company will not be subject to such claims in the future. A
product liability claim brought against the Company could have a material
adverse effect on the Company's business, operating results and financial
condition.
ANTITAKEOVER PROTECTIONS
The Company is authorized to issue 5,000,000 shares of undesignated
Preferred Stock, of which 440,000 shares have been designated Series A
Preferred, none of which is outstanding; of which 440,000 shares have been
designated Series A-1 Preferred, of which 220,000 shares were previously
outstanding (including 60,000 shares of Series A-1 Preferred which were issued
upon partial exercise of the Series A-1 Warrant) and converted into 12,769,908
shares of Common Stock in February 1998 and of which 80,000 shares remain
issuable upon exercise of the Series A-1 Warrant; and of which 50,000 shares
have been designated Series B Preferred, of which 50,000 shares are outstanding.
Subject to the prior consent of the holders of the Series A-1 Preferred and the
Series B Preferred, the Board of Directors has the authority to issue additional
shares of Preferred Stock in one or more series and to fix the price, rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
a series or the designation of such series, without any further vote or action
by the Company's stockholders. To date, the Company has used its ability to
designate and issue new series of Preferred Stock in transactions intended to
raise additional capital for the Company. The ability to issue additional shares
of Preferred Stock, however, also provides desirable flexibility in connection
with possible acquisitions and other corporate purposes but could also have the
effect of delaying, deferring or preventing a change in control of the Company
without further action by the stockholders and may adversely affect the market
price of the Common Stock and the voting and other rights of the holders of
Common Stock. The issuance of Preferred Stock with voting and conversion rights
may adversely affect the voting power of the holders of Common Stock, including
the loss of voting control to others. In particular, certain rights, preferences
and privileges of the Series A-1 Preferred and Series B Preferred could have the
effect of preventing or discouraging potential bids to acquire the Company
unless the terms of such acquisition are approved by such stockholders. See
"--Risks Associated with Convertible Preferred Stock Financings."
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws eliminate the right of stockholders to act by written
consent without a meeting and specify certain procedures for nominating
directors and submitting proposals for consideration at stockholder meetings.
The Board of Directors of the Company is divided into three classes, with each
class standing for election once every three years. Such provisions are intended
to enhance the likelihood of continuity and stability in the composition of the
Board of Directors and in the policies formulated by the Board of Directors and
to discourage certain types of transactions which may involve an actual or
threatened change of control of the Company. Such provisions are designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal
and, accordingly, could discourage potential acquisition proposals and could
delay or prevent a change in control of the Company. Such provisions are also
intended to discourage certain tactics that may be used in proxy fights but
could, however, have the effect of discouraging others from making tender offers
for the Company's shares and, consequently, may also inhibit fluctuations in the
market price of the Company's Common Stock that could result from actual or
rumored takeover attempts. These provisions may also have the effect of
preventing changes in the management of the Company. In addition,
37
the Company has adopted a Rights Agreement (the "Rights Agreement"), commonly
referred to as a "poison pill," which could also discourage potential acquirors.
The Company is subject to Section 203 of the Delaware General Corporation
Law (the "Antitakeover Law"), which regulates corporate acquisitions. The
Antitakeover Law prevents certain Delaware corporations, including those whose
securities are listed for trading on the Nasdaq National Market, from engaging,
under certain circumstances, in a "business combination" with any "interested
stockholder" for three years following the date that such stockholder became an
interested stockholder. For purposes of the Antitakeover Law, a "business
combination" includes, among other things, a merger or consolidation involving
the Company and the interested stockholder and the sale of more than 10% of the
Company's assets. In general, the Antitakeover Law defines an "interested
stockholder" as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the Company and any entity or person affiliated with
or controlling or controlled by such entity or person. A Delaware corporation
may "opt out" of the Antitakeover Law with an express provision in its original
certificate of incorporation or an express provision in its certificate of
incorporation or bylaws resulting from amendments approved by the holders of at
least a majority of the company's outstanding voting shares. The Company has not
"opted out" of the provisions of the Antitakeover Law.
STOCK PRICE VOLATILITY
The market price of the Company's Common Stock has in the past been highly
volatile and is expected to continue to be subject to significant price and
volume fluctuations in the future based on a number of factors, including market
uncertainty about the Company's financial condition or business prospects or the
prospects for the RDBMS market in general; shortfalls in the revenues or results
of operations of the Company or its principal competitors from revenues or
results of operations expected by securities analysts; announcements of new
products by the Company or its competitors; quarterly fluctuations in the
Company's financial results or the results of other software companies,
including those of direct competitors of the Company; changes in analysts'
estimates of the Company's financial performance, the financial performance of
competitors, or the financial performance of software companies in general; the
introduction of new products or product enhancements by the Company or its
competitors; general conditions in the software industry; changes in prices for
the Company's products or competitors' products; changes in revenue growth rates
for the Company, its competitors or the RDBMS market in general; changes in the
mix of revenues attributable to domestic and international sales; and seasonal
trends in technology purchases and other general economic conditions. In
addition, the stock market may from time to time experience extreme price and
volume fluctuations, which particularly affect the market for the securities of
many technology companies and which have often been unrelated to the operating
performance of the specific companies. There can be no assurance that the market
price of the Company's Common Stock will not experience significant fluctuations
in the future. See "--Uncertain Impact of Restatement of Financial Statements,"
"--Need for Additional Financing; Customer Financing," and "--Fluctuations in
Quarterly Results; Seasonality."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Subsequent to fiscal year end 1997, the Company began entering into forward
foreign currency exchange contracts to hedge no more than 80% of anticipated net
income of foreign subsidiaries of up to one year maximum in the future. From an
accounting perspective, these hedges are considered to be speculative. The
Company's outstanding forward exchange contracts used to hedge anticipated net
income are marked to market. This hedging activity did not have a material
impact on the Company's results of operations.
38
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ACTIONS ARISING UNDER FEDERAL AND STATE SECURITIES LAWS
Beginning on or about April 16, 1997, a total of 24 complaints alleging
violations of the federal securities laws were filed against the Company, Ernst
& Young LLP, the Company's independent auditors and certain Named Individual
Defendants (listed below) in the United States District Court for the Northern
District of California. Of the 24 complaints, 22 have been filed as purported
class actions by individuals who allege that they are individual investors who
purchased the Company's Common Stock during the purported class period; the
alleged class periods in the different complaints vary according to the date on
which the complaints were filed. The complaints name some or all of the
following current and former officers and directors of the Company as
defendants: Phillip E. White, Howard H. Graham, David H. Stanley, Ronald M.
Alvarez, Karen Blasing, D. Kenneth Coulter, Ira H. Dorf, Stephen E. Hill, Myron
(Mike) Saranga, Steven R. Sommer, MichaelR. Stonebraker and Edwin C. Winder (the
"Named Individual Defendants"). On August 20, 1997, the District Court entered
an order consolidating all of the separately-filed class actions pending at that
time, designating the action as IN RE INFORMIX CORPORATION SECURITIES
LITIGATION, and designating as "related cases" all cases brought under the
federal securities laws then pending and any that may be filed after that date.
A consolidated amended class action complaint was filed on April 6, 1998. As
required by the provisions of the Exchange Act, as amended by the Private
Securities Litigation Reform Act of 1995, the Court has designated the lead
plaintiffs in the federal action and has appointed lead plaintiffs' counsel.
Two related non-class actions, TEACHERS' RETIREMENT SYSTEM OF LOUISIANA ET
AL. V. INFORMIX CORPORATION ET AL. and STATE BOARD OF ADMINISTRATION OF FLORIDA
V. INFORMIX CORPORATION ET AL., have been consolidated with IN RE INFORMIX
CORPORATION SECURITIES LITIGATION for all pre-trial purposes. The LOUISANA and
FLORIDA plaintiffs request a total of $10.173 million in damages. An amended
consolidated complaint was filed by the LOUISIANA and FLORIDA plaintiffs on
April 3, 1998.
The existing federal court complaints allege that the Company, the Named
Individual Defendants and Ernst & Young issued false or misleading statements in
the Company's filings with the Commission, press releases, statements to
securities analysts and other public statements regarding its financial results
and business prospects. The alleged class period in the amended consolidated
complaints extends from February 7, 1995 through November 18, 1997. In
particular, plaintiffs allege that defendants overstated the Company's revenue
and earnings during the time period by improperly recognizing revenue from sales
of software licenses. All of these actions allege that the defendants' false and
misleading statements violate section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder. The complaints further allege that the Named Individual
Defendants sold the Company's Common Stock while in the possession of adverse
material non-public information. The existing complaints, in general, do not
specify the amount of damages that plaintiffs seek.
On or about March 19, 1998, a complaint alleging securities and common law
fraud and misrepresentation causes of action was filed in the United States
District Court for the Northern District of California. This complaint,
captioned WILLIAMS V. INFORMIX CORPORATION, ET AL., alleges both individual and
class claims on behalf of former securities holders of Illustra Information
Technologies, Inc. ("Illustra") who exchanged their Illustra securities for
securities of the Company in February 1996 in connection with the Company's
February 1996 acquisition of Illustra pursuant to an Agreement and Plan of
Reorganization (the "Illustra Agreement"). This matter has been consolidated
with IN RE INFORMIX CORPORATION SECURITIES LITIGATION. The WILLIAMS complaint,
like the previously-filed federal complaints, alleges that the Company and
certain of its former officers and/or directors, and its independent auditors,
issued false or misleading statements regarding the Company's reported financial
results and business prospects. Defendants are scheduled to file a response to
the consolidated, amended complaint on June 16, 1998.
39
Three purported securities class actions containing allegations similar to
the federal actions were filed in the Superior Court of the State of California,
County of San Mateo between May 19, 1997 and August 25, 1997. Those actions,
captioned RILEY V INFORMIX CORPORATION ET AL., DAYANI V. INFORMIX CORPORATION ET
AL., AND GOLDSTEIN V. WHITE ET AL., contained factual allegations nearly
identical to the allegations set forth in the federal court complaints. The
Superior Court has consolidated these actions into the DAYANI case, and has
appointed lead plaintiffs' counsel. By stipulation, plaintiffs filed a
consolidated, amended complaint on December 23, 1997. The state court
consolidated, amended complaint names as defendants the Company, Ernst & Young
and the Named Individual Defendants. The claims in the consolidated amended
state complaint arise under California securities, fraud and unfair business
practices statutes.
The state court consolidated, amended complaint alleges that the defendants
issued false financial statements which were not prepared in conformity with
Generally Accepted Accounting Principles for fiscal years 1996, 1995 and 1994,
materially overstating the Company's revenue. Plaintiffs allege that defendants
recorded as revenue approximately $300 million from software license sales which
should not have been recorded because INTER ALIA, revenue was recognized on
sales to resellers before end-users were identified; revenue was recognized in
circumstances where customers had rights of return or cancellation; and the
Company recognized revenue from barter transactions in which the Company
allegedly exchanged software licenses for products that had no value to the
Company. Plaintiffs further allege that while the Company's stock price was
artificially inflated due to the overstatement of revenue, the defendants used
the Company's stock to make corporate acquisitions, and the Named Individual
Defendants sold stock while in possession of material adverse non-public
information. The alleged class period in the state court consolidated, amended
complaint is February 7, 1995 through November 18, 1997.
Defendants filed demurrers to the state court consolidated, amended
complaint on February 13, 1998. Defendants base their demurrers to the
consolidated, amended complaint in this action on the grounds that certain of
the individual defendants made no actionable statements during the alleged class
period, the Company did not engage in any market activity during the alleged
class period, the plaintiffs did not actually rely upon any of the alleged false
and misleading statements, the California statutory unfair business practices
claims are inapplicable to securities transactions, and the consolidated,
amended complaint fails to plead the alleged fraud with sufficient
particularity. The hearing on defendants' demurrers is set for May 29, 1998. The
Company will not file an answer in this action unless the Court overrules the
pending and any subsequent demurrers. Further, the Company is not in a position
to state its factual defenses to the consolidated, amended complaint until the
Court rules upon the pending and any subsequent demurrers.
DERIVATIVE ACTIONS
The Company also was named as a nominal defendant in eight derivative
actions, purportedly brought on its behalf, filed in the Superior Court of the
State of California, County of San Mateo. The cases have been consolidated under
the caption IN RE INFORMIX CORPORATION DERIVATIVE LITIGATION, and the Court has
appointed lead plaintiff's counsel in the consolidated actions. The
consolidated, amended complaint alleges that, based upon the facts alleged in
the federal and state securities class actions, defendants breached their
fiduciary duties to the Company, engaged in abuses of their control of the
Company, were unjustly enriched by their sales of the Company's Common Stock,
engaged in insider trading in violation of California law and published false
financial information in violation of California law. The consolidated, amended
complaint names as defendants Ernst & Young, the Named Individual Defendants and
Albert F. Knorp, Jr., James L. Koch, Thomas A. McDonnell and Cyril J. Yansouni,
non-management directors of the Company. The plaintiff seeks unspecified damages
on the Company's behalf from each of the defendants. On December 18, 1997,
plaintiffs served their first amended, consolidated derivative complaint.
The Company, on whose purported behalf the derivative action is asserted,
and the individual defendants and Ernst & Young, against whom the claims are
alleged, filed demurrers to the consolidated derivative complaint on February 6,
1998. The Company's demurrer in this action is based upon the fact
40
that the plaintiff did not make demand on the Company's board prior to filing
the derivative action as is required by governing Delaware law. In addition, the
Company's current and former officers and directors have brought demurrers to
the consolidated, amended complaint on the grounds that plaintiffs fail to plead
any of their claims with sufficient particularity and that certain of
plaintiffs' California statutory causes of action do not apply, by their terms,
to officers and directors of a Delaware corporation. On April 1, 1998, the Court
sustained Informix's demurrer based upon the plaintiffs' failure to make demand.
The Court has given plaintiffs leave to amend their complaint. In addition, the
Court has kept on its calendar the defendants' demurrers based upon the lack of
merit in plaintiffs' substantive claims. That hearing is set for May 29, 1998.
The Company will not file an answer in this action unless the Court overrules
the pending or any subsequent demurrers. Further, the Company is not in a
position to state its factual defenses to the consolidated, amended complaint
until the Court rules upon the pending demurrers. Because of the nature of
derivative litigation, any recovery in the action would inure to the benefit of
the Company.
ILLUSTRA ESCROW
In January 1997, pursuant to the Illustra Agreement, Informix made a claim
to certain shares held in an escrow fund. In response, the Illustra shareholders
have claimed that the Company wrongfully caused these shares to be retained in
escrow, thereby harming the Illustra shareholders. The Illustra securities
holders have filed a demand for arbitration with the private arbitration service
agreed upon by the parties to the Illustra Agreement; however, at present, no
litigation or arbitration proceedings have been commenced with respect to the
Illustra escrow. In March 1998, a complaint was filed against the Company on
behalf of former Illustra shareholders alleging securities and common law fraud
and misrepresentation causes of actions. See "--Actions Arising Under Federal
and State Securities Laws."
GENERAL
The pending federal and state securities actions are in the early stages of
discovery. Consequently, at this time it is not reasonably possible to estimate
the damages, or the range of damages, that the Company might incur in connection
with such actions. However, the uncertainty associated with substantial
unresolved litigation can be expected to have an adverse impact on the Company's
business. In particular, such litigation could impair the Company's
relationships with existing customers and its ability to obtain new customers.
Defending such litigation will likely result in a diversion of management's time
and attention away from business operations, which could have a material adverse
effect on the Company's results of operations. Such litigation may also have the
effect of discouraging potential acquirors from bidding for the Company or
reduce the consideration such acquirors would otherwise be willing to pay in
connection with an acquisition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
On May 13, 1998, the Company announced that it had dismissed Ernst & Young
LLP as its independent auditors and that it was in the process of engaging KPMG
Peat Marwick LLP as its independent auditors.
41
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NO. EXHIBIT
- ------------- -----------------------------------------------------------------------------------------------------
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K on February 27, 1998 related to the
sale of 60,000 shares of Series A-1 Preferred Stock.
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INFORMIX CORPORATION
By: /s/ JEAN-YVES DEXMIER
-----------------------------------------
Jean-Yves Dexmier
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER (PRINCIPAL FINANCIAL
Dated: May 15, 1998 AND ACCOUNTING OFFICER)
43
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT TITLE
- ------------- -----------------------------------------------------------------------------------------------------
27.1 Financial Data Schedule.
44