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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-15325
INFORMIX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3011736
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4100 BOHANNON DRIVE, MENLO PARK, CA 94025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
650-926-6300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $0.01
PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
the 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K/A. / /
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of February 28, 1998 based on the closing sales price of the
Company's Common Stock, as reported on The Nasdaq Stock Market, was
approximately $1,297,423,211. Shares of Common Stock held by each officer and
director have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of February 28, 1998, Registrant had 166,903,848 shares of Common
Stock issued and outstanding.
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INFORMIX CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
-----------
PART I....................................................................................................... 3
ITEM 1. BUSINESS.................................................................................. 3
ITEM 2. PROPERTIES................................................................................ 11
ITEM 3. LEGAL PROCEEDINGS......................................................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................... 15
PART II...................................................................................................... 16
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................... 16
ITEM 6. SELECTED FINANCIAL DATA................................................................... 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..... 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................... 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...... 50
PART III..................................................................................................... 51
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT............................................ 51
ITEM 11. EXECUTIVE COMPENSATION.................................................................... 55
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................ 63
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................ 65
PART IV...................................................................................................... 68
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........................... 68
SIGNATURES................................................................................................... 73
2
PART I
ITEM 1. BUSINESS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER
"FACTORS THAT MAY AFFECT FUTURE RESULTS" UNDER "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN, OR
INCORPORATED BY REFERENCE INTO, THIS REPORT.
BACKGROUND
The Company is a leading multinational supplier of information management
software. The Company designs, develops, manufactures, markets and supports
relational database management systems ("RDBMS"), connectivity interfaces and
gateways and application development tools for graphical and character-based
software applications as part of an RDBMS. Database management software permits
multiple individual users, employing different application software, to access
and manage the same data concurrently without corrupting the underlying
database. RDBMS software extends the functionality and utility of non-relational
database management software by simplifying the data retrieval process for end-
users, who do not require specific knowledge about the structure of the database
but need only to specify the data to be retrieved. Companies commonly employ
RDBMS software for use in storing, managing and retrieving the large amounts of
data necessary to support internal management information and decision-support
systems as well as mission-critical data processing applications.
The Company believes that technological advances, including the
development and commercialization of the Internet, will lead to increasingly
sophisticated customer requirements for data storage and management beyond the
functionality offered by conventional RDBMS products. In recent years, the types
and quantities of data required to be stored and managed has grown increasingly
complex and includes, in addition to conventional character data, audio, video,
text and three dimensional graphics. In 1996, the Company devoted substantial
resources in the development of object-relational database management systems
("ORDBMS") and tools for applications in multimedia and entertainment, digital
media publishing and financial services.
The Company markets its products to end-users on a worldwide basis
directly through its sales force and indirectly through application resellers,
OEMs and distributors. The principal geographic markets for the Company's
products are North America, Europe, the Asia/Pacific region and Latin America.
In recent years, approximately half of the Company's total revenues have been
generated outside North America. The Company's principal customers include
businesses ranging from small corporations to Fortune 1000 companies,
principally in the manufacturing, financial services, telecommunications, media,
retail/wholesale, hospitality and government services sectors.
The Company was initially incorporated in California in 1980 and was
reincorporated in Delaware in August 1986. Unless the context requires
otherwise, the terms "Company" and "Informix" refer to Informix Corporation and
its subsidiaries. The Company maintains its executive offices at 4100 Bohannon
Drive, Menlo Park, California 94025. Its telephone number at that location is
(650) 926-6300.
PRODUCTS
INFORMIX DYNAMIC SERVER
Informix Dynamic Server is a high performance, enterprise capable online
transaction processing database server. This product is based on Informix's
Dynamic Scalable Architecture and features parallel data processing capability,
replication and connectivity options built into its core. Informix Dynamic
Server is available in a variety of configurations based upon adding one or more
of the configuration options described below.
3
Informix also provides a version of Informix Dynamic Server called the
Workgroup Edition, which has been adapted specifically for workgroup
environments.
SERVER CONFIGURATION OPTIONS
Informix makes available five server configuration options, which are
integrated in various combinations along with Informix Dynamic Server to meet
specific customer requirements.
The Advanced Decision Support Option extends Informix Dynamic Server with
a variety of decision support functions including summarization, sampling, and
"top-N."
The Extended Parallel Option adapts Informix Dynamic Server to work
within loosely coupled, share-nothing computing architectures, including
clusters of symmetric multiprocessing systems and parallel processing systems.
The Universal Data Option extends Informix Dynamic Server with support
for extensibility and SQL3. Extensibility includes the ability to add new
objects and data types, business specific procedures and logic, and new indexing
search methods to the server, as well as support for DataBlade modules, which
can include a related set of data types, functions and indexes for a specific
purpose.
The MetaCube ROLAP Option adds an on-line analytical processing engine to
Informix Dynamic Server that automatically preconsolidates data and provides a
multidimensional view of data without the constraints of two dimensional (row
and table) data model. This option also includes MetaCube Explorer; MetaCube
Scheduler for batch processing; MetaCube Queryback for running queries in the
background; MetaCube Aggregator for creating and maintaining aggregates in a
data warehouse; MetaCube for Excel which enables data Warehouse analysis in an
Excel spreadsheet environment; and MetaCube for the Web which brings MetaCube
analysis capabilities to intranets.
Finally, the Web Integration Option provides connectivity between Web
servers and Informix Dynamic Server. This option enables developers to create
intelligent web applications based upon database information that deliver
multimedia, tailored Web pages to users.
DATABLADE MODULES
DataBlade modules combine new data types, new functions or methods, and
new indexing operations, which taken together extend Informix Dynamic Server.
The DataBlade modules are used in conjunction with the Universal Data Option.
Informix sells the following DataBlade modules, and others are available through
Informix's partners:
The Informix Video Foundation DataBlade module provides an open and
scalable software architecture that allows strategic third-party development
partners to incorporate specific video technologies such as video servers,
external control devices, compression codes or cataloging tools into database
management applications with the Informix Dynamic Server. In addition, the video
data types and data model allow customers to explore new ways to manipulate
video and associated metadata, or information about the video.
The Informix TimeSeries DataBlade module expands the functionality of the
database by adding support for the management of time-series and temporal data.
The TimeSeries DataBlade module supports a regular or irregular repeating
time-stamped series of any datatype supported by Informix Dynamic Server or any
structure or combination of these. For example, a set of open, high, low, and
close currency values can be used to record a time-based series of stock prices.
The granularity of time recording can be adjusted to suit the unique
requirements of the application. The TimeSeries DataBlade module provides
support for three new datatypes, time-series, calendar and calendar pattern, and
over 80 functions to manage them. The time-series type stores sequences of
time-stamped information, and a related calendar allows access to specific
portions of the time series for update, analysis, display or other uses.
4
The Informix Geodetic DataBlade module provides geo-spatial datatypes and
functions supporting two-dimensional representation of the earth's surface based
on a geodetic (longitude, latitude and datum) coordinate system. In addition to
two-dimensional geographic feature support, the Geodetic DataBlade Module allows
an altitude range and a time range to be specified.
CONNECTIVITY PRODUCTS
The Company's principal connectivity products include the following:
Informix--Enterprise Gateway Manager is a connectivity tool allowing
applications running on various operating systems to access data sources via
loadable gateway drivers. The Company also offers gateway drivers for Oracle and
Sybase databases. Drivers for additional data sources are available from various
third parties.
Informix--Enterprise Gateway with DRDA is a UNIX based connectivity tool
allowing interoperability to IBM databases such as DB2/MVS, DB2/VM and DB2/400
from Windows and UNIX clients. Informix-Gateway with DRDA allows applications
built with Informix application development tools to access and modify
information in Distributed Relational Database Architecture compliant database
management systems.
Informix--ESQL for C and COBOL are embedded SQL products which permit
developers to take advantage of SQL technology while building applications is in
C or COBOL.
Informix--CLI is a library of low level functions that provide high
performance direct access to Informix databases from applications built in C or
other third generation languages. Informix--CLI is compliant with Microsoft's
ODBC specifications.
DATABASE TOOLS
The Company offers a variety of database application development tools
designed to allow users to build applications. The Company's principal database
tools include:
Informix Data Director for Visual Basic enables developers to prototype,
build and extend workgroup and enterprise applications. Data Director for Visual
Basic reduces the amount of application code necessary for writing client/server
solutions by automating the data access operations for the client application.
This automation eliminates the time consuming task of writing data access code,
allows developers to incorporate sophisticated functionality without having to
be SQL experts and enables project teams to improve their time to market with
scalable applications. Data Director enables developers to create applications
that support user defined data types, including images, Web pages and spatial
data.
Informix--NewEra is a graphical, object-oriented development environment
designed for creating enterprise-wide multi-tier client/server database
applications. Informix--NewEra features a fourth generation object-oriented
programming language, reusable class libraries, application partitioning and
flexible application deployment and supports open connectivity to Informix and
non-Informix databases. Informix--NewEra is currently available for Microsoft
Windows and OSF Motif.
Informix--4GL is a character-based development environment, which
includes a fourth generation programming language with screen building, report
entry, and SQL database input/output capabilities. The Informix--4GL product
family is comprised of three core products: Informix--4GL Compiled,
Informix--4GL Rapid Development Systems and Informix--4GL interactive Debugger.
Informix--SQL is a package of five interactive tools for creating
character-based applications. Informix--SQL consists of a forms package, a
report writer, an interactive SQL editor, a menu building and an interactive
schema editor.
5
SERVICES, CONSULTING AND CUSTOMER SUPPORT
The Company maintains field-based and centralized corporate technical
staffs to provide a comprehensive range of assistance to its customers. These
services include pre- and post-sales technical assistance, consulting, product
and sales training and technical support services. Consultants and trainers
provide services to customers to assist them in the use of the Company's
products and the design and development of applications that utilize the
Company's products.
The Company provides post-sales support to its customers on an optional
basis for annual fees which generally range from 12% to 18% of the license fees
paid by the customer. These support services usually include product updates.
During fiscal 1996 and the first quarter of fiscal 1997, as part of its
sales and marketing strategy, the Company launched a series of "Information
SuperStores." The Superstores were intended to demonstrate and offer the
Company's software products to customers on actual hardware platforms used by
those customers, thereby permitting the end-user to evaluate and monitor the
performance and functionality of the Company's products prior to purchase. In
addition, the Superstores offered application tools from leading third-party
tools and application vendors installed on a variety of platforms, including
Data General Corporation, Hewlett-Packard Company, International Business
Machines ("IBM"), NCR Corporation/Teradata ("NCR/Teradata"), Pyramid, Sequent
Computer Systems, Inc. ("Sequent"), Silicon Graphics and Sun Microsystems. In
connection with the Company's restructuring announced in the second quarter of
fiscal 1997, the Company scaled back its original plans and repositioned its
remaining sites as solution labs managed by the Company's consulting practice.
The decision to scale back the Superstores resulted in a charge to operations
during fiscal 1997.
MARKETING AND CUSTOMERS
The Company distributes its products through the channels of direct
end-user licensing, OEMs, application vendors addressing specific markets and
distributors. The Company has chosen a multiple channel distribution strategy to
maintain broad market coverage and product availability. The Company, therefore,
has generally avoided exclusive relationships with its licensees and other
resellers of its products. Discount policies and reseller licensing programs are
intended to support each distribution channel with a minimum of channel
conflict. The Company also provides a financing option to customers in
connection with the license of software. For fiscal 1997, sales of licenses
directly to end users accounted for 58% of total license revenues and sales to
OEM's and sales through resellers accounted for 42% of total license revenues.
At December 31, 1997, the Company's sales, marketing and support staff
totaled 986 regular employees in the North America region; 128 regular employees
in the Latin America region; 619 regular employees in Europe, the Middle East
and Africa; and 369 regular employees in the Asia/Pacific region.
LICENSING
END-USER LICENSING
The Company licenses its products to large companies and government
entities through its direct sales force, and to certain of these companies, as
well as smaller end-users, through its telemarketing sales force. The Company
believes that the common core technology of its database management system
products, based on standard operating systems and the SQL database language,
helps it sell into major corporations and government agencies that wish to
standardize their diverse computing environments. As a result, certain of these
end-user organizations have entered into general purchasing agreements with the
Company which offer volume discounts.
6
APPLICATION VENDOR LICENSING
Since its inception, the Company has licensed application vendors to
distribute its products. A typical application vendor develops an application
product (E.G., an insurance agency management system) using one of the Company's
products and then licenses the resultant application software to its customers
in the target market. The application vendor customer purchases a license for
use of the Company's product to develop an applications program. Depending on
the application program developed, it may include a run-only license, a full
version license or even multiple product licenses.
Application vendors develop applications using a wide array of
application development tools, including products from the Company, such as
Informix--NewEra, Informix--4GL and Informix--SQL, as well as products offered
by third parties. Applications developed using the Company's products are
generally portable across various brands of computers and different operating
systems.
The Company has specialized programs to support the application vendor
distribution channel. Under these programs, the Company provides to selected
application vendors a combination of marketing development services, consulting
and technical marketing support and discounts.
OEM LICENSING
The Company's products are also marketed with the assistance of the sales
forces of its OEM customers who have concluded that "solution selling" of a
combination of software and hardware to their respective customers enhances the
sales of their computer equipment. The Company believes that the compatibility
and range of applications for its products are significant to this distribution
channel.
DISTRIBUTOR LICENSING
The Company has established a network of full service international
distributors who provide local service and support, as well as the Company's
products, to their respective national markets. Distributors are used to
supplement the Company's direct sales force and enable the Company to sell its
products and services in countries where the Company has not established a
direct sales force.
PRODUCT DEVELOPMENT
The computer software industry is highly competitive and rapidly
changing. Consequently, the Company dedicates considerable resources to research
and development efforts to enhance its existing product lines and to develop new
products to meet new market opportunities. Most of the Company's current
software products and accompanying documentation have been developed internally;
however, the Company has acquired certain software products from others and
plans to do so again in the future.
Major product releases resulting from research and development projects
in fiscal 1997 included the new releases of Informix Dynamic Server; Universal
Data Option; Extended Parallel Option; Advanced Decision Support Option;
Informix Dynamic Server, Workgroup Edition; and the initial release of Web
Integration Option.
The Company's current product development efforts are focused on (i)
improving and enhancing current products and new products, with particular
emphasis on parallel computer architecture, user-defined database extensions,
Web technology integration, graphical desk top and system administration; (ii)
improving the Company's products to provide greater speed and support for larger
numbers of concurrent users; and (iii) adapting new products to the broad range
of computer brands and operating systems the Company currently supports and
adapting current products to new brands of computers and operating systems which
represent attractive market opportunities for the Company's products.
There can be no assurance that the Company's product development efforts
will be successful or that any new products will achieve significant market
acceptance.
7
As of December 31, 1997, the Company had 941 regular employees engaged in
research and development. In recent months, the Company has experienced high
attrition in its product development group and has had difficulty attracting
qualified replacement development personnel. Failure to attract and retain a
sufficient number of qualified development personnel would have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company's research and development expense for fiscal 1997, 1996 and
1995 was $139.3 million, $120.2 million and $85.6 million, respectively,
representing approximately 21%, 17% and 14% of revenues for such periods. In
addition, during fiscal 1997, 1996, and 1995 the Company capitalized product
development costs of $21.8 million, $28.4 million and $17.5 million,
respectively, in accordance with Statement of Financial Accounting Standards No.
86. See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Research and Development Expenses."
The market for the Company's products and services is characterized by
rapidly changing technology, changing customer needs, frequent new product
introductions and evolving industry standards that may render existing products
and services obsolete. The life cycles of the Company's products are difficult
to estimate. The Company's growth and future financial performance will depend
upon its ability to enhance its existing products and to introduce new products
on a timely and cost-effective basis and that meet dynamic customer
requirements. There can be no assurance that the Company will be successful in
developing new products or enhancing its existing products or that such new or
enhanced products will receive market acceptance or be delivered timely to the
market. The Company's product development efforts are expected to continue to
require substantial investments by the Company, and there can be no assurance
that the Company will have sufficient resources to make the necessary
investments. The Company has experienced product development delays in the past
and may experience delays in the future. Delays in the scheduled availability or
a lack of market acceptance of its products or failure to accurately anticipate
customer demand and meet customer performance requirements, including as a
result of recent attrition in the Company's product development group, could
have a material adverse effect on the Company's business results of operations
and financial condition. In addition, products as complex as those offered by
the Company may contain undetected errors or bugs when first introduced or as
new versions are released. There can be no assurance that, despite testing, new
products or new versions of existing products will not contain undetected errors
or bugs that will delay the introduction or commercial acceptance of such
products. A key determinative factor in the Company's success will continue to
be the ability of the Company's products to operate and perform well with
existing and future leading, industry-standard application software products
intended to be used in connection with RDBMS. Failure to meet existing or future
interoperability requirements of certain independent vendors and performance
requirements of certain independent vendors marketing such applications in a
timely manner could adversely affect the market for the Company's products.
Commercial acceptance of the Company's products and services could also be
adversely affected by critical or negative statements or reports by brokerage
firms, industry and financial analysts and industry periodicals concerning the
Company, its products, business or competitors or by the advertising or
marketing efforts of competitors, or other factors that could affect consumer
perception.
In recent years, the types and quantities of data required to be stored
and managed has grown increasingly complex and includes, in addition to
conventional character data, audio, video, text, and three dimensional graphics.
In 1996, the Company devoted substantial resources in developing the Company's
ORDBMS product line. The market for the products offering object-relational
database functionality is new and evolving, and its growth depends upon a
growing need to store and manage complex data and on broader market acceptance
of the Company's products as a solution for this need. There can be no assurance
that organizations will chose to make the transition from conventional RDBMS to
ORDBMS. Delays in market acceptance of object-relational database management
products offered by the Company could have an adverse effect on the Company's
results of operations and financial condition.
8
COMPETITION
Competitors in the relational database software market compete primarily
on the basis of product price and performance characteristics, name recognition,
technical product support, product training and services. With respect to
product performance, the Company believes that the principal competitive factors
include (i) application development productivity (I.E., the speed with which
applications can be built); (ii) database performance (I.E., the speed at which
database storage and retrieval functions are executed); (iii) product function
and features; (iv) the ability to support large warehouses of information; (v)
reliability, availability and serviceability; (vi) the distribution of software
applications and data across networks of computers from multiple suppliers; and
increasingly (vii) the ability to manage complex data and solve more complex
business problems based on such data. Although the Company believes that it
currently competes favorably with respect to such factors, there can be no
assurance that the Company can maintain its competitive position against current
and potential competitors, especially those with greater financial, marketing,
service, support, technical and other resources. The Company believes that the
technical advantages of its products, its approach to sales and marketing, its
relations with application vendors, OEMs and distributors and its customer
service and support contribute to its ability to compete in this market.
The Company faces intense competition in the market for RDBMS software
products. The market for the Company's products is subject to rapid
technological change and frequent new product introductions and enhancements,
and the Company's competitors in the market include several large vendors that
develop and market databases, applications, development tools or decision
support products. The Company's principal competitors include Computer
Associates International, Inc. ("Computer Associates"), IBM, Microsoft
Corporation ("Microsoft"), NCR/Teradata, Oracle Corporation ("Oracle") and
Sybase, Inc. ("Sybase"). Several of these competitors have significantly greater
financial, technical, marketing and other resources than the Company. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products than the Company. Any failure
by the Company to compete successfully with its existing competitors or future
competitors could have a material adverse effect on the Company's business,
results of operations and financial condition.
Several of the Company's competitors have announced the development of
enhanced versions of their principal database products that are intended to
improve the performance or expand the capabilities of their existing products.
New or enhanced products by existing competitors or new competitors could result
in greater price pressure on the Company's products. In addition, the industry
movement to new operating systems, like Windows NT, access through low-end
desktop computers, and access to data through the Internet may cause downward
pressure on prices of database software and related products. The bundling of
software products for promotional purposes or as a long-term pricing strategy by
certain of the Company's competitors could also result in reductions in the
price the Company may charge for its products. If such downward pressure on
prices were to occur, the Company's operating margins would be adversely
affected. Existing and future competition or changes in the Company's product or
service pricing structure or product or service offerings could result in an
immediate reduction in the prices of the Company's products or services. If
significant price reductions in the Company's products or services were to occur
and not be offset by increases in sales volume, the Company's business, results
of operation and financial condition would be adversely affected. There can be
no assurance that the Company will continue to compete successfully with its
existing competitors or will be able to compete successfully with new
competitors.
In addition, the Company's public announcement in August 1997 of the
pending restatement of its financial statements, delays in reporting operating
results for the second and third quarters of fiscal 1997 while the restatement
was being compiled, threatened de-listing of the Company's Common Stock from the
Nasdaq National Market as a result of the Company's failure to satisfy its
public reporting obligations, corporate actions to restructure operations and
reduce operating expenses and customer uncertainty
9
regarding the Company's financial condition adversely affected the Company's
ability to sell its products in fiscal 1997. In addition, since the beginning of
1997, the Company and its competitors in the RDBMS industry have experienced
substantially slower growth in the market for RDBMS products. The financial
restatement has now been completed, its results have been publicly disclosed and
the Company is current with respect to its public reporting obligations. In
addition, the Company believes that it has effectively controlled its operating
expenses and significantly improved its financial condition. Nevertheless, there
can be no assurance that uncertainties resulting from the restatement, including
ongoing customer concern about the Company's financial condition, will not
continue to have a materially adverse effect on the Company's competitive
position and results of operations.
INTELLECTUAL PROPERTY
The Company's success depends on proprietary technology. To protect its
proprietary rights, the Company relies primarily on a combination of patent,
copyright and trademark laws, trade secrets, confidentiality procedures,
contractual provisions contained in its license agreements and technical
measures. The Company seeks to protect its software, documentation and other
written materials under trade secret and copyright laws, which provide only
limited protection. The Company holds one United States patent and several
pending applications. There can be no assurance that any other patents covering
the Company's inventions will issue or that any patent, if issued, will provide
sufficiently broad protection or will prove enforceable in actions against
alleged infringers.
The Company's products are generally licensed to end-users on a
"right-to-use" basis pursuant to a license that restricts the use of the
products for the customer's internal business purposes. The Company also relies
on "shrink wrap" licenses, which include a notice informing the end-user that,
by opening the product packaging, the end-user agrees to be bound by the
Company's license agreement printed on the package. Despite such precautions, it
may be possible for unauthorized third parties to copy aspects of its current or
future products or to obtain and use information that the Company regards as
proprietary. In particular, the Company has licensed the source code of its
products to certain customers under certain circumstances and for restricted
uses. The Company has also entered source code escrow agreements with a number
of its customers that generally require release of source code to the customer
in the event of the Company's bankruptcy, liquidation or otherwise ceasing to
conduct business. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar or superior technology.
Policing unauthorized use of the Company's software is difficult, and while the
Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States, and
"shrink-wrap" licenses may be wholly or partially unenforceable under the laws
of certain jurisdictions. Litigation may be necessary in the future to enforce
the Company's intellectual property rights, to protect the Company's trade
secrets or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and diversion of
resources and management attention and could have a material adverse effect on
the Company's business, results of operations and financial condition.
The Company is not aware that any of its software product offerings
infringe the proprietary rights of third parties. There can be no assurance,
however, that third parties will not claim infringement by the Company with
respect to its current or future products. The Company expects that software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
10
EMPLOYEES
As of December 31, 1997, the Company and its subsidiaries had 3,489
regular employees worldwide, including 2,102 in sales, marketing and support;
941 in research and development; 69 in operations and 377 in administration and
finance. Of the Company's total employees at December 31, 1997, approximately
1,447 were located outside North America. None of the Company's U.S. employees
are represented by a labor union. A small number of employees located outside of
the United States are represented by labor unions, and the degree and scope of
representation varies from country to country. The Company has not experienced
any work stoppages either domestically or internationally.
Since the first quarter of fiscal 1997, the Company has experienced a
significant number of voluntary resignations and has taken selective actions to
reduce the number of employees in certain functional areas. The Company had
3,489 employees at December 31, 1997, compared to 4,491 at December 31, 1996. In
fiscal 1997, the Company experienced high attrition rates in its product
development and sales groups and has had trouble attracting qualified
replacement personnel. The competition for employees in the software industry is
intense, and the Company expects that such competition will continue for the
foreseeable future. The Company has experienced difficulty in locating
candidates with appropriate qualifications and believes that recent financial
and business developments at the Company have made recruitment more difficult.
ITEM 2. PROPERTIES
The Company's headquarters and its principal marketing, finance, sales,
administration, customer service and research and development operations are
located in five buildings in a corporate office park in Menlo Park, California.
The Company currently leases approximately 214,000 square feet of space in these
buildings. The leases for space in two of these buildings expire in September
2001. The leases for spaces in the remaining three of the buildings were
recently renewed for an additional five year term expiring in March 2003. In
addition, the Company leases space totalling approximately 33,000 square feet in
two additional buildings in close proximity. These leases expire in May 1998 and
October 2000. The Company anticipates renewing the lease expiring in May 1998 at
prevailing market rates.
In addition, certain of the Company's research and development
facilities, a portion of its customer service organization, its principal
domestic manufacturing facility and its telemarketing organization are located
in a 134,000 square foot facility in Lenexa, Kansas. The buildings are leased to
the Company under a lease expiring in April 2003, subject to renewal for up to
two additional five year terms. The Lenexa, Kansas facility was leased to the
Company by a partnership of which the Company held a 50% partnership interest.
The Company entered an agreement to sell 49.9% of its interest in the
partnership to the other partner. Such sale closed in the first quarter of
fiscal 1998. The Company also leases office space, principally for sales and
support offices, in a number of facilities in the United States, Canada and
outside North America. The Company believes that its current facilities are
adequate to meet its needs through the next twelve months.
Some of the research and development operations for the Company's tools
products and a portion of customer service and sales training are located in
Oakland, California. The Company leases approximately 130,000 square feet at
this site, and the lease expires in May 2003. The Company also leases 47,276
square feet in Portland, Oregon, primarily for its research and development
group. The lease on approximately one-half of this space expires on October 31,
1998. The lease on the remaining space expires in March 2000.
In December 1996, the Company announced plans to relocate its corporate
headquarters from the Menlo Park facilities to a new corporate campus in Santa
Clara, California. In January 1997, the Company entered into a two-year lease
for 27 acres of undeveloped commercial real estate in Santa Clara, which was
intended to be used for construction of the new headquarters facility. The
Company also obtained an option to purchase the land for $61.5 million. In order
to secure performance of its obligations under the
11
lease, the Company pledged $61.5 million in cash collateral to the lessor. In
April 1997, the Company exercised its option to purchase the land, and in
December 1997 completed the sale of the real estate for net proceeds of
approximately $59.3 million. In addition, in November 1996, the Company had
leased approximately 200,000 square feet of office space in Santa Clara on
property located adjacent to the 27 acre undeveloped parcel. In December 1997,
the Company assigned its rights under such lease agreement to an unrelated third
party, although the Company remains contingently liable for the lease payments
thereunder.
ITEM 3. LEGAL PROCEEDINGS
ACTIONS ARISING UNDER FEDERAL AND STATE SECURITIES LAWS
Beginning on or about April 16, 1997, a total of 24 complaints alleging
violations of the federal securities laws were filed against the Company, Ernst
& Young LLP, the Company's independent auditors and certain Named Individual
Defendants (listed below) in the United States District Court for the Northern
District of California. Of the 24 complaints, 22 have been filed as purported
class actions by individuals who allege that they are individual investors who
purchased the Company's Common Stock during the purported class period; the
alleged class periods in the different complaints vary according to the date on
which the complaints were filed. The complaints name some or all of the
following current and former officers and directors of the Company as
defendants: Phillip E. White, Howard H. Graham, David H. Stanley, Ronald M.
Alvarez, Karen Blasing, D. Kenneth Coulter, Ira H. Dorf, Stephen E. Hill, Myron
(Mike) Saranga, Steven R. Sommer, Michael R. Stonebraker and Edwin C. Winder
(the "Named Individual Defendants"). On August 20, 1997, the District Court
entered an order consolidating all of the separately-filed class actions pending
at that time, designating the action as IN RE INFORMIX CORPORATION SECURITIES
LITIGATION, and designating as "related cases" all cases brought under the
federal securities laws then pending and any that may be filed after that date.
A consolidated amended class action complaint is set to be filed on April 3,
1998, and defendants will file a response to that consolidated, amended
complaint shortly thereafter. As required by the provisions of the Exchange Act,
as amended by the Private Securities Litigation Reform Act of 1995, the Court
has designated the lead plaintiffs in the federal action and has appointed lead
plaintiffs' counsel.
The existing federal court complaints allege that the Company, the Named
Individual Defendants and Ernst & Young issued false or misleading statements in
the Company's filings with the Commission, press releases, statements to
securities analysts and other public statements regarding its financial results
and business prospects. The alleged class periods vary among the complaints; the
longest class period extends from February 7, 1995 through November 18, 1997. In
particular, plaintiffs allege that defendants overstated the Company's revenue
and earnings during the time period by improperly recognizing revenue from sales
of software licenses. All of these actions allege that the defendants' false and
misleading statements violate section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder. The complaints further allege that the Named Individual
Defendants sold the Company's Common Stock while in the possession of adverse
material non-public information. The existing complaints, in general, do not
specify the amount of damages that plaintiffs seek.
Defendants have not filed any answers, motions to dismiss or other
responsive pleadings in the federal action. Until plaintiffs in IN RE INFORMIX
CORPORATION SECURITIES LITIGATION file their consolidated, amended complaint,
defendants are unable to specify their factual defenses in that action.
On or about March 19, 1998, a complaint alleging securities and common
law fraud and misrepresentation causes of action was filed in the United States
District Court for the Northern District of California. This complaint,
captioned WILLIAMS V. INFORMIX CORPORATION, ET AL., alleges both individual and
class claims on behalf of former securities holders of Illustra Information
Technologies, Inc. ("Illustra") who exchanged their Illustra securities for
securities of the Company in February 1996 in connection with the Company's
February 1996 acquisition of Illustra pursuant to an Agreement and Plan of
Reorganization
12
(the "Illustra Agreement"). The members of the purported class in WILLIAMS are
included within the definition of the class purportedly represented in the IN RE
INFORMIX CORPORATION SECURITIES LITIGATION action also pending in the Northern
District of California. The WILLIAMS complaint, like the previously-filed
federal complaints, alleges that the Company and certain of its former officers
and/or directors, and its independent auditors, issued false or misleading
statements regarding the Company's reported financial results and business
prospects.
Three purported securities class actions containing allegations similar
to the federal actions were filed in the Superior Court of the State of
California, County of San Mateo between May 19, 1997 and August 25, 1997. Those
actions, captioned RILEY V INFORMIX CORPORATION ET AL., DAYANI V. INFORMIX
CORPORATION ET AL., AND GOLDSTEIN V. WHITE ET AL., contained factual allegations
nearly identical to the allegations set forth in the federal court complaints.
The Superior Court has consolidated these actions and has appointed lead
plaintiffs' counsel. By stipulation, plaintiffs filed a consolidated, amended
complaint on December 23, 1997. The state court consolidated, amended complaint
names as defendants the Company, Ernst & Young and the Named Individual
Defendants. The claims in the consolidated amended state complaint arise under
California securities, fraud and unfair business practices statutes.
The state court consolidated, amended complaint alleges that the
defendants issued false financial statements which were not prepared in
conformity with Generally Accepted Accounting Principles for fiscal years 1996,
1995 and 1994, materially overstating the Company's revenue. Plaintiffs allege
that defendants recorded as revenue approximately $300 million from software
license sales which should not have been recorded because INTER ALIA, revenue
was recognized on sales to resellers before end-users were identified; revenue
was recognized in circumstances where customers had rights of return or
cancellation; and the Company recognized revenue from barter transactions in
which the Company allegedly exchanged software licenses for products that had no
value to the Company. Plaintiffs further allege that while the Company's stock
price was artificially inflated due to the overstatement of revenue, the
defendants used the Company's stock to make corporate acquisitions, and the
Named Individual Defendants sold stock while in possession of material adverse
non-public information. The alleged class period in the state court
consolidated, amended complaint is February 7, 1995 through November 18, 1997.
Defendants filed demurrers to the state court consolidated, amended
complaint on February 13, 1998. Defendants base their demurrers to the
consolidated, amended complaint in this action on the grounds that certain of
the individual defendants made no actionable statements during the alleged class
period, the Company did not engage in any market activity during the alleged
class period, the plaintiffs did not actually rely upon any of the alleged false
and misleading statements, the California statutory unfair business practices
claims are inapplicable to securities transactions, and the consolidated,
amended complaint fails to plead the alleged fraud with sufficient
particularity. The hearing on defendants' demurrers is set for May 5, 1998. The
Company will not file an answer in this action unless the Court overrules the
pending and any subsequent demurrers. Further, the Company is not in a position
to state its factual defenses to the consolidated, amended complaint until the
Court rules upon the pending and any subsequent demurrers.
DERIVATIVE ACTIONS
The Company also has been named as a nominal defendant in eight
derivative actions, purportedly brought on its behalf, filed in the Superior
Court of the State of California, County of San Mateo. The Court has appointed
lead plaintiff's counsel in all of these derivative actions, and the cases have
been consolidated under the caption IN RE INFORMIX CORPORATION DERIVATIVE
LITIGATION. The consolidated, amended complaint alleges that, based upon the
facts alleged in the federal and state securities class actions, defendants
breached their fiduciary duties to the Company, engaged in abuses of their
control of the Company, were unjustly enriched by their sales of the Company's
Common Stock, engaged in insider trading in violation of California law and
published false financial information in violation of California law. The
consolidated, amended complaint names as defendants Ernst & Young, the Named
Individual
13
Defendants and Albert F. Knorp, Jr., James L. Koch, Thomas A. McDonnell and
Cyril J. Yansouni, non-management directors of the Company. The plaintiff seeks
unspecified damages on the Company's behalf from each of the defendants. On
December 18, 1997, plaintiffs served their first amended, consolidated
derivative complaint.
The Company, on whose purported behalf the derivative action is asserted,
and the individual defendants and Ernst & Young, against whom the claims are
alleged, filed demurrers to the consolidated derivative complaint on February 6,
1998. The Company's demurrer in this action is based upon the fact that the
plaintiff did not make demand on the Company's board prior to filing the
derivative action as is required by governing Delaware law. In addition, the
Company's current and former officers and directors have brought demurrers to
the consolidated, amended complaint on the grounds that plaintiffs fail to plead
any of their claims with sufficient particularity and that certain of
plaintiffs' California statutory causes of action do not apply, by their terms,
to officers and directors of a Delaware corporation. The hearing on the
Company's demurrers, which, if granted, would be dispositive, is set for March
19, 1998. The defendants' demurrers are scheduled for hearing on May 5, 1998.
The Company will not file an answer in this action unless the Court overrules
the pending or any subsequent demurrer. Further, the Company is not in a
position to state its factual defenses to the consolidated, amended complaint
until the Court rules upon the pending demurrer. Because of the nature of
derivative litigation, any recovery in the action would inure to the benefit of
the Company.
INDEMNIFICATION AGREEMENTS AND LIABILITY INSURANCE
Pursuant to Delaware law, the Company's Certificate of Incorporation, its
Bylaws and the indemnification agreements between the Company and each of its
current and former officers and directors, the Company is obligated to indemnify
its current and former officers and directors for certain liabilities arising
from their employment with or service to the Company. These indemnification
obligations require the Company to indemnify its current and former officers and
directors for any suit or other proceeding, threatened or actual, whether civil,
criminal, administrative, investigative, appellate or any other type of
proceeding, that arises as a result of any act or omission in the indemnitee's
capacity as an officer or director of the Company to the fullest extent
permitted under Delaware or any other applicable law. The indemnification
extends to any and all expenses (including but not limited to attorneys' fees
and costs, and any other out-of-pocket expense) and/or liabilities of any type
(including but not limited to judgments, fines, excise taxes or penalties under
the Employee Retirement Income Security Act ("ERISA"), and amounts paid in
settlement) reasonably incurred in connection with the investigation, defense,
settlement or appeal of such proceedings. The obligation to provide
indemnification does not apply if the indemnitee is adjudicated to be liable for
fraudulent or criminal conduct.
The Company has purchased directors' and officers' liability insurance to
reimburse it for the costs incurred in connection with its indemnification
obligations described above. For the period from August 1996 to August 1997, the
period in which most of the claims against the Company and certain of its
directors and officers were asserted, the Company had in place three directors
and officers liability insurance policies (the "1996 and 1997 D&O Policies"),
each providing $5 million in coverage for an aggregate of $15 million. The
primary policy and first excess policy were issued by Lloyds of London. The
second excess policy was issued by Admiral Insurance Company. The insurance
carriers have taken the position that litigation filed after the policy periods
of the 1996 and 1997 D&O Policies but arising from the same facts and
circumstances as claims filed during the period from August 1996 to August 1997,
"relates back" to the 1996 and 1997 D&O Policies. Thus, the issuance carriers
assert that actions filed after August 1997 do not implicate coverage under the
Company's D&O insurance policies for the period August 1997 to August 1998 (the
"Current D&O Policies"). The Current D&O Policies provide aggregate coverage of
$20 million, subject to various exclusions, including claims relating to the
restatement of the Company's financial statements. The 1996 and 1997 D&O
Policies provide that 100 percent of the costs incurred in defending claims
asserted jointly against the Company and its current and former officers and
14
directors are allocable to the individuals' defense and, thus, are covered by
the policy. However, the 1996 and 1997 D&O Policies do not provide any separate
coverage for the Company. Moreover, the Company does not have separate insurance
to cover the costs of its own defense or to cover any liability for any claims
asserted against it. The Company has not currently set aside any financial
reserves relating to any of the above-referenced actions.
In addition, in July 1997, the Commission issued a formal order of
investigation of the Company and certain unidentified individuals associated
with the Company with respect to non-specified accounting matters, public
disclosures and trading activity in the Company's securities. The Company is
cooperating with the investigation and is providing all information subpoenaed
by the Commission.
ILLUSTRA ESCROW
In January 1997, pursuant to the Illustra Agreement, Informix made a
claim to certain shares held in an escrow fund. In response, the Illustra
shareholders have claimed that the Company wrongfully caused these shares to be
retained in escrow, thereby harming the Illustra shareholders. The Illustra
securities holders have filed a demand for arbitration with the private
arbitration service agreed upon by the parties to the Illustra Agreement;
however, at present, no litigation or arbitration proceedings have been
commenced with respect to the Illustra escrow. In March 1998, a complaint was
filed against the Company on behalf of former Illustra shareholders alleging
securities and common law fraud and misrepresentation causes of actions. See
"--Actions Arising Under Federal and State Securities Laws."
GENERAL
The pending federal and state securities actions are in the early stages
of discovery. Consequently, at this time it is not reasonably possible to
estimate the damages, or the range of damages, that the Company might incur in
connection with such actions. However, the uncertainty associated with
substantial unresolved litigation can be expected to have an adverse impact on
the Company's business. In particular, such litigation could impair the
Company's relationships with existing customers and its ability to obtain new
customers. Defending such litigation will likely result in a diversion of
management's time and attention away from business operations, which could have
a material adverse effect on the Company's results of operations. Such
litigation may also have the effect of discouraging potential acquirors from
bidding for the Company or reduce the consideration such acquirors would
otherwise be willing to pay in connection with an acquisition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders
during the fourth quarter of fiscal 1997.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the National Market of The Nasdaq
Stock Market under the symbol "IFMX." The following table lists the high and low
closing sales prices of the Company's Common Stock for the periods indicated.
HIGH LOW
--------- ---------
FISCAL YEAR ENDING DECEMBER 31, 1998:
First Quarter (through March 30, 1998)....................................................... $ 8.84 $ 5.28
FISCAL YEAR ENDING DECEMBER 31, 1997:
Fourth Quarter............................................................................... $ 8.03 $ 4.06
Third Quarter................................................................................ 12.20 6.28
Second Quarter............................................................................... 15.13 6.78
First Quarter................................................................................ 24.00 15.25
FISCAL YEAR ENDED DECEMBER 31, 1996:
Fourth Quarter............................................................................... $ 28.63 $ 17.63
Third Quarter................................................................................ 30.25 20.31
Second Quarter............................................................................... 26.88 18.38
First Quarter................................................................................ 35.88 26.38
At December 31, 1997, there were approximately 3,800 stockholders of
record of the Company's common stock, as shown in the records of the Company's
transfer agent.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common
Stock. The Company expects to retain future earnings, if any, for use in the
operation of its business and does not anticipate paying any cash dividends on
its Common Stock in the foreseeable future. The holders of the Company's Series
B Convertible Preferred Stock (the "Series B Preferred") are entitled to receive
a cumulative dividend at an annual rate of 5% of the face value of each share of
Series B Preferred, resulting in an aggregate annual dividend accrual of $2.5
million. As of December 31, 1997, aggregate accrued, but unpaid, dividends of
approximately $301,000 were owed to the holders of the Series B Preferred. The
dividend is generally payable upon the conversion or redemption of the Series B
Preferred and may be paid in cash or, at the Company's election and subject to
certain conditions, in shares of Common Stock. In addition, the Certificate of
Designation of the Series B Preferred prohibits the Company from paying any
dividend or other distribution on any security ranking junior to the Series B
Preferred. The Company's Series A-1 Convertible Preferred Stock (the "Series A-1
Preferred") is senior to the Series B Preferred. In the event the Company fails
to satisfy certain contractual obligations under the agreements pursuant to
which the Series A-1 Preferred was issued, the holders of the Series A-1
Preferred are entitled to a 15% annual dividend on the face value of each share
of Series A-1 Preferred which would, based on 160,000 shares of Series A-1
Preferred outstanding as of December 31, 1997, result in an aggregate annual
dividend of $6.0 million, payable quarterly in cash for so long as the Company
is in breach of such obligations. As of the date of this report, there were no
shares of Series A-1 Preferred outstanding. However, Fletcher International
Limited ("Fletcher") holds a presently exercisable warrant to purchase up to
80,000 shares of Series A-1 Preferred. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Recent Developments."
16
RECENT SALES OF UNREGISTERED SECURITIES
The Company has issued and sold the following unregistered securities
during the period covered by this report which have not previously been reported
in the Company's quarterly reports on Form 10-Q:
1. On August 12, 1997, pursuant to a Subscription Agreement dated of
even date (the "Subscription Agreement"), the Company sold 160,000 shares of its
Series A Convertible Preferred Stock (the "Series A Preferred") for aggregate
gross proceeds of $40,000,000 to Fletcher. The Series A Preferred was
convertible into shares of Common Stock at any time after issuance and would
have automatically converted into Common Stock 18 months following the date of
its issuance by the Company. At the holder's option, each share of Series A
Preferred, which had a face value of $250, was convertible into Common Stock at
a per share price equal to 101% of the Common Stock average price for the 30
trading days ending five trading days prior to the conversion, but not greater
than the lesser of (i) 105% of the Common Stock average price of the first five
trading days of such 30 day period, or (ii) $12. The number of shares of Common
Stock to be issued upon conversion varied based on future stock price movements.
In connection with the sale of the Series A Preferred, the Company issued a
warrant to purchase up to 140,000 shares of its Series A Preferred (the "Series
A Warrant") to Fletcher with an aggregate purchase price of $35,000,000. The
Series A Warrant was generally exercisable from and after August 13, 1997 to and
including February 15, 1998, with a provision for extension of the warrant
exercise period under certain circumstances.
2. On November 17, 1997, pursuant to an amendment to the Subscription
Agreement, the Registrant issued 160,000 shares of its Series A-1 Preferred to
Fletcher in exchange for the cancellation of the Series A Preferred that had
been issued in August 1997. The Series A-1 Preferred is generally convertible
according to the same terms as the Series A Preferred described above. In
connection with the issuance of the Series A-1 Preferred, the Company issued a
warrant to purchase up to 140,000 shares of its Series A-1 Preferred to Fletcher
with an aggregate purchase price of $35,000,000 in exchange for the cancellation
of the Series A Warrant (the "Series A-1 Warrant"). The Series A-1 Warrant is
generally exercisable from its date of issuance until April 15, 1999, with a
provision for extension of the warrant exercise period under certain
circumstances.
3. On November 19, 1997, pursuant to a Securities Purchase Agreement
dated November 17, 1997, the Company sold 50,000 shares of newly authorized
Series B Preferred for aggregate gross proceeds of $50,000,000 to an investor
group led by an affiliate of Credit Suisse First Boston. Upon conversion of the
Series B Preferred, the Company is required to issue a warrant to acquire a
number of shares equal to 20% of the shares of Common Stock issued upon the
conversion of the Series B Preferred but no less than 1,300,000 shares, together
with an additional increment of warrants to purchase 200,000 shares of Common
Stock (collectively, the "Series B Warrants"). The Series B Warrants may be
exercised until 2002. In connection with the sale of the Series B Preferred, the
Company issued 100,000 shares of its Common Stock to The Shemano Group, a
financial advisor to the Company ("Shemano"). In addition, the Company agreed to
issue Shemano a warrant to purchase up to 50,000 shares of the Company's Common
Stock if the closing sales price of the Company's Common Stock as reported on
The Nasdaq Stock Market on May 17, 1998 does not exceed $12.50.
4. On February 13, 1998, Fletcher exercised the Series A-1 Warrant in
part and the Company issued 60,000 shares of Series A-1 Preferred (the "Series
A-1 Warrant Stock") to Fletcher for aggregate gross proceeds of $15.0 million.
In addition, pursuant to the Subscription Agreement, Fletcher converted 220,000
shares of Series A-1 Preferred into 12,769,908 shares of the Company's Common
Stock.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Regulation S under the
Securities Act, Section 4(2) of the Securities Act, Regulation D promulgated
thereunder or Section 3(a)(9) of the Securities Act as transactions by an issuer
not involving a public offering or as an exchange of securities of the Company
with existing security holders where no commission or other renumerator is paid
or given directly or indirectly for soliciting such exchange. The
17
recipients of securities in each such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and warrants issued in such transactions. All recipients
had adequate access, through their relationships with the Company, to
information about the Registrant.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL OVERVIEW
FIVE-YEAR SUMMARY (1)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997(2) 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues........................................ $ 662,298 $ 727,849 $ 632,770 $ 451,969 $ 353,115
Net income (loss)................................... (356,867) (73,565) 38,600 48,293 54,989
Net income (loss) per common share
Basic............................................. $ (2.36) $ (0.49) $ 0.27 $ 0.35 $ 0.42
Diluted........................................... $ (2.36) $ (0.49) $ 0.26 $ 0.34 $ 0.40
Retained earnings (accumulated deficit)............. $ (280,046) $ 78,723 $ 154,098 $ 115,668 $ 86,484
Total assets........................................ 563,244 881,998 682,445 447,769 328,001
Long-term obligations............................... 6,311 2,359 2,846 892 451
- ------------------------
The Company has not paid and does not anticipate paying cash dividends on its
Common Stock. The Company is obligated to pay a cumulative dividend on its
outstanding Series B Preferred. The dividend accumulates at an annual rate of 5%
of the face value of the outstanding Series B Preferred and is generally payable
upon conversion. See "Market for Registrant's Common Equity and Related
Stockholder Matters--Dividend Policy" and "Factors That May Affect Future
Results--Risks Associated with Preferred Stock Financings."
(1) See Note 1 to Consolidated Financial Statements for information concerning
the Company's restatement of its financial statements. All financial data in
the table above as of and for fiscal 1996, 1995 and 1994 presented reflect
such restatement.
(2) In fiscal 1997, the Company recorded a restructuring charge of $108.2
million, a write-down of certain assets in Japan of $30.5 million and a
write-down of capitalized software of $14.7 million.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER
"FACTORS THAT MAY AFFECT FUTURE RESULTS" IN THIS ITEM 7 AND ELSEWHERE IN, OR
INCORPORATED BY REFERENCE INTO, THIS REPORT.
OVERVIEW
The Company is a leading multinational supplier of information management
software. It derives license revenues principally from licensing its RDBMS
software and derives service revenues from providing technical product support
and product updates and consulting and training services to customers. The
Company's products are sold directly to end-users and indirectly through
application resellers, OEM's and distributors.
In the first quarter of fiscal 1997, the Company experienced a
substantial shortfall in license revenues compared to forecasts, resulting in a
substantial loss for that quarter. The shortfall in revenue was due to slow
growth in demand for RDBMS products as well as the Company's inability to close
a number of sales transactions that management anticipated would close by
quarter's end, particularly in Europe.
As a result of the shortfall in license revenues for the first quarter of
fiscal 1997, the Company, in the second quarter and again in the third quarter
of fiscal 1997, initiated an internal restructuring of its operations intended
to reduce operating expenses and improve the Company's financial condition.
These restructurings included selective reductions in headcount and leased
facilities and the downsizing, elimination or conversion into solution labs of
the Company's planned Information Superstores. Costs associated with the
restructurings totaled approximately $108.2 million and had a material adverse
effect on the Company's results of operations for fiscal 1997. In addition, the
Company issued newly designated series of Preferred Stock in two financing
transactions which resulted in aggregate net proceeds of $87.6 million to the
Company (excluding a $1.0 million fee paid to a financial advisor of the Company
in connection with the sale of the Series B Preferred) and entered into a senior
secured credit facility agreement with available proceeds of up to $75.0
million, of which the Company was eligible to borrow $47.0 million at December
31, 1997, based on certain eligibility criteria. See "Recent Sales of
Unregistered Securities" and "--Liquidity and Capital Resources."
In August 1997, the Company announced that it had become aware of errors
and irregularities that affected the timing and the dollar amount of reported
earned revenues from license transactions for all annual periods in the three
years ended December 31, 1996. These errors and irregularities included
unauthorized and undisclosed arrangements or agreements between Company
personnel and resellers, recognition of revenue on certain transactions in
reporting periods prior to contract acceptance, the recording of certain
transactions that lacked economic substance and the recording of maintenance
revenue as license revenue. The unauthorized and undisclosed agreements with
resellers introduced acceptance contingencies, permitted resellers to return
unsold licenses for refunds, extended payment terms or committed the Company to
assist resellers in selling the licenses to end-users. Accordingly, license
revenues from these transactions that were recorded at the time product was
delivered to resellers should have instead been recorded at the time all
conditions to the sale lapsed. Because of the pervasiveness of the unauthorized
arrangements with resellers in the 1994, 1995 and 1996 accounting periods, the
Company concluded that all revenue from license agreements with resellers,
except for those licenses sold and billed on a per copy basis, should be
recognized only when the licenses were resold or utilized by resellers and all
related obligations had been satisfied. In addition, amounts received from
resellers or financial institutions as prepayments of software license fees in
advance of revenue recognition should be recorded as advances
19
on unearned license revenue. The financial review undertaken by the Company
resulted in the restatement of the Company's financial results for fiscal 1996,
1995 and 1994 and for the first quarter of fiscal 1997. The Company publicly
disclosed the results of the restatement in November 1997.
In connection with the errors and irregularities discussed above, a
number of conditions which collectively represented a material weakness in the
Company's internal accounting controls were identified. These conditions
included a deterioration in the Company's accounting controls at corporate and
regional management levels, and a related failure to stress the importance of
these controls, an inappropriate level of influence, principally by the
Company's sales organization, over the revenue recognition process and an
apparent lack of clarity and consistent understanding within the Company
concerning the application of the Company's revenue recognition policies to
large, complex reseller license transactions. To address the material weakness
represented by these conditions, the Company is implementing a plan to
strengthen the Company's internal accounting controls. This plan includes
updating the Company's revenue recognition policies regarding accounting and
reporting for large, complex reseller license transactions, developing and
conducting educational programs to help implement such policies, changing the
Company's corporate and regional accounting and reporting structure and
re-establishing the internal audit function reporting to the Company's Board of
Directors.
As a result of the restatement, total revenues were reduced from amounts
previously reported by $211.5 million from $939.3 million as originally reported
to $727.8 million, by $81.4 million from $714.2 million as originally reported
to $632.8 million, and by $18.1 million from $470.1 million as originally
reported to $452.0 million for fiscal 1996, 1995 and 1994, respectively. The
restatement also resulted in an increase in revenues of $15.5 million from
$133.7 million as originally reported to $149.2 million for the first quarter of
fiscal 1997. In addition, the restatement resulted in a reduction in net income
of $171.4 million from $97.8 million as originally reported to a loss of $73.6
million for fiscal 1996; a reduction in net income of $59.0 million from $97.6
million as originally reported to $38.6 million for fiscal 1995; and a reduction
in net income of $13.6 million from $61.9 million as originally reported to
$48.3 million for fiscal 1994. The restatement had a material adverse effect on
the Company's financial condition, most notably evidenced by substantial
reductions in retained earnings and working capital. At December 31, 1996, after
giving effect to the restatement, the Company's working capital decreased $255.3
million from $258.4 million as originally reported to $3.1 million. At December
31, 1997, the Company had a working capital deficit of $140.2 million. The
substantial reductions in working capital at December 31, 1997 and 1996 reflect
substantial operating losses and the addition of "advances on unearned license
revenue" as a current liability on the Company's balance sheet. Such advances
totaled $180.0 million at December 31, 1997 and $239.5 million at December 31,
1996.
The Company's public announcement of the pending restatement, delays in
reporting operating results for the second and third quarters of fiscal 1997
while the restatement was being compiled, threatened de-listing of the Company's
Common Stock from the Nasdaq National Market as a result of the Company's
failure to satisfy its public reporting obligations, corporate actions to
restructure operations and reduce operating expenses, and customer uncertainty
regarding the Company's financial condition adversely affected the Company's
ability to sell its products in fiscal 1997. The financial restatement has now
been completed, its results have been publicly disclosed and the Company is
current with respect to its public reporting obligations. In addition, the
Company believes that it has effectively controlled its operating expenses and
significantly improved its financial condition. Nevertheless, adverse market
conditions, including significant competitive pressures in the Company's markets
and ongoing customer uncertainty about the Company's financial condition and
business prospects, may continue to have an adverse effect on the Company's
ability to sell its products and results of operations.
20
FISCAL YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The following table sets forth operating results as a percentage of net
revenues for the three years ended December 31, 1997, respectively.
YEARS ENDED DECEMBER
31,
---------------------
1997 1996 1995
----- ----- -----
PERCENT OF NET
REVENUE
---------------------
Net revenues:
Licenses.......................................................................... 57% 68% 72%
Services.......................................................................... 43 32 28
----- ----- -----
Total net revenues............................................................ 100 100 100
Cost and expenses:
Cost of software distribution..................................................... 10 6 6
Cost of services.................................................................. 25 20 14
Sales and marketing............................................................... 63 57 48
Research and development.......................................................... 21 16 14
General and administrative........................................................ 13 9 8
Write-off of goodwill and long-term assets........................................ 5 -- --
Write-off of acquired research and development.................................... 1 -- --
Restructuring charges............................................................. 16 -- --
Merger expenses................................................................... -- 1 --
----- ----- -----
Total expenses................................................................ 154 109 90
----- ----- -----
Operating income (loss)............................................................. (54) (9) 10
----- ----- -----
Net income (loss)................................................................... (54)% (10)% 6%
----- ----- -----
----- ----- -----
Informix's operating results for fiscal 1997 were significantly below the
prior year due to decreases in license revenue and increases in costs and
expenses. Revenue declined 9% for fiscal 1997 in comparison to fiscal 1996.
Revenue declined 9%, 7%, 9% and 2% in North America, Asia/Pacific, Europe and
Latin America, respectively. The increase in operating expenses reflects
continued expansion of product and customer support organizations through the
early months of fiscal 1997 as well as incremental legal and audit expenses
related to the stockholder lawsuits and the restatement process, charges of
$30.5 million related to the Company's Japanese operations, $108.2 million for
restructuring charges, $14.7 million for write-down to net realizable value of
previously capitalized software costs and $7.0 million for a write-off of
acquired research and development during the period. The lower revenues combined
with increased operating costs resulted in an operating loss of $357.3 million
for the year. See "Legal Proceedings," "--Cost of Software Distribution,"
"--Write-off of Acquired Research and Development," "--General and
Administrative Expenses" and "--Restructuring Charges."
Informix's operating results were affected negatively in fiscal 1996 as a
result of operating expenses growing more rapidly than revenues. Informix
continued to invest heavily in personnel in the areas of sales, marketing and
customer service and research and development and incurred integration expenses
and fees associated with the acquisition in February 1996 of Illustra. In
December 1996, Informix began shipping its Universal Server product. Informix
incurred significant marketing expenses in connection with the initial
announcement and launch of the Universal Server in fiscal 1996. These
development, integration and marketing expenses adversely affected Informix's
operating margins in fiscal 1996.
REVENUES
The Company derives revenues from licensing its software and providing
post-license technical product support and updates to customers and from
consulting and training services. License revenues may
21
involve the shipment of product by the Company or the granting of a license to a
customer to manufacture products. Service revenues consist of customer telephone
or direct support, product update rights, consulting and training fees. Total
net revenues were $662.3 million, $727.8 million and $632.8 million for fiscal
1997, 1996 and 1995, respectively. Between December 31, 1996 and 1997, total net
revenues decreased by 9% or $65.5 million, primarily as a result of a
substantial decrease in license revenues, partially offset by an increase in
service revenues. Between December 31, 1995 and 1996, total net revenues
increased by 15% or $95.1 million.
LICENSE REVENUES
The Company sells its products directly to end-users as well as through
resellers, including OEM's, distributors and VAR's. During fiscal 1996, the
Company increased the focus on its reseller channels to establish partnerships
with hardware and application vendors in order to utilize their sales force,
obtain access to their installed base of customers and benefit from their
consulting and systems integration organizations. The Company recognizes license
revenue from resellers, except for those sold and billed on a per copy basis,
when the licenses are resold or utilized by the reseller and all related
obligations have been satisfied. License revenues accounted for 57%, 68% and 72%
of total revenues in fiscal 1997, 1996 and 1995, respectively. The year-to-year
declines in license revenues as a percentage of total revenues reflect the fact
that service revenues have grown at a faster pace than license revenues, and
that license revenues declined substantially in fiscal 1997.
License revenue declined by 24% to $376.6 million for fiscal 1997 from
$496.0 million for fiscal 1996. In the first quarter of fiscal 1997, license
revenues decreased 43% compared to the fourth quarter of fiscal 1996. This
decrease was primarily due to slow growth in demand for RDBMS products as well
as the Company's inability to close a number of sales transactions that
management anticipated would close by quarter's end, particularly in Europe. In
the second quarter of fiscal 1997, license revenue increased 27% compared to the
first quarter, principally as a result of stronger product license sales in
North America. In the third quarter of fiscal 1997, license revenues decreased
29% compared to the second quarter. The decrease in the third quarter was
attributable to a significant extent to decreased product license sales in
Europe and Latin America and customer uncertainties resulting from the Company's
announcement of the restatement of its financial statements in August 1997 and
restructuring activities in September 1997. During the fourth quarter of fiscal
1997, license revenues increased 36% as compared to the third quarter of fiscal
1997. The increase in the fourth quarter of fiscal 1997 was principally due to
increased license sales in Europe and Latin America, which the Company believes
was due to improved customer confidence about the Company and its financial
condition following the announcement of its restated financial statements.
The Company does not believe that the decrease in license revenue in
fiscal 1997 compared to fiscal 1996 reflects a reduced acceptance of the
Company's products or a reduced competitive advantage of its products. The
Company believes that this decrease was primarily attributable to the slowing
growth in the market for RDBMS products and customer uncertainty about the
Company's financial condition and viability, due to the Company's operating
losses in the first three quarters of fiscal 1997, the announcement of the
restatement, the delays in reporting operating results for the second and third
quarters of fiscal 1997, the threatened de-listing of the Company's Common Stock
from the Nasdaq National Market as a result of the Company's failure to satisfy
its public reporting obligations, and the Company's actions to restructure
operations and reduce operating expenses. In addition, the Company experienced a
significant turnover in senior management sales positions during 1997, which
adversely affected sales. During the fourth quarter of fiscal 1997, the Company
filled certain key sales positions through new hires, internal promotion and
reorganization of its sales force.
License revenues increased 8% to $496.0 million for fiscal 1996 from
$458.3 million for fiscal 1995. The license revenue growth during fiscal 1996
reflects an increase in sales of the Company's server products, particularly the
Company's flagship database server, OnLine Dynamic Server, partially offset by
22
a decrease in license revenues from its database tool products. The increase in
server product revenues during fiscal 1996 reflected continued acceptance of the
Company's server products. The Company believes that the RDBMS industry has
benefited from market acceptance of UNIX, Windows, Windows NT and other open
operating environments and trends to downsize from large proprietary computer
systems. The Company believes that the decline in license revenues derived from
its database tool products is primarily the result of competitive product
offerings from other companies.
At December 31, 1997, 1996 and 1995 licenses not resold by resellers
representing approximately $180.0 million, $239.5 million and $83.6 million,
respectively, were recorded as advances on unearned license revenues and had not
been recognized as earned revenue. Licenses originally recorded as advances on
unearned license revenue representing approximately $64.8 million, $58.2 million
and $34.2 million were sold through reseller channels to end users during fiscal
1997, 1996 and 1995, respectively, and recognized as earned revenue. The Company
estimates that approximately $50 to $70 million of the advances on unearned
license revenues of $180.0 million at December 31, 1997 will be sold through to
end-users during fiscal 1998. Nevertheless, there can be no assurances that such
licenses will be resold. If the underlying license agreements expire and are not
renewed prior to resellers' selling all licenses to end users and the Company
has no remaining obligations, the remaining revenue relating to customers'
advances will be recognized in the quarter following the expiration of the
reseller license agreements.
The Company's license transactions can be relatively large in size and
difficult to forecast both in timing and dollar value. As a result, these
transactions have caused fluctuations in net revenues and net income (loss)
because of the relatively high gross margin on such revenues. As is common in
the industry, a disproportional amount of the Company's license revenue is
derived from transactions that close in the last weeks or days of a quarter. The
timing of closing large license agreements also increases the risk of
quarter-to-quarter fluctuations. The Company expects that these types of
transactions and the resulting fluctuations will continue.
The Company is currently unable to forecast whether the decreases in
license revenue experienced in fiscal 1997 will continue in fiscal 1998. During
1997, substantial uncertainty existed about the Company's business and financial
condition. The Company believes that various actions taken by the Company during
1997 have substantially improved its financial condition. See "--Restructuring
Charges" and "--Liquidity and Capital Resources." Nevertheless, adverse market
conditions, including significant competive pressures and ongoing customer
uncertainty about the Company's financial condition and business prospects,
could continue to have an adverse effect on license revenues and results of
operations.
SERVICE REVENUES
Service revenues increased 23% to $285.7 million for fiscal 1997 from
$231.8 million for fiscal 1996. Service revenues increased 33% to $231.8 million
for fiscal 1996 from $174.5 million for fiscal 1995. Service revenues accounted
for 43%, 32% and 28% of total revenues in fiscal 1997, 1996 and 1995,
respectively. As the Company's products become more complex, more support
services are expected to be required. The Company intends to satisfy this
requirement through internal support, third-party services and OEM support.
Service revenues are comprised of maintenance, consulting and training revenues.
The Company continues to emphasize support services as a source of revenue and
the growth achieved in absolute dollars reflects the growth in the Company's
installed base and strategic focus on providing consulting services for its
customers. The year-to-year increases in service revenues as a percentage of
total revenues reflect the fact that service revenues have continued to grow
while license revenues declined substantially in fiscal 1997.
Revenue derived from post-contract technical support and fees for
software updates increased 18% to $188.1 million in fiscal 1997 from $159.5
million in fiscal 1996 and 31% in fiscal 1996 from $121.9 million in fiscal
1995. This increase is attributable principally to maintenance contracts for new
license sales in each year as well as the renewal of existing maintenance
contracts. In the event the
23
Company continues to experience substantial declines in license revenue, such
declines would be expected to have an adverse effect on growth in service
revenues.
Consulting and training revenues increased 35% to $97.6 million in fiscal
1997 from $72.3 million in fiscal 1996 and 38% in fiscal 1996 from $52.6 million
in fiscal 1995. The growth in the consulting and training practice was driven by
increased demand for consulting services primarily in North America and in
Europe. Some significant one-time large consulting contracts were also executed
in fiscal 1997 and contributed to the significant increase of consulting
revenues year over year. There can be no assurances that similar one-time large
consulting contracts will be entered into in future periods. Failure to secure
such contracts may have an adverse impact on the growth of service revenues.
GEOGRAPHIC DISTRIBUTION
The Company's distribution markets are organized into four general
markets: North America; Europe, the Middle East and Africa; Latin America; and
the Asia/Pacific region, including Japan. The North America, Europe, Latin
America and Asia/Pacific organizations contributed 46%, 34%, 8% and 12% of the
Company's net revenues, respectively, in fiscal 1997, compared to 46%, 34%, 7%
and 13%, respectively, in fiscal 1996 and 45%, 36%, 6% and 13%, respectively, in
fiscal 1995.
Approximately 54%, 54% and 55% of Informix's net revenues were derived
from sales to foreign customers in fiscal 1997, 1996 and 1995, respectively.
Informix expects that foreign revenues will continue to provide a significant
portion of total revenues. However, changes in foreign currency exchange rates,
the condition of local economies, and the general volatility of software markets
may result in a higher or lower proportion of foreign revenues in the future. In
Europe and Asia/Pacific most revenues and expenses are now denominated in local
currencies. The U.S. dollar strengthened in fiscal 1997 against the major
European and Asia/Pacific currencies, which resulted in lower revenue and
expenses recorded when translated into U.S. dollars, compared with the prior
year periods. Although the Company has also increased its direct presence in
Latin America, a significant percentage of this region's revenue is still
denominated in U.S. dollars. Although the effect was not significant in fiscal
1997, the Company has in the past experienced significant currency fluctuations
in Mexico, and to a lesser extent, other Latin American countries, and expects
such fluctuations may occur in the future. The Company's operating and pricing
strategies take into account changes in exchange rates over time; however, the
Company's results of operations may be significantly affected in the short term
by fluctuations in foreign currency exchange rates. In addition, the current
continued weakness observed in Asian currencies may result in reduced revenues
from the countries affected by this condition, thus having a negative impact on
the overall performance of the Company.
CONCURRENT TRANSACTIONS
Principally during fiscal 1996, the Company entered into software license
agreements with certain computer and service vendors where the Company
concurrently committed to acquire goods and services. These concurrent
transactions in fiscal 1996 included license agreements of approximately $170.0
million and a commitment by the Company to acquire goods and services in the
aggregate of approximately $130.0 million. Concurrent transactions in 1997
included license agreements of approximately $21 million and a commitment by the
Company to acquire goods and services in the aggregate of approximately $50
million. See Notes 1 and 2 of Notes to Consolidated Financial Statements.
24
COST OF SOFTWARE DISTRIBUTION
1997 CHANGE 1996 CHANGE 1995
--------- --------- --------- ----------- ---------
(DOLLARS IN MILLIONS)
Manufactured cost of software distribution........................... $ 26.9 (16)% $ 32.2 26% $ 25.6
Percentage of license revenue........................................ 7% 6% 6%
Amortization of capitalized software................................. $ 21.4 47% $ 14.6 21% $ 12.0
Percentage of license revenue........................................ 6% 3% 3%
Write-down to net realizable value................................... $ 14.7 N.M. -- N.M. --
Percentage of license revenue........................................ 4%
Total cost of software distribution.................................. $ 63.0 35% $ 46.8 24% $ 37.6
Percentage of license revenue........................................ 17% 9% 8%
- ------------------------
N.M. = Not meaningful
Cost of software distribution increased to $63.0 million for fiscal 1997
from $46.8 million and $37.6 million for fiscal 1996 and 1995, respectively.
Software distribution costs consist primarily of (i) manufacturing and related
costs such as media, documentation, product assembly and purchasing costs,
freight, customs, and third-party royalties and (ii) amortization of previously
capitalized software development costs including adjustments to the carrying
value of such capitalized costs based on changes to the Company's estimates of
the net realizable value of related products.
Excluding amortization and the write-down to net realizable value of
previously capitalized software development costs, cost of software distribution
as a percentage of license revenue was 7% for fiscal 1997 and 6% for both fiscal
1996 and 1995. In the future, the cost of software distribution as a percentage
of revenue may vary depending upon the extent to which the product is reproduced
by the Company or by its customers.
Amortization of capitalized software costs commences the quarter
following product introduction. Capitalized software amortization increased 47%
to $21.4 million for fiscal 1997 from $14.6 million for the prior year period.
The increase in amortization of capitalized software in absolute dollars and as
a percentage of net revenues is due to the release of the Company's Universal
Server products in the fourth quarter of fiscal 1996. The absolute value of
amortization of capitalized software will vary period to period as new products
are released and other products become fully amortized.
Amortization of capitalized software increased 21% in fiscal 1996
compared to fiscal 1995 due to the release of several products in the latter
half of fiscal 1995 and 1996. The absolute value of amortization of capitalized
software will vary from quarter to quarter as new products are released and
other product development costs become fully amortized.
The write-down to net realizable value of $14.7 million during the first
quarter of fiscal 1997 was due to the Company's acquisition of CenterView
Software, Inc. ("CenterView") and the related announcements of its revised tool
strategy. In accordance with Financial Accounting Standards Board Statement No.
86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed," a net realizable value test was performed on certain of the
Company's database tool products and resulted in a write-down of $14.7 million
of previously capitalized software costs. In addition to this write-down, the
Company recorded separately a $7.0 million charge for write-off of Acquired
Research and Development in connection with the Company's acquisition of
CenterView. See "--Write-off of Acquired Research and Development."
25
COST OF SERVICES
Cost of services consists primarily of maintenance, consulting and
training expenses. Cost of services increased 15% to $166.9 million for fiscal
1997 from $144.9 million for fiscal 1996. Cost of services increased 58% to
$144.9 million for fiscal 1996 from $91.5 million for fiscal 1995. The overall
growth in cost of services of 15% between fiscal 1996 and 1997 is consistent
with the 23% growth in service revenues over the same period. The cost of
services increased significantly in fiscal 1996 as the Company substantially
expanded its consulting practice in the United States and Europe as well as its
technical support organization in order to provide customer assistance for the
Online Dynamic Server product line. Cost of services decreased as a percentage
of service revenues to 58% for fiscal 1997 compared to 62% for the same period
in 1996. During fiscal 1997, gross margins increased relative to both support
revenue and consulting/training revenue, particularly in the third and fourth
quarters of that year. The Company believes that the increased margins during
fiscal 1997 were principally attributable to more efficient delivery of
services. The increase in cost of services in fiscal 1996 in absolute dollars
and as a percentage of net revenues compared to the prior year is primarily due
to the Company's expansion of consulting and support service capabilities as
products have become more complex.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased less than 1% to $417.2 million for
fiscal 1997 from $413.7 million for fiscal 1996. Sales and marketing expenses
increased 37% to $413.7 million for fiscal 1996 from $301.9 million for fiscal
1995. As a percentage of revenues, sales and marketing expenses increased to 63%
in fiscal 1997 from 57% in fiscal 1996, due to a reduction in net revenues. As a
percentage of revenues, sales and marketing expenses increased to 57% in fiscal
1996 from 48% in fiscal 1995, due to significant increases in sales and
marketing personnel and marketing programs starting in late 1996.
During the late months of fiscal 1996 and in the early months of fiscal
1997, there were significant increases in personnel and expenses as the Company
continued to expand its sales force for anticipated license revenue growth and
continued to implement various marketing programs, including its Information
Superstore program. The Information Superstore program, which was launched in
fiscal 1996 and through the early months of 1997, resulted in increased
depreciation expense due to the fixed asset purchases related to the program.
The slight increase in sales and marketing expense in fiscal 1997 in absolute
dollars compared to fiscal 1996 was a result of continued increased expenses in
the early months of fiscal 1997, offset by a significant reduction in overall
sales and marketing expenses in the second half of fiscal 1997 in connection
with the restructuring plan executed by the Company.
Due to the significant revenue shortfall in the first quarter of fiscal
1997, the Company executed internal restructuring plans in the second quarter
and again in the third quarter, which included reducing headcount, consolidating
facilities and operations, and downsizing, eliminating or converting Information
Superstores into solution labs managed by the Company's consulting practice. The
Company had significantly lower sales and marketing costs in the fourth quarter
of fiscal 1997 as a result of these measures. In the fourth quarter of fiscal
1997, sales and marketing expenses were reduced to $69.3 million. Costs in the
fourth quarter of fiscal 1997 were 43% lower than the prior year quarter and 32%
lower than the third quarter of fiscal 1997.
The significant increase in sales and marketing expenses in fiscal 1996
in absolute dollars compared to fiscal 1995 was a result of the addition of new
sales offices and sales personnel worldwide as the Company expanded its
worldwide sales organization, the opening of new foreign offices, higher
commission expense associated with the increase of revenues prior to the
restatement and increased marketing programs associated with new product
launches.
26
RESEARCH AND DEVELOPMENT EXPENSES
1997 CHANGE 1996 CHANGE 1995
--------- --------- --------- ----------- ---------
(DOLLARS IN MILLIONS)
Incurred product development expenditures......................... $ 161.1 8% $ 148.6 44% $ 103.1
Expenditures capitalized.......................................... 21.8 (23)% 28.4 62% 17.5
Research and development expenses................................. $ 139.3 16% $ 120.2 40% $ 85.6
Expenditures capitalized as a percentage of incurred.............. 14% 19% 17%
Research and development expenses increased 16% to $139.3 million for
fiscal 1997 from $120.2 million for fiscal 1996. Research and development
expenses increased 40% to $120.2 million for fiscal 1996 from $85.6 million for
fiscal 1996. The year-to-year increase in research and development expenses in
absolute dollars for fiscal 1997, is attributable principally to an increase in
staff which occurred during the early part of fiscal 1997, working on new
products and product extensions. The year-to-year increase in research and
development expenses in absolute dollars for fiscal 1996 is attributable
principally to an increase in staff, working on the development of new products
and product extensions, including Universal Server.
Informix accounts for its software development expenses in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." This
statement requires that, once technological feasibility of a developing product
has been established, all subsequent costs incurred in developing that product
to a commercially acceptable level be capitalized and amortized ratably over the
revenue life of the product.
Prior to fiscal 1997, the higher capitalization in absolute dollars of
product development expenditures from year to year resulted from an increase in
the work involved in projects having already reached technological feasibility
as they neared their release dates, including Universal Data Options formerly
Informix Universal Server.
The Company believes that research and development expenditures are
essential to maintaining its competitive position in its primary markets and
expects the expenditure levels to continue to constitute a significant
percentage of revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
In fiscal 1997, general and administrative expenses increased 36% to
$87.5 million from $64.4 million for fiscal 1996. In fiscal 1996, general and
administrative expenses increased 26% to $64.4 million from $51.1 million for
fiscal 1995. The increase in fiscal 1997 in general and administrative expenses
in absolute dollars and as a percentage of net revenue was primarily the result
of the continued expansion of the Company's international operations, higher bad
debt expense of $4.6 million, incremental legal and auditing expenses of $8
million resulting from the stockholders' litigation and the restatement of the
Company's financial statements, and the write-off of certain assets of $2.2
million. General and administrative expenses increased in absolute dollars in
1996 compared to 1995 as a result of the continued expansion of the Company's
international operations.
WRITE-OFF OF GOODWILL AND OTHER LONG-TERM ASSETS
In accordance with Financial Accounting Standards Board Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," the Company records impairment losses on long-lived
assets used in its operations when events and circumstances indicate that the
assets might be impaired and the estimated future undiscounted cash flows to be
generated by those assets are less than the assets' carrying amounts.
In the first quarter of fiscal 1997, the Company's Japanese subsidiary
experienced a significant shortfall in business activity compared to historical
levels. This fact, coupled with continuing competitive
27
pressures in the Japanese market, resulted in the Company adjusting its
forecasts of the subsidiary's future cash flows and further led the Company to
evaluate the recoverability of the subsidiary's long-lived assets, including
computer and other equipment, acquired intangible assets and goodwill. As a
result of this evaluation, the Company determined that the carrying value of
these long-lived assets had been impaired and, accordingly, recorded a charge in
the first quarter of $30.5 million to write-down the assets' carrying value to
their estimated fair value. Fair value was determined using estimated future
discounted cash flows of the subsidiary and/or resale values as appropriate.
WRITE-OFF OF ACQUIRED RESEARCH AND DEVELOPMENT
In February 1997, the Company acquired all of the outstanding capital
stock of CenterView, a privately owned corporation that provides software tools
for application development. The aggregate purchase price was approximately $8.7
million, which included cash plus direct costs of acquisition. For financial
statement purposes, the acquisition has been accounted for as a purchase and,
based on an independent appraisal of all the assets acquired and liabilities
assumed, the purchase price was allocated to the specifically identifiable
tangible and intangible assets acquired, including approximately $7.0 million of
purchased research and development which has been charged to operations in the
period the acquisition was consummated, the first quarter of fiscal 1997.
Based on a review of CenterView's current suite of products, the
Company's management identified and classified future versions of the Company's
Data Director product as in-process technology, specifically Versions 3.0 and
4.0, as of the date of its acquisition. Data Director is an integrated
development extension for Microsoft Visual Basic that enables companies to build
corporate Intranet and client/server applications in a single environment. Data
Director enhances Visual Basic with a model-driven data access engine that
manages all database interactions between client and server, eliminating the
complexity traditionally associated with client/server development and enabling
companies to build client/ server applications faster and more efficiently than
with Visual Basic alone.
Based on discussions with CenterView management, including project
development project managers regarding the stage of development of Versions 3.0
and 4.0, it was determined that these projects had not reached technological
feasibility as of the date of the CenterView acquisition, nor did these projects
have any alternative future use. This determination was based primarily on an
assessment of the history of the research and development schedules for the
projects, their current stage of development, the risks inherent in completing
the incremental research and development efforts necessary to reach
technological feasibility, and the planned general release dates. Version 3.0
was scheduled for first customer release in July 1997 while Version 4.0 was
anticipated to reach first customer release in April 1998. Based on the
discussions with CenterView management regarding historical product releases, it
was determined that commercial release occurs approximately two to three months
after first customer introduction of the product. The projects are expected to
produce positive levels of cash flow during the year ended December 31, 1998.
Moreover, the Company estimated that the costs to complete these projects would
be approximately $8.4 million in fiscal 1997 and approximately $4.2 million in
fiscal 1998. These figures were estimated by considering (i) the development
schedules of the in-process projects; (ii) complexity of the identified
development projects; and (iii) number of engineer hours per project, per year.
The market for the Company's Data Director product is characterized by
rapidly changing technology, frequent new product introductions and evolving
market and customer demands. Although CenterView successfully developed and
marketed Data Director Version 2.1 and previous versions, there can be no
assurance that the Company will be successful in developing and marketing the
enhanced versions of the Data Director product. As such, the in-process
technology embedded in Data Director Versions 3.0 and 4.0 was valued utilizing
risk-adjusted cash flows to incorporate these and other uncertainties associated
with the Company's product development efforts. Failure to successfully complete
these
28
efforts in a timely manner could adversely affect the market potential for the
acquired CenterView products.
RESTRUCTURING CHARGES
In June and again in September 1997, the Company approved plans to
restructure its operations in order to bring expenses in line with forecasted
revenues. In connection with these restructurings, the Company substantially
reduced its worldwide headcount and consolidated facilities and operations to
improve efficiency. The following analysis sets forth the significant components
of the restructuring reserve at December 31, 1997:
RESTRUCTURING NON-CASH CASH ACCRUAL BALANCE AT
EXPENSE COSTS PAYMENTS DECEMBER 31, 1997
------------- ----------- ----------- -------------------
(IN MILLIONS)
Severance and benefits............... $ 21.9 $ -- $ 19.5 $ 2.4
Write-off of assets.................. 48.2 48.2 -- --
Facility charges..................... 34.7 7.7 3.8 23.2
Other................................ 3.4 2.2 .2 1.0
------ ----- ----- -----
$ 108.2 $ 58.1 $ 23.5 $ 26.6
------ ----- ----- -----
------ ----- ----- -----
Severance and benefits represent the reduction of approximately 670
employees, primarily sales and marketing personnel, on a worldwide basis.
Temporary employees and contractors were also reduced. Write-off of assets
include the 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 the write-offs and write-downs
consists primarily of computer servers, workstations, and personal computers
that will no longer be utilized in the Company's operations. These assets were
written down to their fair value less cost to sell. Facility charges include
early termination costs associated with the closing of certain domestic and
international sales offices.
The total Restructuring Expense decreased by $1.2 million during the
fourth quarter of fiscal 1997 primarily due to adjusting the original estimate
of the loss to be incurred on the sale of land to the actual loss.
The Company expects to complete most of the actions associated with
restructuring by the end of the second quarter of fiscal 1998.
MERGER EXPENSES
In the first quarter of fiscal 1996, the Company recorded expenses of
approximately $5.9 million as a result of the acquisition of Illustra, which was
accounted for as a pooling of interests. These costs consisted primarily of
investment banking, legal and accounting fees.
INTEREST INCOME
Interest income was $5.6 million as compared to $9.9 million and $8.1
million for fiscal 1997, 1996 and 1995, respectively. The decline in fiscal 1997
in comparison to fiscal 1996 resulted from a reduction in the average
interest-bearing cash and short-term investments balances in fiscal 1997. The
reduction in cash is due to lower sales and higher expenses. The increase in
interest income from fiscal 1995 to fiscal 1996 was due to higher balances of
cash and cash equivalents and short-term investments, offset by slightly lower
interest rates.
29
INTEREST EXPENSE
Interest expense increased to $7.8 million from $5.8 million and $2.5
million for fiscal 1997, 1996 and 1995, respectively. Interest expense
principally relates to interest charges incurred in connection with financing of
customer accounts receivable and has increased due to an increase in the average
balance of receivables financed. These financing costs are expensed ratably over
the term of the financing arrangement.
OTHER INCOME, NET
Other income, net, increased to $10.5 million for fiscal 1997 from $2.9
million and $0.1 million in fiscal 1996 and 1995, respectively. The increase
from fiscal 1996 was due primarily to $8.1 million of net gains on the sale of
marketable securities and $8.0 million of foreign currency transaction gains,
offset partially by adjustments of $4.5 million to the carrying value of
strategic investments and $1.1 million of other expenses. Other income, net, in
fiscal 1996 consisted of $3.9 million of gain on sale of marketable securities
offset by other net expenses of $1.0 million.
The restatement of the 1996, 1995 and 1994 financial statements resulted
in a change in the Company's foreign currency denominated intercompany accounts
payable and accounts receivable balances. As a result, certain foreign currency
transaction gains and losses realized due to fluctuation in the related asset
and liability currency exchange rates were not offset by underlying gains and
losses on forward foreign currency exchange contracts used to hedge those
foreign currency exposures. The Company recorded net foreign currency
transaction gains of approximately $8.0 million, $.3 million and $.2 million in
fiscal 1997, 1996 and 1995, respectively; the restatement of the Company's
financial statements affected the recorded net foreign currency transaction
gains and (losses) as follows: $7.5 million, $(0.7) million, $0.1 million, and
$(0.5) million in fiscal 1997, 1996, 1995 and 1994, respectively.
INCOME TAXES
In fiscal 1997, income tax expense resulted primarily from foreign
withholding taxes and taxable earnings in certain foreign jurisdictions. The
expected tax benefit computed by applying the federal statutory rate to the loss
before income taxes was substantially offset by a corresponding increase in the
valuation allowance for net deferred tax assets. The Company has provided a
valuation allowance for the net deferred tax assets in excess of amounts
recoverable through carryback of net operating losses. Accordingly, realization
of the net deferred tax asset at December 31, 1997 of $34 million is not
dependent on future taxable income.
In fiscal 1996, income tax expense resulted from an increase in the
valuation allowance for deferred tax assets attributable to foreign net
operating loss carryforwards, foreign withholding taxes and taxable earnings in
certain foreign jurisdictions.
30
IMPACT OF RESTATEMENT ON QUARTERLY FINANCIAL INFORMATION
The restatement of the financial statements for fiscal 1996, 1995 and
1994 and the first quarter of fiscal 1997 had the following impact on previously
reported quarterly financial information.
FOURTH
FIRST QUARTER SECOND QUARTER THIRD QUARTER QUARTER
------------------------ ----------------------- ----------------------- ------------
AS REPORTED RESTATED AS REPORTED RESTATED AS REPORTED RESTATED AS REPORTED
------------ ---------- ------------ --------- ------------ --------- ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Year ended December 31, 1997
Net revenues.......................... $ 133,664 $ 149,223 $ 182,012 -- $ 149,911 -- $ 181,152
Gross profit (1)(2)................... 63,185 78,937 123,527 -- 97,625 -- 132,266
Net income (loss) (1)(2).............. (140,107) (144,161) (111,377) -- (110,523) -- 9,194
Preferred stock dividend.............. -- -- -- -- -- -- (301)
Value assigned to warrants............ -- -- -- -- -- -- (1,601)
------------ ---------- ------------ --------- ------------ --------- ------------
Net income (loss) applicable to common
stockholders........................ (140,107) (144,161) (111,377) -- (110,523) -- 7,292
Net income (loss) per common share:
Basic............................... $ (0.93) $ (0.95) $ (0.73) -- $ (0.73) -- $ 0.05
Diluted............................. (0.93) (0.95) (0.73) -- (0.73) -- 0.04
Year ended December 31, 1996
Net revenues.......................... $ 204,021 $ 164,605 $ 226,282 $ 159,323 $ 238,180 $ 187,073 $ 270,828
Gross profit.......................... 160,584 121,378 178,474 112,074 189,003 138,092 218,342
Net income (loss)..................... 15,891 (15,377) 21,628 (34,083) 26,181 (17,095) 34,118
Net income (loss) per share:
Basic............................... $ 0.11 $ (0.10) $ 0.15 $ (0.23) $ 0.17 $ (0.11) $ 0.23
Diluted............................. 0.10 (0.10) 0.14 (0.23) 0.17 (0.11) 0.22
Year ended December 31, 1995
Net revenues.......................... $ 148,037 $ 146,120 $ 164,068 $ 141,175 $ 182,701 $ 166,929 $ 219,413
Gross profit.......................... 121,893 120,138 134,042 111,226 150,183 136,595 178,396
Net income (loss)..................... 17,646 16,177 20,184 (2,731) 23,896 7,759 35,918
Net income (loss) per share:
Basic............................... $ 0.12 $ 0.11 $ 0.14 $ (0.02) $ 0.16 $ 0.05 $ 0.24
Diluted............................. 0.12 0.11 0.14 (0.02) 0.16 0.05 0.23
Year ended December 31, 1994
Net revenues.......................... $ 96,242 $ 92,763 $ 106,214 $ 96,217 $ 117,081 $ 111,428 $ 150,575
Gross profit.......................... 81,429 77,950 89,765 79,768 98,106 92,453 129,520
Net income (loss)..................... 11,540 8,922 12,210 4,686 15,446 11,191 22,752
Net income (loss) per share:
Basic............................... $ 0.09 $ 0.07 $ 0.09 $ 0.03 $ 0.11 $ 0.08 $ 0.16
Diluted............................. 0.08 0.06 0.09 0.03 0.11 0.08 0.16
RESTATED
---------
Year ended December 31, 1997
Net revenues.......................... --
Gross profit (1)(2)................... --
Net income (loss) (1)(2).............. --
Preferred stock dividend.............. --
Value assigned to warrants............ --
---------
Net income (loss) applicable to common
stockholders........................ --
Net income (loss) per common share:
Basic............................... --
Diluted............................. --
Year ended December 31, 1996
Net revenues.......................... $ 216,848
Gross profit.......................... 164,669
Net income (loss)..................... (7,010)
Net income (loss) per share:
Basic............................... $ (0.05)
Diluted............................. (0.05)
Year ended December 31, 1995
Net revenues.......................... $ 178,546
Gross profit.......................... 137,678
Net income (loss)..................... 17,372
Net income (loss) per share:
Basic............................... $ 0.12
Diluted............................. 0.11
Year ended December 31, 1994
Net revenues.......................... $ 151,561
Gross profit.......................... 130,506
Net income (loss)..................... 23,494
Net income (loss) per share:
Basic............................... $ 0.17
Diluted............................. 0.16
- ------------------------
(1) The Company recorded in the second quarter and again in the third quarter of
fiscal 1997, restructuring charges of $59.6 million and $49.7 million,
respectively. The total restructuring expenses 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. (See Note 13 to the Consolidated Financial Statements)
(2) In the first quarter of fiscal 1997, the Company recorded a charge of $30.5
million to write down the carrying values of certain of its Japanese
subsidiary's long-lived assets to their fair values. During the same
quarter, the Company also recorded a charge of $14.7 million to write down
the carrying value of capitalized software development costs for certain
products to their net realizable values.
31
LIQUIDITY AND CAPITAL RESOURCES
AS OF OR FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
Cash, cash equivalents and short-term investments................................. $ 155.5 $ 261.0 $ 253.2
Working capital (deficit)......................................................... (140.2) 3.1 163.6
Cash and cash equivalents used in operations...................................... (144.8) (29.4) 59.3
Cash and cash equivalents used for investment activities.......................... (63.1) (145.3) (157.7)
Cash and cash equivalents provided by financing activities........................ 115.2 228.7 136.8
OPERATING CASH FLOWS
Cash used by operations increased significantly to $144.8 million for the
year ended December 31, 1997 from $29.4 million in 1996 due to operating
expenses in excess of revenues. Cash from operations did not provide sufficient
resources to fund the Company's operations in fiscal 1997 and 1996.
The net loss of $356.9 million for fiscal 1997, included a number of
non-cash transactions. These non-cash transactions included write-downs of long
term assets, capitalized software, goodwill and acquired research and
development and certain non-cash restructuring charges which partially offset
the net loss resulting in net cash used by operations of $144.8 million.
Net accounts receivable decreased by $52.5 million to $142.0 million as
of December 31, 1997 from December 31, 1996. This decrease resulted from a $35.7
million decrease in revenues during the fourth quarter of fiscal 1997 as
compared to the fourth quarter of fiscal 1996 partially offset by a reduction in
its financing programs with third-party financial institutions in fiscal 1997.
Days sales outstanding ("DSO") was 71, 83 and 79 at December 31, 1997, 1996 and
1995, respectively. The Company increased its efforts to improve cash
collections in fiscal 1997 in response to its deteriorating cash position during
the year. The Company expects DSO in 1998 to approximate or to slightly increase
from the fiscal 1997 levels. Cash received from customers and third-party
financial institutions in advance of revenue being recognized is recorded as
advances on unearned license revenue.
INVESTING CASH FLOWS
Net cash and cash equivalents used in investing activities decreased for
the year ended December 31, 1997 compared with the same period in 1996. The
decrease was due in large part to lower investments of excess cash due to the
significant decline in cash balances over the year. Significant investing
activities, excluding the investment of excess cash, during the year included
additions to software costs of $20.8 million, the sale of available-for-sale
securities for $46.0 million, purchase of the Santa Clara property and capital
equipment of $92.2 million, the purchase of CenterView for $8.7 million and net
proceeds from selling the Santa Clara property of $59.3 million.
The Company sold its interest in a strategic investment during fiscal
1997 which resulted in net proceeds of $10.4 million.
The Company planned on relocating its corporate headquarters to Santa
Clara, California, approximately 15 miles to the south of the Company's
headquarters. In January 1997, the Company entered into a two year lease for 27
acres of undeveloped commercial real estate which required a pledge of $61.5
million in cash 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, and $59.3 million is
disclosed on the "proceeds from disposal of land and property and equipment."
32
In addition, during fiscal 1997, the Company acquired $30.7 million of
capital equipment consisting primarily of computer equipment, computer software
and office equipment. Capital equipment purchases were primarily the result of
the Company's expected expansion during the first half of fiscal 1997.
In February 1997, the Company acquired all of the outstanding capital
stock of Centerview, a privately owned corporation that provides software tools
for application development. The aggregate purchase price was approximately $8.7
million, which included cash plus direct costs of acquisition. For financial
statement purposes, the acquisition has been accounted for as a purchase and,
based on an independent appraisal of all the assets acquired and liabilities
assumed, the purchase price was allocated to the specifically identifiable
intangible assets acquired, including approximately $7.0 million of purchased
research and development which has been charged to operations in the period the
acquisition was consummated the first quarter of fiscal 1997.
FINANCING
Net cash and cash equivalents provided by financing activities in fiscal
1997 decreased in comparison to the same period in 1996. A significant portion
of the decrease was the decline in advances on unearned license revenue,
partially offset by the proceeds from issuances of preferred and common stock.
Proceeds from common stock represent stock options exercised and
purchases under the employee stock purchase plan. In September 1997, the
Company's Board of Directors authorized the repricing of outstanding stock
options to purchase Common Stock under the Company's stock option plans so that
the exercise price of repriced options would equal the closing sales price of
the Company's Common Stock as reported on The Nasdaq Stock Market on November
17, 1997, which was $7.1563. See "Executive Compensation--Stock Option
Repricing."
In August 1997, the Company raised net proceeds of $37.6 million through
the issuance of 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 newly designated 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.
The Company assigned its leasehold interest and its related obligations
under an office space lease in Santa Clara, California to an unrelated third
party. The lease term was for fifteen years and minimum lease payments amount to
$96.0 million over the term. The Company remains contingently liable for minimum
lease payments under the terms of the assignment.
As of December 31, 1997, the Company was contractually obligated to
purchase approximately $4.4 million of various computer equipment.
The Company has several active software development and service provider
contracts with third-party technology providers. These agreements contain
financial commitments by the Company of $15.1 million, $11.4 million, $10.4
million, $7.3 million and $3.5 million in fiscal 1998, 1999, 2000, 2001 and
2002, respectively.
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
Commercial 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
33
borrowings or issuances of letters of credit, is based on 80 percent of the
eligible domestic accounts receivable and 50 percent of the eligible foreign
accounts receivable. 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 percent 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 December 31, 1997, no borrowings were outstanding
under the Credit Facility, the Company's accounts receivable totaled $142
million and its borrowing base under the Credit Facility was $47 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" 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 the
following financial covenants requiring the Company to: (a) maintain a ratio of
1.25 to 1.00 in respect of the sum of cash and acounts 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 greater than the sum of
restated revenue, capitalized software costs, capital expenditures, cash outlays
in respect of accrued expenses arising from restructuring charges, and the sum
of depreciation and amortization, (e) 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, less any carry
forward amount, and (g) refrain from entering into any merger, consolidation,
reorganization or other transaction resulting in a fundamental change. At
December 31, 1997, the Company was in compliance with all financial covenants
under the Credit Facility.
34
DISCLOSURES ABOUT MARKET RATE RISK
INTEREST RATE RISK. The Company's exposure to market rate risk for changes
in interest rates relates primarily to the Company's investment portfolio. The
Company does not use derivative financial instruments in its investment
portfolio. The Company places its investments with high quality issuers and, by
policy, limits the amount of credit exposure to any one issuer. The Company is
averse to principal loss and ensures the safety and preservation of its invested
funds by limiting default, market and reinvestment risk. The table below
presents the amounts and related weighted interest rates of the Company's
investment portfolio at December 31, 1997:
AVERAGE
INTEREST RATE COST FAIR VALUE
--------------- --------- -----------
(IN THOUSANDS)
Cash equivalents
Fixed rate................................................................. 6.02% $ 71,161 $ 71,178
Variable rate.............................................................. 5.59 1,353 1,353
Short-term investments
Fixed rate................................................................. 5.61 15,899 15,898
Variable rate.............................................................. 5.73 117 117
FOREIGN CURRENCY RISK. The Company enters into forward foreign exchange
contracts primarily to hedge the value of accounts receivable or accounts
payable denominated in foreign currencies (mainly European and Asian foreign
currencies) against fluctuations in exchange rates until such receivables are
collected or such payables are disbursed. The Company does not enter into
forward foreign exchange contracts for speculative or trading purposes. The
Company's accounting policies for these contracts are based on the Company's
designation of the contracts as hedging transactions. The criteria the Company
uses for designating a contract as a hedge include the contract's effectiveness
in risk reduction and one-to-one matching of derivative instruments to
underlying transactions. Gains and losses on forward foreign exchange contracts
are deferred and recognized in income in the same period as losses and gains on
the underlying transactions are recognized and generally offset. If an
underlying hedged transaction is terminated earlier than initially anticipated,
the offsetting gain or loss on the related forward foreign exchange contract
would be recognized in income in the same period. Subsequent gains or losses on
the related contract would be recognized in income in each period until the
contract matures, is terminated or sold. The Company operates in certain
countries in Latin America, Eastern Europe and Asia Pacific where there are
limited forward currency exchange markets and thus the Company has unhedged
transaction exposures in these currencies. However, such exposures are not
material to the Company's financial statements for any period presented. The
table below provides information about the Company's foreign currency forward
exchange contracts. The information is provided in U.S. Dollar equivalents and
presents the notional amount and the weighted average contractual foreign
currency exchange rates. All contracts mature within twelve months.
35
FORWARD CONTRACTS
AVERAGE
AT DECEMBER 31, 1997 CONTRACT RATE
- --------------------------------------------------------------- CONTRACT VALUE -------------
--------------
(IN THOUSANDS)
Forward currency contracts sold:
British Pound................................................ $ 55,740 $ 0.60
Deutsche Mark................................................ 17,050 1.77
French Franc................................................. 14,139 5.91
Italian Lira................................................. 3,901 1,742.34
Spanish Peseta............................................... 3,166 149.76
Swedish Krona................................................ 1,682 7.76
Other (individually less than $1 million).................... 2,090 NM
--------------
Total.......................................................... $ 97,768
--------------
--------------
Forward currency contracts purchased:
Swiss Franc.................................................. $ 1,636 1.42
Dutch Guilder................................................ 1,096 1.99
Other (individually less than $1 million).................... 2,208 NM
--------------
Total.......................................................... $ 4,940
--------------
--------------
Grand Total.................................................... $ 102,708
--------------
--------------
SUMMARY
The Company believes that its current cash balances, cash available under
the Credit Facility and cash flow from operations will be sufficient to meet its
working capital requirements for at least the next 12 months.
RECENT DEVELOPMENTS
On February 13, 1998, Fletcher exercised the Series A-1 Warrant in part,
and the Company issued 60,000 shares of Series A-1 Preferred to Fletcher for net
proceeds of $14.1 million. The sale of the Series A-1 Warrant Stock was not
registered under the Securities Act pursuant to the exemption provided by
Regulation S.
On February 13, 1998, pursuant to the Subscription Agreement, Fletcher
converted 220,000 shares of Series A-1 Preferred into 12,769,908 shares of the
Company's Common Stock.
In December 1997, the Company's Board of Directors authorized a second
option repricing of outstanding stock options under the Company's stock option
plans so that the exercise price of the repriced options would equal the closing
sales price of the Company's Common Stock as reported on The Nasdaq Stock Market
on January 9, 1998, $5.094. See "Executive Compensation--Stock Option
Repricing."
RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2 (SOP 97-2), "Software Revenue Recognition" as amended
by Statement of Position 98-4 (SOP 98-4). The Company will be required to adopt
the provisions of the SOPs' as of January 1, 1998. The adoption may, in certain
circumstances, result in the deferral of software license revenues that would
have been recognized upon delivery of the related software under preceding
accounting standards. In response to these SOPs', the Company will likely change
its business practices and, consequently, at this time the Company cannot
quantify the effect the SOPs' will have on its operating results, financial
position or cash flows.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, Reporting Comprehensive Income (FAS No. 130) and Statement No. 131,
Disclosures About Segments of An
36
Enterprise and Related Information (FAS No. 131). FAS No. 130 establishes rules
for reporting and displaying comprehensive income. FAS No. 131 will require the
Company to use the "management approach" in disclosing segment information. Both
statements are effective for the Company during 1998. The Company does not
believe that the adoption of either FAS No. 130 or FAS No. 131 will have a
material impact on the Company's results of operations, financial position or
cash flows.
FACTORS THAT MAY AFFECT FUTURE RESULTS
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 on
Form 10-Q for the quarter ended March 30, 1997, the Company became aware of
errors and irregularities that 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 restatement had a material adverse effect on the Company's financial
condition, most notably evidenced by substantial reductions in retained earnings
and working capital. For a description of the errors and irregularities
identified and the impact of the restatement on the Company's reported revenues
and net income for fiscal 1996, 1995 and 1994 and the first quarter of fiscal
1997, see "--Working Capital Deficit" and "Management's Discussion and Analysis
of Financial Condition and Result of Operations."
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 adopting 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 in August 1997 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
37
beginning of 1997, the Company and its competitors in the RDBMS industry have
experienced substantially slower growth in the market for RDBMS products. The
financial restatement has now been completed, its results have been publicly
disclosed, and the Company is current with respect to its public reporting
obligations. In addition, the Company believes that it has effectively
controlled its operating expenses and significantly improved its financial
condition. Nevertheless, 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. See "--Fluctuations in Quarterly Results; Seasonality."
NEED FOR ADDITIONAL FINANCING; CUSTOMER 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 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, has created further
uncertainty concerning the Company's revenues, cash flows and results of
operations.
In December 1997, Informix Software entered into the Credit Facility
providing for a revolving credit line of up to $75 million. The actual amount
available under the Credit Facility, for either direct borrowings or issuances
of letters of credit, is based on 80 percent of the eligible domestic accounts
receivable and 50 percent of the eligible foreign accounts receivable. As of
December 31, 1997, no borrowings were outstanding under the Credit Facility, the
Company's accounts receivable totaled $142 million and its borrowing base under
the Credit Facility was $47 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 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
financial covenants. For a description of the accounts receivable eligibility
criteria, the alternative variable interest rates and the financial covenants
associated with the Credit Facility, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
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
38
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" and "--Antitakeover Protections."
In the normal course of its business, the Company arranges for
non-recourse financing through the sale of customer accounts receivable to
third-party financial institutions. The Company has traditionally relied on a
limited number of financial institutions for most of the customer financings it
arranges. 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. See "--Working Capital Deficit" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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 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 on unearned license revenue" 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 on unearned license revenue 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 fiscal 1997.
"Advances on unearned license revenues" 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 OEMs, 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. The Company is presently unable to
estimate what portion, if any, of such advances may be subject to potential
refund. At December 31, 1997 approximately $23 million of such amounts received
from customers were subject to commercial disputes, several of which have
proceeded to litigation. Of the $23 million subject to commercial disputes, $6.0
million has been reflected on the balance sheet as accrued expenses, and the
Company believes that the remainder is properly booked as advances on unearned
license revenues 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 net
proceeds of
39
approximately $87.6 million (excluding of 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 amount of $75.0 million with a syndicate of commercial banks
with BankBoston N.A., as Administrative Agent and Canadian Imperial Bank of
Commerce, as Syndication Agent. The term of the Credit Facility is two years.
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," "--Need for Additional Financing; Customer Financing" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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 purchase by customers, (iv) the size, timing and
contractual terms of significant orders, the effect 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 pressure 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. 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
40
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," "--International Operations; Currency
Fluctuations" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
LITIGATION
Beginning on or about April 16, 1997, a total of 24 complaints alleging
violations of the federal securities laws were filed against the Company, Ernst
& Young LLP, the Company's independent auditors and certain Named Individual
Defendants (listed below) in the United States District Court for the Northern
District of California. Of the 24 complaints, 22 have been filed as purported
class actions by individuals who allege that they are individual investors who
purchased the Company's Common Stock during the purported class period; the
alleged class periods in the different complaints vary according to the date on
which the complaints were filed. The complaints name some or all of the
following current and former officers and directors of the Company as
defendants: Phillip E. White, Howard H. Graham, David H. Stanley, Ronald M.
Alvarez, Karen Blasing, D. Kenneth Coulter, Ira H. Dorf, Stephen E. Hill, Myron
(Mike) Saranga, Steven R. Sommer, Michael R. Stonebraker and Edwin C. Winder
(the "Named Individual Defendants"). On August 20, 1997, the District Court
entered an order consolidating all of the separately-filed class actions pending
at that time, designating the action as IN RE INFORMIX CORPORATION SECURITIES
LITIGATION, and designating as "related cases" all cases brought under the
federal securities laws then pending and any that may be filed after that date.
A consolidated amended class action complaint is set to be filed on April 3,
1998, and defendants will file a response to that consolidated, amended
complaint shortly thereafter. As required by the provisions of the Exchange Act,
as amended by the Private Securities Litigation Reform Act of 1995, the Court
has designated the lead plaintiffs in the federal action and has appointed lead
plaintiffs' counsel. For further description of these matters see "Legal
Proceedings--Actions Arising Under Federal and State Securities Laws."
The Company also has been named as a nominal defendant in eight
derivative actions, purportedly brought on its behalf, filed in the Superior
Court of the State of California, County of San Mateo. The Court has appointed
lead plaintiff's counsel in all of these derivative actions, and the cases have
been consolidated under the caption IN RE INFORMIX CORPORATION DERIVATIVE
LITIGATION. The consolidated, amended complaint alleges that, based upon the
facts alleged in the federal and state securities class actions, defendants
breached their fiduciary duties to the Company, engaged in abuses of their
control of the Company, were unjustly enriched by their sales of the Company's
Common Stock, engaged in insider trading in violation of California law and
published false financial information in violation of California law. The
consolidated, amended complaint names as defendants Ernst & Young, the Named
Individual Defendants and Albert F. Knorp, Jr., James L. Koch, Thomas A.
McDonnell and Cyril J. Yansouni, the Company's non-management directors. The
plaintiff seeks unspecified damages on the Company's behalf from each of the
defendants. For further description of these matters see "Legal
Proceedings--Derivative Actions."
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
41
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 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 reports. 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.
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.
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 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
42
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 only some 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 3,489
regular employees at December 31, 1997, compared to approximately 4,491 at
December 31, 1996. Voluntary attrition has remained high across all functional
areas. In fiscal 1997, the Company experienced high attrition rates in its
product development and sales groups and has had trouble attracting qualified
replacement personnel. The competition for employees in the software industry is
intense, and the Company expects that such competition will continue for the
foreseeable future. The Company has experienced difficulty in locating
candidates with appropriate qualifications and believes that recent financial
and business developments at the Company have made recruitment more difficult.
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 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 newly designated Series A Preferred. In November 1997, the
Company raised an additional $50.0 million in net proceeds (excluding of 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 newly designated 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
43
obligations. In particular, the holders of the Series A-1 Preferred will become
entitled to an annual dividend of $6.0 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; 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 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. 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" and
"--Antitakeover Protection."
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 the Series A-1
Warrant to the holders of the Series A-1 Preferred to acquire up to an
additional 140,000 shares of Series A-1 Preferred for an aggregate purchase
price of $35 million. 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 outstanding were converted into 12,769,208 shares of Common
Stock. The Company is also obligated to issue the Series B Warrants upon
conversion of the Series B Preferred. The Series A-1 Warrant and the Series B
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, IBM, Microsoft, NCR/Teradata, Oracle and 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.
44
Several of the Company's competitors have announced the development of
enhanced versions of their principal database products that are intended to
improve the performance or expand the capabilities of their existing products.
New or enhanced products by existing competitors or new competitors could result
in greater price pressure on the Company's products. In addition, the industry
movement to new operating systems, like Windows NT, access through low-end
desktop computers, and access to data through the Internet may cause downward
pressure on prices of database software and related products. The bundling of
software products for promotional purposes or as a long-term pricing strategy by
certain of the Company's competitors could also result in reductions in the
price the Company may charge for its products. In addition, the Company's own
practices of bundling its software products for enterprise licenses or for
promotional purposes with the Company's partners could also 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. 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 perform well with existing
45
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 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 fiscal 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. See "Business--Products" and "--Product Development."
INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS
International sales represented approximately 54% of total revenues for
both fiscal 1997 and 1996. 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
fiscal 1997 and 1996, respectively, 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. 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."
The Company has implemented a foreign exchange hedging program consisting
principally 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 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. The Company does not
attempt to hedge the translation to United States dollars of foreign denominated
revenues and expenses not yet earned or incurred. 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
46
associated with foreign currency fluctuations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Other Income, Net."
YEAR 2000 IMPACT ON INFORMATION TECHNOLOGY BUDGETS
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. To the extent the Company's software
products are not fully Year 2000 compliant, there can be no assurance that the
Company's software products 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.
To date the Company has not identified a separate budget for
investigating and remedying issues related to Year 2000 compliance whether
involving the Company's own software products or the software or systems used in
its internal operations. There can be no assurances that Company resources spent
on investigating and remedying Year 2000 compliance issues will not 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
47
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. See "Business--Intellectual Property."
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
48
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 12,769,208
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, 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
49
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in the Company's
Financial Statements and Notes thereto beginning at page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the
Company's executive officers and directors as of December 31, 1997.
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
Robert J. Finocchio, Jr.............................. 46 President, Chief Executive Officer and Chairman of
the Board of Directors-- Class III, term to expire
at 1999 Annual Stockholder Meeting
Jean-Yves F. Dexmier................................. 46 Executive Vice President and Chief Financial Officer
Karen Blasing........................................ 41 Vice President and Corporate Controller
Susan T. Daniel(a)................................... 57 Vice President, Human Resources
James F. Engle....................................... 51 Vice President and Treasurer
Diane L. Fraiman(b).................................. 42 Vice President, Corporate Marketing
J.F. Hendrickson, Jr................................. 58 Vice President, Customer Services, and Lenexa
(Kansas) Site General Manager
Stephen E. Hill(c)................................... 39 Vice President, and General Manager, Tools Business
Unit
Gary Lloyd(d)........................................ 50 Vice President, Legal, General Counsel and Secretary
Wesley Raffel........................................ 42 Vice President, North American Field Operations
Myron (Mike) Saranga................................. 60 Senior Vice President, Product Management and
Development
Michael R. Stonebraker............................... 54 Vice President and Chief Technology Officer
Leslie G. Denend..................................... 56 Director--Class I, term to expire at 2000 Annual
Stockholder Meeting
Albert F. Knorp, Jr.................................. 62 Assistant Secretary and Director Class III, term to
expire at 1999 Annual Stockholder Meeting
James L. Koch........................................ 53 Director--Class II, term to expire at 1998 Annual
Stockholder Meeting
Thomas A. McDonnell.................................. 52 Director--Class II, term to expire at 1998 Annual
Stockholder Meeting
Cyril J. Yansouni.................................... 55 Director--Class I, term to expire at 2000 Annual
Stockholder Meeting
- ------------------------
(a) Ms. Daniel became the Company's Vice President, Human Resources on February
9, 1998
(b) Ms. Fraiman will become the Company's Vice President, Corporate Marketing
beginning April 1998
(c) Mr. Hill was promoted to Vice President, Tools Business Units in January
1998 from the position of Vice President, Advanced Technology
(d) Mr. Lloyd became the Company's Vice President, Legal, and General Counsel on
January 23, 1998 and its Secretary on February 26, 1998
ROBERT J. FINOCCHIO, JR. has served as Chairman, President and Chief
Executive Officer since July 1997. From December 1988 until May 1997, Mr.
Finocchio was employed with 3Com Corporation ("3Com"), a global data networking
company, where he held various positions, most recently serving as
51
President, 3Com Systems. Prior to his employment with 3Com, Mr. Finocchio held
various executive positions in sales and service with Rolm Communications, a
telecommunications and networking company, most recently as Vice President of
Rolm Systems Marketing. Mr. Finocchio also serves as a director of Latitude
Communications, a teleconferencing company. Mr. Finocchio is also a Regent of
Santa Clara University. Mr. Finocchio holds a B.S. in economics from Santa Clara
University and an M.B.A. from the Harvard Business School.
JEAN-YVES F. DEXMIER has served as the Company's Executive Vice President
and Chief Financial Officer since October 1997. Mr. Dexmier also served as the
Company's Secretary from October 1997 to February 1998. Mr. Dexmier served as a
strategy consultant to high technology companies from February 1997 to September
1997. From November 1995 until February 1997, Mr. Dexmier served as Senior Vice
President and Chief Financial Officer of Octel Communications Corporation, a
provider of voice messaging systems ("Octel"). From April 1995 to October 1995,
Mr. Dexmier served as Chief Financial Officer for Kenetech Corporation, a wind
energy company. From May 1994 to March 1995, Mr. Dexmier served as Chief
Financial Officer for Air Liquide America Corporation, a U.S. subsidiary of the
French-based group Air Liquide, a worldwide producer of industrial gases. From
January 1991 to January 1994, Mr. Dexmier served as Chief Financial Officer for
Thomson Consumer Electronics, Inc., a subsidiary of Thomson SA, a worldwide
electronics manufacturer. Mr. Dexmier holds a B.S. in mathematics from Lycee
Pasteur, a Ph.D. in electronics from the Ecole Nationale Superieure de
l'Aeronautique et de l'Espace and an M.B.A. in economics and finance from the
Ecole Polytechnique. In addition, he attended the executive management program
at the University of Michigan School of Business Administration.
KAREN BLASING has served as the Company's Corporate Controller since June
1996 and as a Vice President since August 1997. Ms. Blasing joined the Company
in November 1992 as its Director of Financial Planning and Analysis. From
January 1989 to October 1992, Ms. Blasing was a Senior Financial Manager at
Oracle Corporation, a provider of information management software and services.
Ms. Blasing holds a B.S. in both economics and business from the University of
Montana and an M.B.A. from the University of Washington.
SUSAN T. DANIEL has served as the Company's Vice President, Human
Resources since February 1998. From March 1981 until February 1998, Ms. Daniel
served in a variety of positions at Advanced Micro Devices, Inc., a
semiconductor manufacturer, most recently as Vice President, Human Resource
Operations. Ms. Daniel holds a B.A. in History from Queens College, an M.A. in
social sciences from Syracuse and J.D. from Santa Clara University.
JAMES F. ENGLE has served as the Company's Vice President and Treasurer
since December 1997. From 1991 until December 1997, Mr. Engle served as a Vice
President and the Corporate Treasurer of Octel. Mr. Engle holds a B.A. in
economics from the University of Missouri and an M.B.A. in international
business and corporate finance from the Columbia University Graduate School of
Business.
DIANE L. FRAIMAN will serve as the Company's Vice President, Corporate
Marketing beginning April 1998. From September 1996 to March 1998, Ms. Fraiman
served as Vice President, Marketing Video & Networking Division, at Tektronix,
Inc., a producer of hardware and software networking and video products. From
May 1994 to August 1996, Ms. Fraiman was Director of Marketing at Sequent, a
manufacturer of large-scale multiprocessor systems. From 1978 to April 1994, Ms.
Fraiman worked in a variety of positions at Digital Equipment Corporation, a
global networking company, most recently as its Director, Corporate
Digital/Microsoft Alliance. Ms. Fraiman holds a B.S. in biomedical engineering
from Vanderbilt University.
J.F. HENDRICKSON, JR. has served as the Company's Vice President,
Customer Services, since July 1992 and as its Lenexa (Kansas) Site General
Manager since February 1995. From 1991 until the time he joined the Company, Mr.
Hendrickson was Senior Vice President of Sales and Support at Image Business
Systems, a developer of document image management software for client/server
systems.
52
Mr. Hendrickson holds a B.S. in mechanical engineering from Stanford University
and an M.B.A. in business and administration from the University of California,
Los Angeles.
STEPHEN E. HILL has served as the Company's Vice President and General
Manager, Tools Business Unit since January 1998. Prior to assuming that
position, Mr. Hill served as the Company's Vice President, Advanced Technology
since December 1995. Mr. Hill has been employed with the Company since 1985 and
has served in various strategic planning and marketing positions. Prior to
joining the Company, Mr. Hill held various product development positions at
General Electric Company, a diversified electronics and manufacturing company,
Software Publishing Corporation, a supplier of business productivity software,
and Human Edge Software, a business software company. Mr. Hill holds a B.S. in
electrical engineering from the University of Vermont.
GARY LLOYD has served as the Company's Vice President, Legal and General
Counsel since January 1998 and as its Secretary since February 1998. From
November 1997 until January 1998, Mr. Lloyd served as the Company's interim
General Counsel. From March 1994 until October 1997, Mr. Lloyd was with the law
firm of Farella Braun & Martel L.L.P. From 1984 until February 1994 Mr. Lloyd
served in a variety of positions at the Securities and Exchange Commission, most
recently as its Assistant Director, Division of Enforcement. Mr. Lloyd holds a
B.A. in political science and English from Kent State University and a J.D. from
Case Western Reserve University.
WESLEY RAFFEL has served as the Company's Vice President, North American
Field Operations since September 1997. From January 1996 to January 1997, Mr.
Raffel served as Senior Vice President, Sales and Marketing, and was the acting
Chief Executive Officer of AssureNet Pathways, Inc., a network security company.
From October 1992 to September 1995, Mr. Raffel was Vice President, Sales, of
Global Village Communication, Inc., a designer of integrated communications
products for personal computers ("Global Village"). Prior to joining Global
Village, Mr. Raffel held a variety of positions at 3Com, most recently as its
Vice President, Intercontinental Operations. Mr. Raffel holds a B.A. in general
studies from Harvard University and an M.B.A. from the University of Chicago
Graduate School of Business.
MYRON (MIKE) SARANGA has served as the Company's Senior Vice President,
Product Management and Development, since May 1993. Prior to joining the
Company, Mr. Saranga was employed by IBM for 30 years, where he held various
positions, most recently as Assistant General Manager of Programming Systems.
Mr. Saranga holds a B.A. in economics from Northeastern University.
MICHAEL R. STONEBRAKER has served as the Company's Vice President and
Chief Technology Officer since February 1996. Dr. Stonebraker co-founded
Illustra and served in a consulting capacity with Illustra as its Chief
Technology Officer until February 1996. Dr. Stonebraker is the professor
emeritus of Electrical Engineering and Computer Sciences at the University of
California, Berkeley, where he joined the faculty in 1971. Dr. Stonebraker holds
a B.S. in electrical engineering from Princeton University and an M.S. and Ph.D.
in computer information and control engineering from the University of Michigan.
LESLIE G. DENEND has served as a member of the Company's Board of
Directors since December 1997. Since December 1997, Mr. Denend has served as
President of Network Associates, Inc., a provider of network security and
management software, that resulted from the merger of McAfee Associates, Inc.
and Network General Corporation ("Network General"). From June 1993 to December
1997, Mr. Denend served as President and Chief Executive Officer of Network
General. He also served as Network General's Senior Vice President of Products
from February 1993 to June 1993. From November 1990 to December 1992, he was
President of Vitalink Communications, a manufacturer of networking products.
From January 1989 to October 1990, Mr. Denend served in a variety of positions
at 3Com, most recently as Executive Vice President for Product Operations. Mr.
Denend is also a director of Rational Software Inc., a provider of
component-based development software systems, and Proxim, Inc., a designer of
wireless local area networking products. Mr. Denend is a graduate of the United
States Air Force Academy and holds an M.B.A. and Ph.D. in economics, public
policy and business from Stanford University. Mr. Denend was also a Fulbright
Scholar in economics at Bonn University.
53
ALBERT F. KNORP, JR. has served as a member of the Company's Board of
Directors since 1984 and as its Assistant Secretary since 1985. Mr. Knorp is a
general partner in Seaport Ventures, L.P., a family partnership. Since November
1994, Mr. Knorp has been of counsel to the law firm of Gray Cary Ware &
Freidenrich. He had previously been a partner in the law firm of Lewis, Knorp,
Walsh & Kavalaris. Mr. Knorp holds a B.A. in social studies from Stanford
University and an L.L.B. from Santa Clara University.
JAMES L. KOCH has served as a member of the Company's Board of Directors
since May 1991. Since July 1990, Mr. Koch has served in various positions at
Santa Clara University. Since February 1997, Mr. Koch has been its Director of
the Center for Science, Technology and Society and, since July 1990, a Professor
of Management and Corporate Strategy. In addition, from July 1990 to July 1996,
Mr. Koch served as Dean of the Leavey School of Business Administration at Santa
Clara University. Mr. Koch holds a B.A. in business administration from San
Francisco State University and an M.B.A. and Ph.D. in business administration
from the University of California, Los Angeles.
THOMAS A. MCDONNELL has served as a member of the Company's Board of
Directors since February 1988. Since 1971, Mr. McDonnell has served as Chief
Executive Officer of DST Systems, Inc. ("DST"), a transfer agent for mutual
funds, stocks and bonds, and since October 1984 as a director of DST. Mr.
McDonnell is also President of DST, a position he has held since 1973; Mr.
McDonnell also served as Treasurer of DST from 1973 to September 1995. From
August 1983 to November 1995, Mr. McDonnell was Executive Vice President and a
director of Kansas City Southern Industries, Inc., a holding company and the
former parent of DST. Mr. McDonnell is also director of BHA Group, Inc., a
manufacturer of pollution control devices, Cerner Corporation, a provider of
software and technology to the health care industry, Computer Sciences
Corporation, an information technology company, Euronet Services, Inc., an
operator of automatic teller machines, Janus Capital Corporation, a registered
investment advisor and Nellcor-Puritan-Bennett Corporation, a medical device
company. Mr. McDonnell holds a B.S. and B.A. in accounting from Rockhurst
College and an M.B.A. from the Wharton School of the University of Pennsylvania.
CYRIL J. YANSOUNI has served as a member of the Company's Board of
Directors since May 1991. Since March 1991, Mr. Yansouni has been the Chief
Executive Officer and Chairman of the Board of Directors of Read-Rite
Corporation, a manufacturer of thin film magnetic recording heads. He also is a
member of the Advisory Board of both the Leavey School of Business
Administration at Santa Clara University and the San Jose State University
School of Engineering. Mr. Yansouni is a director of PeopleSoft, Inc., a
provider of client/server business software, Raychem Corporation, an
international manufacturer and marketer of products for electronics, industrial
and telecommunications applications, and ActivCard, a French company that
develops authentication communication software. Mr. Yansouni holds a B.S. degree
in electrical and mechanical engineering from the University of Louvain, Belgium
and an M.S. degree in electrical engineering from Stanford University. In
addition, he attended the executive management program at Stanford University.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, requires the Company's officers and
directors and persons who own more than 10% of a registered class of the
Company's equity securities to file reports of ownership on Form 3 and changes
in ownership on Form 4 or 5 with the Commission. Such officers, directors, and
10% shareholders are also required by Commission rules to furnish the Company
with copies of all Section 16(a) reports they file.
Based solely on its review of the copies of such forms received by it or
written representations from certain reporting persons, the Company believes
that, during the year ended December 31, 1997, except as noted below, all
Section 16(a) filing requirements applicable to its officers, directors, and 10%
54
stockholders were satisfied on a timely basis. In making these statements, the
Company has relied upon the written representations of its officers and
directors.
Thomas McDonnell, a member of the Company's Board of Directors, failed to
file a report on Form 4 on a timely basis for a transaction involving the
exercise of an option under the 1994 Plan. Such transaction was reported on Mr.
McDonnell's Form 5 for the year ended December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the total compensation awarded to, earned
by, or paid for services rendered to the Company in all capacities during each
of fiscal 1997, 1996 and 1995, respectively, by the "Named Executive Officers"
who include (i) the Company's Chairman, President and Chief Executive Officer,
(ii) each of the Company's four most highly compensated executive officers other
than its Chief Executive Officer who were serving as officers of the Company at
the end of the fiscal year ended December 31, 1997 and whose salary and bonus
for fiscal 1997 exceeded $100,000; and (iii) the Company's former President and
Chief Executive Officer.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION(1) ---------------
SECURITIES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS OPTIONS(#) COMPENSATION
- --------------------------------------------------- ----------- ---------- ---------- --------------- -------------
CURRENT EXECUTIVE OFFICERS
Robert J. Finocchio, Jr. (2) ...................... 1997 $ 185,278 $ -- 1,500,000 5,000(12)
Chairman, President and Chief 1996 -- -- -- --
Executive Officer 1995 -- -- -- --
J. F. Hendrickson, Jr. (3) ........................ 1997 192,667 39,600 83,560(8) 5,977(13)
Vice President, Customer 1996 179,667 -- 30,000 6,013
Services, and Lenexa (Kansas) 1995 171,667 95,000 40,000 5,395
Site General Manager
Stephen E. Hill (4) ............................... 1997 163,667 33,400 56,000(9) 2,533(14)
Vice President and General 1996 154,569 -- 30,000 2,500
Manager, Tools Business Unit 1995 145,667 85,000 40,000 2,429
Myron (Mike) Saranga (5) .......................... 1997 267,667 69,000 409,000(10) 43,886(15)
Senior Vice President, Product 1996 245,667 -- 100,000 45,875
Management and Development 1995 229,333 168,000 130,000 5,525
Michael R. Stonebraker (6) ........................ 1997 209,200 42,400 135,000(11) 2,592(16)
Vice President and Chief 1996 155,000 -- 75,000 1,620
Technology Officer 1995 -- -- -- --
FORMER EXECUTIVE OFFICERS
Phillip E. White (7) .............................. 1997 277,083 -- -- 203,967(17)
Chairman, President and Chief 1996 461,667 -- 200,000 4,484
Executive Officer 1995 421,667 400,000 250,000 4,256
- ------------------------------
(1) Other than the salary and bonus described herein, the Company did not pay
any executive officer named in the Summary Compensation Table any fringe
benefits, perquisites or other compensation in excess of 10% of such
executive officer's salary and bonus during fiscal 1997, 1996 or 1995.
55
(2) Mr. Finocchio became Chairman, President and Chief Executive Officer in
July 1997. Accordingly, he received no reportable income from the Company
for fiscal 1996 or 1995. Mr. Finocchio's salary and other compensation for
fiscal 1997 were determined in accordance with the provisions of his
Employment Agreement with the Company. See "--Employment Agreements and
Change in Control Arrangements." In January 1998, the Company granted Mr.
Finocchio an additional option under the 1994 Plan to acquire 500,000
shares of Common Stock, subject to vesting in equal annual installments
over four years.
(3) Mr. Hendrickson became Vice President, Customer Services, in July 1992 and
Lenexa (Kansas) Site General Manager in February 1995.
(4) Mr. Hill was promoted to Vice President and General Manager, Tools Business
Unit in January 1998 from Vice President, Advanced Technology, a position
he had held since December 1995.
(5) Mr. Saranga became Senior Vice President, Product Management and
Development in May 1993.
(6) Dr. Stonebraker became Vice President and Chief Technology Officer in
February 1996. Accordingly, he received no reportable income for fiscal
1995.
(7) Mr. White resigned as Chairman, President and Chief Executive Officer in
July 1997.
(8) Includes options to purchase 56,000 shares that Mr. Hendrickson elected to
reprice under the Company's November 1997 option repricing program. In
connection with such repricing, Mr. Hendrickson forfeited the right to
purchase 14,000 shares of Common Stock under options previously granted to
him. See "--Stock Option Repricing."
(9) Fiscal 1997 figure includes 56,000 shares that Mr. Hill elected to reprice
under the Company's November 1997 option repricing program. In connection
with such repricing, Mr. Hill forfeited the right to purchase 14,000 shares
of Common Stock under options previously granted to him. See "--Stock
Option Repricing." In January 1998, the Company granted Mr. Hill an
additional option under the 1994 Plan to acquire 100,000 shares of Common
Stock, subject to vesting in equal installments over four years.
(10) Fiscal 1997 figure includes 184,000 shares Mr. Saranga elected to reprice
under the Company's November 1997 option repricing program. In connection
with such repricing, Mr. Saranga forfeited the right to purchase 46,000
shares of Common Stock under options previously granted to him. See
"--Stock Option Repricing." Fiscal 1997 figure also includes 100,000 option
shares of which will vest on December 31, 2000 if Mr. Saranga remains an
employee of the Company on such date. In January 1998, the Company granted
Mr. Saranga the right to receive 35,000 performance shares of Common Stock
under the 1994 Plan during each of the next three years if certain
financial milestones are met as of January 1, 1999, 2000 and 2001. Such
performance shares are subject to a right of repurchase in favor of the
Company which shall lapse if Mr. Saranga remains an employee of the Company
on January 1, 2001.
(11) Fiscal 1997 figure includes options to purchase 60,000 shares Dr.
Stonebraker elected to reprice under the Company's November 1997 option
repricing program. In connection with such repricing, Dr. Stonebraker
forfeited the right to purchase 15,000 shares of Common Stock under options
previously granted to him. See "--Stock Option Repricing."
(12) Represents reimbursement by the Company of $5,000 in legal fees incurred in
connection with the negotiation of Mr. Finocchio's Employment Agreement.
See "Employment Agreements and Change in Control Arrangements."
(13) Represents $4,050, $4,013 and $3,395 in group life insurance paid by the
Company in fiscal 1997, 1996 and 1995, respectively, and $1,927, $2,000 and
$2,000 in matching contributions under the Company's 401(k) Plan by the
Company in fiscal 1997, 1996 and 1995, respectively.
(14) Represents $533, $500 and $429 in group life insurance paid by the Company
in fiscal 1997, 1996 and 1995, respectively, and $2,000, $2,000 and $2,000
in matching contributions under the Company's 401(k) Plan by the Company in
fiscal 1997, 1996 and 1995, respectively.
(15) Represents $6,318, $4,050 and $3,525 in group life insurance paid by the
Company in fiscal 1997, 1996 and 1995, respectively and $2,000, $2,000, and
$2,000 in matching contributions under the Company's 401(k) plan in fiscal
1997, 1996 and 1995, respectively. Includes $35,568 and $39,825 in
forgiveness by the Company in fiscal 1997 and 1996, respectively, of
outstanding principal and accrued interest (such forgiveness amounts were
not grossed up to satisfy tax obligations) under a promissory note
delivered by Mr. Saranga to the Company. See "Certain Relationships and
Related Transactions."
(16) Represents $2,592 and $1,620 in group life insurance paid by the Company in
fiscal 1997 and 1996, respectively.
(17) Represents $4,050, $2,484 and $2,256 in group life insurance paid by the
Company in fiscal 1997, 1996 and 1995, respectively; and $2,000, $2,000 and
$2,000 in matching contributions under the Company's 401(k) plan paid by
the Company in fiscal 1997, 1996 and 1995, respectively. Fiscal 1997 figure
also includes $197,917 paid by the Company in connection with Mr. White's
resignation pursuant to the terms of his Employment Agreement with the
Company. See "--Employment Agreements and Change in Control Arrangements"
and "Certain Relationships and Related Transactions."
56
STOCK OPTION GRANTS
The following table provides information relating to stock options
awarded to each of the Named Executive Officers during fiscal 1997.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
---------------------------------------------------- POTENTIAL REALIZABLE VALUES
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTIONS TERM(1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ----------------------------
GRANTED FISCAL 1997(2) SHARE(3) DATE(4) 5% 10%
---------- --------------- ---------- ----------- ------------- -------------
CURRENT EXECUTIVE OFFICERS
Robert J. Finocchio, Jr. (5).......... 1,500,000 11.44% $ 10.8125 07/22/07 $ 10,199,885 $ 25,848,511
J. F. Hendrickson, Jr. (6)............ 27,500 0.21 9.0313 06/18/07 156,193 395,823
32,000 0.24 7.1563 04/18/05 99,665 234,842
24,000 0.18 7.1563 05/16/06 88,044 213,728
Stephen E. Hill(7).................... 50,000 0.38 9.0313 06/18/07 283,987 719,678
32,000 0.24 7.1563 04/18/05 99,665 234,842
24,800 0.18 7.1563 05/16/06 88,044 213,728
Myron (Mike) Saranga (8).............. 125,000 0.95 9.0313 06/18/07 709,967 1,799,196
100,000 0.76 9.5000 09/15/07 597,450 1,514,055
104,000 0.79 7.1563 04/18/05 323,911 763,235
80,000 0.61 7.1563 05/16/06 293,481 712,425
Michael R. Stonebraker (9)............ 75,000 0.57 9.0313 06/18/07 425,980 1,079,517
60,000 0.46 7.1563 04/15/06 217,424 526,549
FORMER EXECUTIVE OFFICERS
Phillip E. White...................... -- -- -- -- -- --
- ------------------------------
(1) Potential realizable value is based on the assumption that the Common Stock
of the Company appreciates at the annual rate shown (compounded annually)
from the date of grant until the expiration of the ten year option term.
These numbers are calculated based on the requirements promulgated by the
Commission and do not reflect the Company's estimate of future stock price
growth.
(2) Based on options to acquire 13,107,338 shares granted under the 1994 Plan,
the Director Plan and the Company's 1987 Non-Statutory Stock Option Plan.
Such option grants include shares granted as a result of the Company's
November 1997 option repricing program. See "--Stock Option Repricing."
Unless otherwise specified herein, all options granted to the Named
Executive Officers were under the 1994 Plan.
(3) Options were granted at an exercise price equal to not less than the fair
market value of the Company's Common Stock on the date of grant as reported
on the Nasdaq National Stock Market. The exercise price may be paid in cash,
check, by delivery of already-owned shares of the Company's Common Stock
subject to certain conditions or pursuant to a cashless exercise procedure
under which the optionee provides irrevocable instructions to a brokerage
firm to sell the purchased shares and to remit to the Company, out of the
sale proceeds, an amount equal to the exercise price plus all applicable
withholding taxes.
(4) Twenty-five percent (25%) of the shares issuable upon exercise of options
granted under the 1994 Plan become vested on the first anniversary of the
date of grant, and the remaining shares vest over three years at the rate of
25% of the shares subject to option vesting on each successive anniversary
of the option grant date. Unless otherwise specified, options granted to
Named Executive Officers in fiscal 1997, including options granted outside
the 1994 Plan, are subject to the Company's standard four year vesting
schedule described above.
(5) The options to purchase 1,500,000 option shares of Common Stock granted to
Mr. Finocchio were issued in connection with his Employment Agreement with
the Company. See "Employment Agreements and Change in Control Arrangements."
Of the 1,500,000 option shares granted to Mr. Finocchio, 1,000,000 were
granted under the 1994 Plan and 500,000 were granted under the Company's
1997 Non-Statutory Stock Option Plan. In addition, in January 1998, the
Company granted Mr. Finocchio an additional option under the 1994 Plan to
acquire 500,000 shares of Common Stock, subject to vesting in equal annual
installments over four years.
57
(6) Option grant figures includes 56,000 shares Mr. Hendrickson elected to
reprice under the Company's November 1997 option repricing program. In
connection with such repricing, Mr. Hendrickson forfeited the right to
purchase 14,000 shares of Common Stock under options previously granted to
him. See "--Stock Option Repricing."
(7) Option grant figures includes 56,000 shares Mr. Hill elected to reprice
under the Company's November 1997 option repricing program. In connection
with such repricing, Mr. Hill forfeited the right to purchase 14,000 shares
of Common Stock under options previously granted to him. See "--Stock Option
Repricing." In addition, in January 1998, the Company granted Mr. Hill an
additional option under the 1994 Plan to acquire 100,000 shares of Common
Stock, subject to vesting in equal annual installments over four years.
(8) Option grant figures includes 184,000 shares Mr. Saranga elected to reprice
under the Company's November 1997 option repricing program. In connection
with such repricing, Mr. Saranga forfeited the right to purchase 46,000
shares of Common Stock under options previously granted to him. See "--Stock
Option Repricing." Mr. Saranga's option to purchase up to 100,000 shares of
the Common Stock of the Company granted in September 1997 under the 1994
Plan will become vested on December 31, 2000 if Mr. Saranga remains an
employee of the Company on such date. In January 1998, the Company granted
Mr. Saranga the right to receive 35,000 performance shares of Common Stock
under the 1994 Plan each of the next three years if certain financial
milestones are met as of January 1, 1999, 2000 and 2001. Such performance
shares are subject to a right of repurchase in favor of the Company which
shall lapse if Mr. Saranga remains an employee of the Company on January 1,
2001.
(9) Option grant figures includes 60,000 shares Dr. Stonebraker elected to
reprice under the Company's November 1997 option repricing program. In
connection with such repricing, Dr. Stonebraker forfeited the right to
purchase 15,000 shares of Common Stock under options previously granted to
him. See "--Stock Option Repricing."
OPTION EXERCISES AND FISCAL 1997 YEAR-END VALUES
The following table sets forth certain information regarding the exercise
of stock options by the Named Executive Officers during fiscal 1997 and stock
options held as of December 31, 1997 by the Named Executive Officers.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS
SHARES 1997 AT DECEMBER 31, 1997(2)
ACQUIRED OR VALUE -------------------------- ---------------------------
EXERCISED REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ----------- ----------- ------------- ------------ -------------
CURRENT EXECUTIVE OFFICERS
Robert J. Finocchio, Jr.(3)....... -- $ -- -- 1,500,000 $ -- $ --
J. F. Hendrickson, Jr............. -- -- 320,000 93,500 132,800 --
Stephen E. Hill (4)............... 15,000 142,188 62,500 116,000 -- --
Myron (Mike) Saranga (5).......... -- -- 135,000 429,000 -- --
Michael R. Stonebraker............ -- -- -- 135,000 -- --
FORMER EXECUTIVE OFFICERS
Phillip E. White.................. 50,000 63,810 1,245,000(6) -- 624,348(6) --
- ------------------------------
(1) Market value at the time of exercise less the applicable exercise price.
(2) Based on the closing sales price of $4.750 of the underlying securities as
of December 31, 1997 as reported on the Nasdaq National Stock Market minus
the exercise price.
(3) In January 1998, the Company granted Mr. Finocchio an additional option to
purchase 500,000 shares of Common Stock under the 1994 Plan, subject to
vesting in equal installments over four years.
(4) In January 1998, the Company granted Mr. Hill an additional option to
purchase 100,000 shares of Common Stock under the 1994 Plan, subject to
vesting in equal installments over four years.
(5) In January 1998, the Company granted Mr. Saranga the right to receive 35,000
performance shares of Common Stock under the 1994 Plan each of the next
three years if certain financial milestones are met as of January 1, 1999,
2000 and 2001. Such performance shares are subject to a right of repurchase
in favor of the Company which shall lapse if Mr. Saranga remains an employee
of the Company on January 1, 2001.
(6) All of Mr. White's options expired in February 1998. Prior to the expiration
of such options, Mr. White exercised options to acquire an aggregate of
540,000 shares of Common Stock in January and February 1998 with a realized
value of approximately $1,161,380.
58
STOCK OPTION REPRICING
In September 1997, the Company's Board of Directors authorized the
repricing of outstanding options to purchase Common Stock under the Company's
stock option plans. Employees, including Named Executive Officers, were eligible
to participate only if they remained actively employed at the effective date of
the repricing and were only permitted to exchange options outstanding prior to
May 1, 1997. The repricing/option exchange was effective November 21, 1997 (the
"Repricing Effective Date"). The repricing program offered eligible employees
the opportunity to exchange eligible outstanding options with exercise prices in
excess of the closing sales price of the Company's Common Stock on the Repricing
Effective Date for a new option with an exercise price equal to such price.
Other than the exercise price, each new option issued upon exchange has terms
substantially equivalent to the surrendered option, including with respect to
the number of shares, vesting terms and expiration. Options issued in connection
with the exchange may not be exercised for a period of one year from the
Repricing Effective Date, however. In addition, officers of the Company
participating in the option exchange were required to forfeit 20% of the shares
subject to each option being surrendered. The exercise price for repriced
options was $7.1563, the closing sales price of the Company's Common Stock on
the Repricing Effective Date. The following table provides information with
respect to the November 1997 repricing for the Named Executive Officers and for
other executive officers of the Company who elected to reprice options. These
are the only executive officers of the Company who had their options repriced.
TEN-YEAR OPTION/SAR REPRICINGS
NUMBER OF
SECURITIES MARKET PRICE LENGTH OF
UNDERLYING OF STOCK AT EXERCISE ORIGINAL OPTION
OPTIONS/SARS TIME OF PRICE AT TIME NEW TERM REMAINING
REPRICED OR REPRICING OR OF REPRICING EXERCISE AT DATE OF
AMENDED AMENDMENT OR AMENDMENT PRICE REPRICING OR
NAME DATE (#)(1) ($) ($) ($) AMENDMENT
- ------------------------------------ --------- ------------- ------------- ------------- ----------- ---------------
CURRENT EXECUTIVE OFFICERS
Robert F. Finocchio, Jr.(2)....... -- -- -- -- -- --
Karen Blasing(3).................. 11/21/97 4,200 7.1563 18.250 7.1563 7.41
11/21/97 4,800 7.1563 18.250 7.1563 8.49
11/21/97 8,000 7.1563 18.250 7.1563 8.54
J. F. Hendrickson, Jr.(4)......... 11/21/97 32,000 7.1563 18.250 7.1563 7.41
11/21/97 24,000 7.1563 24.125 7.1563 8.48
Stephen E. Hill(5)................ 11/21/97 32,000 7.1563 18.250 7.1563 7.41
11/21/97 24,000 7.1563 24.125 7.1563 8.48
Myron (Mike) Saranga(6)........... 11/21/97 104,000 7.1563 18.250 7.1563 7.41
11/21/97 80,000 7.1563 24.125 7.1563 8.48
Michael R. Stonebraker(7)......... 11/21/97 60,000 7.1563 19.375 7.1563 8.40
FORMER EXECUTIVE OFFICERS
Philip E. White(8)................ -- -- -- -- -- --
- ------------------------------
(1) All options repriced by the Named Executive Officers and other executive
officers listed in the above table were granted under the 1994 Plan.
(2) Mr. Finocchio became Chairman, President and Chief Executive Officer in July
1997; consequently, he was not eligible to participate in the November 1997
repricing.
(3) Ms. Blasing has served as the Company's Corporate Controller since June 1996
and as a Vice President since August 1997. Ms. Blasing forfeited the right
to purchase 4,250 shares of Common Stock as a result of the repricing. At
the time of the repricing, 4,600 of the 17,000 options Ms. Blasing elected
to reprice were vested.
59
(4) Mr. Hendrickson forfeited the right to purchase 14,000 shares of Common
Stock as a result of the repricing. At the time of repricing, 22,000 of the
56,000 options Mr. Hendrickson elected to reprice were vested.
(5) Mr. Hill forfeited the right to purchase 14,000 shares of Common Stock as a
result of the repricing. At the time of repricing, 22,000 of the 56,000
options Mr. Hill elected to reprice were vested.
(6) Mr. Saranga forfeited his right to purchase 46,000 shares of Common Stock as
a result of the repricing. At the time of the repricing, 72,000 of the
184,000 options Mr. Saranga elected to reprice were vested.
(7) Dr. Stonebraker forfeited his right to purchase 15,000 shares of Common
Stock as a result of the repricing. At the time of the repricing, 15,000 of
the 60,000 options Dr. Stonebraker elected to reprice were unvested.
(8) Mr. White resigned as the Company's Chairman, President and Chief Executive
Officer in July 1997; consequently he was not eligible to participate in the
November 1997 repricing.
In December 1997, the Company's Board of Directors authorized a second
option repricing to be 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 ($5.094). Under the terms of the
second repricing, each employee, other than officers and directors of the
Company, could elect to exchange any option outstanding as of May 1, 1997 for a
new option with an exercise price equal to the closing sales price on the Second
Repricing Effective Date. Options exchanged in the second repricing may not be
exercised for a period of one year from the Second Repricing Effective Date.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
On July 18, 1997, the Company entered into an at-will employment
agreement with Mr. Finocchio, the Company's Chairman, President and Chief
Executive Officer. The agreement provides for an annual base salary of $460,000,
subject to annual review concerning increases. Pursuant to the agreement, the
Company granted Mr. Finocchio an option to purchase 1,000,000 shares of Common
Stock under the 1994 Plan at an exercise price per share of $10.8125, subject to
vesting in equal annual installments over four years and an option under the
Company's 1997 Non-Statutory Stock Option Plan to acquire an additional 500,000
shares of Common Stock, also at an exercise price of $10.8125 and subject to
vesting under the same terms as the grant under the 1994 Plan. In the event of a
merger or change in control of the Company, the exercisability of Mr.
Finocchio's options will accelerate so as to become fully vested. In January
1998, the Company granted Mr. Finocchio an additional option under the 1994 Plan
to acquire 500,000 shares of Common Stock, subject to vesting in equal annual
installments over four years.
On September 24, 1997, the Company entered into an at-will employment
letter agreement with Jean-Yves F. Dexmier, the Company's Executive Vice
President and Chief Financial Officer, which provides for an annual base salary
of $350,000 and an annual cash bonus based on the achievement of individual and
Company performance objectives. In the event Mr. Dexmier is terminated without
cause within the first twelve months of his employment with the Company, he will
be entitled to receive severance in an amount equal to one year of base salary
plus any bonus he would have been entitled to receive under the Company's
executive compensation plan. If such termination occurs after Mr. Dexmier's
first twelve months with the Company, he shall be entitled to receive as
severance an amount equal to six months base salary. If there is a change of
control of the Company within the first twelve months Mr. Dexmier is employed
with the Company, Mr. Dexmier will be entitled to receive $1,000,000 less any
stock option profit realized upon the change in ownership. In connection with
his employment, the Company granted Mr. Dexmier an option under the 1994 Plan to
acquire 500,000 shares of Common Stock at an exercise price of $6.8125, subject
to vesting in equal annual installments over four years. In January 1998, the
Company granted Mr. Dexmier an additional option under the 1994 Plan to acquire
100,000 shares of Common Stock, subject to equal annual installments over four
years.
On September 18, 1997, the Company entered into an at-will employment
letter agreement with Wesley Raffel, the Company's Vice President, North
American Field Operations, which provides for an annual base salary of $250,000
and an annual cash bonus based on the achievement of individual and Company
performance objectives. In the event of a change in the Chief Executive Officer
or a change in
60
ownership of the Company, Mr. Raffel will be entitled to receive severance in an
amount equal to one year of base salary. In connection with his employment, the
Company granted Mr. Raffel an option under the 1994 Plan to acquire 325,000
shares of Common Stock at an exercise price of $7.3438, subject to vesting in
equal annual installments over four years.
In October 1997, the Company entered into Change of Control Agreements
(the "Change of Control Agreements") with Messrs. Dexmier and Raffel, Myron
(Mike) Saranga, the Company's Senior Vice President, Product Management and
Development, and Karen Blasing, the Company's Vice President and Corporate
Controller. The Change of Control Agreements, which are substantially similar
for each executive officer, provide that in the event a change in control of the
Company occurs, the exercisability of each executive officer's options will
accelerate so as to become fully vested.
In January 1998, the Company entered into an at-will employment letter
with Susan T. Daniel, the Company's Vice President, Human Resources, which
provides for an annual base salary of $230,000 and an annual cash bonus based on
the achievement of individual and Company performance objectives. Ms. Daniel
will also receive $7,500 annually her first two years of employment if she
remains employed with the Company on the anniversary date of her employment with
the Company. In connection with her employment, the Company granted Ms. Daniel
an option under the 1994 Plan to acquire 200,000 shares of Common Stock at a per
share exercise price of $7.4688, subject to vesting in equal annual installments
over four years. In the event of a change of ownership of the Company within Ms.
Daniel's first two years of employment with the Company where Ms. Daniel's
employment is terminated within 90 days of the change of control event other
than for cause, she will be entitled to receive severance in an amount equal to
one (1) year base salary. If a change of control in the ownership of the Company
occurs within Ms. Daniel's first six months with the Company, the exercisability
of her options will accelerate as to two years additional vesting. If such
change of control takes place after such six month period, the exercisability of
Ms. Daniel's options will accelerate so as to become fully vested.
In January 1998, the Company entered into an at-will employment letter
with Gary Lloyd, the Company's Vice President, Legal, General Counsel and
Secretary, which provides for an annual base salary of $200,000 and an annual
cash bonus based on the achievement of individual and Company performance
objectives. In connection with his employment, the Company granted Mr. Lloyd an
option under the 1994 Plan to acquire 150,000 shares of Common Stock at a per
share exercise price of $5.7500, subject to vesting in equal installments over
four years. If a change of control in the ownership of the Company occurs within
Mr. Lloyd's first six months with the Company, the exercisability of his options
will accelerate as to two years additional vesting. If such change of control
takes place after such six month period, the exercisability of Mr. Lloyd's
options will accelerate so as to become fully vested.
On March 18, 1998, the Company entered into an at-will employment letter
agreement with Diane L. Fraiman, the Company's Vice President, Corporate
Marketing, which provides for an annual base salary of $250,000 and an annual
cash bonus based on the achievement of individual and Company performance
objectives. Pursuant to her employment letter, Ms. Fraiman received a $135,000
signing bonus, which Ms. Fraiman will be required to repay in full if she
terminates her employment with the Company prior to the first anniversary of her
commencement date. Ms. Fraiman will be required to repay half that amount if she
terminates her employment after the first anniversary date but prior to the
second anniversary date. In connection with her employment with the Company, the
Company granted Ms. Fraiman option to acquire 200,000 shares of Common Stock at
an exercise price equal to the closing sales price of the Company's Common Stock
as reported by The Nasdaq Stock Market on Ms. Fraiman's employment commencement
date with the Company, subject to vesting in equal annual installments over four
years. If there is a change in control of the Company within the first six
months after the date of Ms. Fraiman's employment letter, the vesting of Ms.
Fraiman's options will accelerate as to two year's additional vesting. If such
change of control occurs after such six month anniversary, Ms. Fraiman's options
will accelerate so as to become fully vested.
61
Other than the employment arrangements described above, the Company does
not have employment agreements with any other current executive officer or
director.
In connection with Philip E. White's resignation as Chairman, President
and Chief Executive Officer in July 1997, and pursuant to his employment
agreement with the Company, the Company was obligated to pay Mr. White six
months salary at a rate of $39,583.34 per month from the time of his
resignation.
The Company has entered into severance arrangements with additional
former executive officers of the Company. See "Certain Relationships and Related
Transactions."
The Company has also adopted a Rights Agreement, commonly referred to as
a poison pill. The Company's Board of Directors has declared a dividend of one
Purchase Right ("Right") under the Company's Rights Agreement for each share of
the Company's Common Stock outstanding on September 17, 1991 or thereafter
issued. When exercisable, each Right initially entitles the holder to purchase
one share of Common Stock at a specified price. The Rights become exercisable on
the earlier of: (i) the tenth day (or such later date as may be determined by a
majority of the Company's Directors not affiliated with the acquiring person or
group (the "Continuing Directors")) after a person or group has acquired, or
obtained the right to acquire, beneficial ownership of 20% of more of the
Company's outstanding Common Stock or (ii) the tenth business day (or such later
date as may be determined by a majority of the Continuing Directors) following
the consummation of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in beneficial ownership by
a person or group of 20% or more of the Company's outstanding Common Stock. If
an acquiror obtains 20% or more of the Company's outstanding Common Stock (other
than in certain permitted transactions), and unless the Rights are earlier
redeemed, the holder of each unexercised Right will have the right to receive
shares of the Company's Common Stock having a value equal to two times the
purchase price. Similarly, unless the Rights are earlier redeemed, after the
tenth day following certain acquisition transactions, proper provision must be
made so that holders of Rights (other than those beneficially owned by an
acquiring person, which will thereafter be void) will thereafter have the right
to receive, upon exercise, shares of common stock of the acquiring company
having a value equal to two times the purchase price. The Rights Agreement has
been amended so as to prevent holders of the Series A-1 Preferred and the
holders of the Series B Preferred from being deemed acquiring persons under the
Rights Agreement by virtue of their beneficial ownership of securities issued or
issuable in connection with the sale and issuance of Preferred Stock. The Rights
expire on July 25, 2005 or on their earlier exchange, redemption or expiration
in connection with certain permitted transactions.
62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock and Series B Preferred as of
December 31, 1997 by (i) each person or entity who is known by the Company to
own beneficially 5% or more of the Company's outstanding Common Stock or Series
B Preferred; (ii) each director of the Company; (iii) the Named Executive
Officers; and (iv) all directors and current executive officers of the Company
as a group.
SHARES OF COMMON STOCK
BENEFICIALLY OWNED(2)
--------------------------
PERCENT OF
NAME AND ADDRESS OF STOCKHOLDER(1) NUMBER CLASS
- ------------------------------------------------------------------------------------------ ------------ ------------
COMMON STOCK
5% STOCKHOLDERS
Fletcher International Limited(3) ...................................................... 13,674,500 8.2%
c/o Midland Bank Trust Corporation (Cayman) Limited
P.O. Box 1109, Mary Street
Grand Cayman, Cayman Islands
British West Indies
DIRECTORS AND CURRENT EXECUTIVE OFFICERS
Leslie G. Denend(4)..................................................................... -- --
Robert J. Finocchio, Jr.(5)............................................................. 100 *
J.F. Hendrickson, Jr.(6)................................................................ 321,072 *
Stephen E. Hill(7)...................................................................... 64,373 *
Albert F. Knorp, Jr.(8)................................................................. 153,868 *
James L. Koch(9)........................................................................ 84,000 *
Thomas A. McDonnell(10)................................................................. 140,000 *
Myron (Mike) Saranga(11)................................................................ 136,760 *
Michael R. Stonebraker(12).............................................................. 638,655 *
Cyril J. Yansouni(13)................................................................... 40,000 *
All current directors and executive officers as a group (17 persons)(14)................ 1,587,679 1.0
FORMER EXECUTIVE OFFICERS
Phillip E. White(15).................................................................... 1,257,819 *
SERIES B PREFERRED
CC Investments, LDC (16)(17) ........................................................... 12,500 25.0
c/o Fund Services
Corporate Centre, West Bay Road
P.O. Box 31106, SMB
Grand Cayman, Cayman Islands BVI
Proprietary Convertible Investment Group Inc.(16)(18) .................................. 20,000 40.0
c/o Credit Suisse First Boston
11 Madison Avenue, 3rd Floor
New York, New York 10010
Capital Ventures International(16)(19) ................................................. 17,500 35.0%
1 Capital Place
P.O. Box 1787
Georgetown, Grand Cayman, Grand Cayman Islands BVI
- ------------------------------
* Less than 1%.
(1) Unless otherwise indicated, the address for each listed stockholder, other
than the Selling Stockholders, is c/o Informix Corporation, 4100 Bohannon
Drive, Menlo Park, California 94025. Except as otherwise indicated, and
subject to applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock held by them.
(2) For figures related to holdings of Common Stock, applicable percentage
ownership is based on 165,356,959 shares of Common Stock outstanding as of
December 31, 1997 (including the February 1998 issuance of 12,769,908
shares of Common Stock issued to Fletcher upon conversion of 220,000 shares
of Series A-1 Preferred as described more fully in footnote 3), together
with applicable options or warrants for such stockholder. Beneficial
ownership is determined in accordance with the rules of the
63
Commission and generally includes voting or investment power with respect
to securities, subject to community property laws, where applicable. Shares
of Common Stock subject to options or warrants that are presently
exercisable or exercisable within 60 days of December 31, 1997 or shares of
Common Stock issuable upon conversion of Preferred Stock which shares of
Preferred Stock are presently convertible or convertible within 60 days of
December 31, 1997 are deemed to be beneficially owned by the person holding
such options or warrants for the purpose of computing the percentage of
ownership of such person but are not treated as outstanding for the purpose
of computing the percentage of any other person.
(3) Includes 12,769,208 shares of Common Stock issued upon conversion of
220,000 shares of Series A-1 Preferred on February 13, 1998 and 904,592
shares of Common Stock currently issuable upon conversion of shares of
Series A-1 Preferred, which are currently issuable upon exercise of the
Series A-1 Warrant. As described below, the number of shares of Common
Stock issuable upon exercise and conversion of the Series A-1 Warrant will
increase effective April 1, 1998. Fletcher is the original purchaser of
160,000 shares of the Company's Series A Preferred and the Series A Warrant
to purchase an additional 140,000 shares of Series A Preferred. Fletcher
exchanged such Series A Preferred for a like number of shares of Series A-1
Preferred and exchanged the Series A Warrant for the Series A-1 Warrant to
purchase a like number of shares of Series A-1 Preferred. The Series A-1
Preferred is convertible into Common Stock of the Company based on a
conversion rate that is dependent upon the trading price of the Company's
Common Stock as reported on The Nasdaq Stock Market prior to the time of
such conversion. As indicated above, on February 13, 1998, Fletcher
exercised the Series A-1 Warrant with respect to 60,000 shares of Series
A-1 Preferred and simultaneously converted 220,000 shares of A-1 Preferred
into 12,769,908 shares of Common Stock. Pursuant to the terms of the
Subscription Agreement, the maximum number of shares of Common Stock
issuable upon conversion of the Series A-1 Preferred (including upon
exercise and conversion of the Series A-1 Warrant) was 13,674,500 as of
December 31, 1997; however, on January 26, 1998, pursuant to the terms of
the original financing agreements, Fletcher gave the Company a notice
designating 16,674,500 shares as the maximum number of shares of Common
Stock to be issuable upon conversion of the Series A-1 Preferred on or
after April 1, 1998. Fletcher must give the Company another notice to
increase the maximum number of conversion shares further. The Series A-1
Preferred shares are non-voting securities and holders of Series A-1
Preferred are not generally entitled to vote on corporate matters, prior to
the conversion of such shares into Common Stock.
(4) Mr. Denend is a member of the Company's Board of Directors.
(5) Includes 100 shares of Common Stock held by Mr. Finocchio's minor son. Mr.
Finocchio is the Company's Chairman, President and Chief Executive Officer.
See "Management--Employment Agreements and Change-in-Control Arrangements."
(6) Includes 320,000 shares of Common Stock held issuable upon exercise of
outstanding options which are presently exercisable or will become
exercisable within 60 days of December 31, 1997. Mr. Hendrickson is the
Company's Vice President, Customer Services, and Lenexa (Kansas) Site
General Manager. Mr. Hendrickson forfeited options to acquire 14,000 shares
of Common Stock in connection with the Company's November 1997 option
repricing program. See "Executive Compensation--Stock Option Repricing."
(7) Includes 62,500 shares of Common Stock issuable upon exercise of
outstanding options which are presently exercisable or will become
exercisable within 60 days of December 31, 1997. Mr. Hill is the Company's
Vice President and General Manager, Tools Business Unit. Mr. Hill forfeited
options to acquire 14,000 shares of Common Stock in connection with the
Company's November 1997 option repricing program. See "Executive
Compensation--Stock Option Repricing."
(8) Includes 25,000 shares of Common Stock issuable upon exercise of
outstanding options which are presently exercisable or will become
exercisable within 60 days of December 31, 1997. Also includes 105,728
shares of Common Stock held by Seaport Ventures, L.P., of which Mr. Knorp
is a general partner. Mr. Knorp is a member of the Company's Board of
Directors.
(9) Includes 82,000 shares of Common Stock issuable upon exercise of
outstanding options which are presently exercisable or will become
exercisable within 60 days of December 31, 1997. Mr. Koch is a member of
the Company's Board of Directors.
(10) Includes 85,000 shares of Common Stock issuable upon exercise of
outstanding options which are presently exercisable or will become
exercisable within 60 days of December 31, 1997. Mr. McDonnell is a member
of the Company's Board of Directors.
(11) Includes 135,000 shares of Common Stock issuable upon exercise of
outstanding options which are presently exercisable or will become
exercisable within 60 days of December 31, 1997. Mr. Saranga is the
Company's Senior Vice President, Product Management and Development. Mr.
Saranga forfeited options to acquire 46,000 shares of Common Stock in
connection with the Company's November 1997 option repricing program. See
"Executive Compensation--Stock Option Repricing."
(12) Includes 181,882 shares of Common Stock held by Dr. Stonebraker's minor
children and 533 shares of Common Stock held by Dr. Stonebraker as trustee
for the Michael Stonebraker Pension Plan. Dr. Stonebraker is the Company's
Vice President and Chief Technology Officer. Dr. Stonebraker forfeited
options to acquire 15,000 shares of Common Stock in connection with the
Company's November 1997 option repricing program. See "Executive
Compensation--Stock Option Repricing."
(13) Includes 40,000 shares of Common Stock issuable upon exercise of
outstanding options which are presently exercisable or will become
exercisable within 60 days of December 31, 1997. Mr. Yansouni is a member
of the Company's Board of Directors.
64
(14) Includes 754,000 shares of Common Stock issuable upon exercise of
outstanding options which are presently exercisable or will become
exercisable within 60 days of December 31, 1997.
(15) Includes 1,245,000 shares of Common Stock issuable upon exercise of
outstanding options which are presently exercisable or will be exercisable
withing 60 days of December 31, 1997. Mr. White resigned as Chairman of
the Board of Directors, President and Chief Executive Officer in July
1997. Mr. White's options remained exercisable for 90 days after the
termination of his employment, and such 90 day period was extended for any
days when the Company was out of compliance with its reporting
requirements under the Exchange Act. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Mr. White's
options expired in February 1998. Prior to the termination of such
options, Mr. White exercised options to acquire an aggregate of 540,000
shares of Common Stock in January and February 1998.
(16) The Series B Preferred is convertible into Common Stock of the Company
based upon the trading price of the Company's Common Stock as reported on
The Nasdaq Stock Market. The Series B Preferred are non-voting securities
and only shares of Common Stock issuable upon conversion of the Series B
Preferred are entitled to vote on corporate matters. Generally, shares of
Series B Preferred are first convertible on May 19, 1998. Upon conversion
of the Series B Preferred, the holders of such Series B Preferred will be
issued the Series B Warrants which will be exercisable immediately
thereafter.
(17) Based on an assumed Series B Preferred conversion price of $4.00, upon
conversion of such holder's shares of Series B Preferred such holder would
hold 3,800,000 shares of Common Stock of the Company, including 675,000
shares of Common Stock purchasable upon exercise of the Series B Warrants.
Based upon the assumed issuance of all shares of Common Stock issuable
upon the conversion of the Series B Preferred and upon exercise of the
Series B Warrants, such holder would hold approximately 2.3% of the
Company's outstanding Common Stock as of December 31, 1997, after taking
into consideration the February 1998 issuance of 12,769,208 shares to
Fletcher upon conversion of certain shares of Series A-1 Preferred (see
footnote 3).
(18) Based on an assumed Series B Preferred conversion price of $4.00, upon
conversion of such holder's shares of Series B Preferred such holder would
hold 6,080,000 shares of Common Stock of the Company, including 1,080,000
shares of Common Stock purchasable upon exercise of the Series B Warrants.
Based upon the assumed issuance of all shares of Common Stock issuable
upon the conversion of the Series B Preferred and upon exercise of the
Series B Warrants, such holder would hold approximately 3.7% of the
Company's outstanding Common Stock as of December 31, 1997, after taking
into consideration the February 1998 issuance of 12,769,208 shares to
Fletcher upon conversion of certain shares of Series A-1 Preferred (see
footnote 3).
(19) Based on an assumed Series B Preferred conversion price of $4.00, upon
conversion of such holder's shares of Series B Preferred such holder would
hold 5,320,000 shares of Common Stock of the Company, including 945,000
shares of Common Stock purchasable upon exercise of the Series B Warrants.
Based upon the assumed issuance of all shares of Common Stock issuable
upon the conversion of the Series B Preferred and upon exercise of the
Series B Warrants, such holder would hold approximately 3.2% of the
Company's outstanding Common Stock as of December 31, 1997, after taking
into consideration the February 1998 issuance of 12,769,208 shares to
Fletcher upon conversion of certain shares of Series A-1 Preferred (see
footnote 3).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1993, the Company made a loan in the principal amount of $150,000
to Myron (Mike) Saranga, the Company's Senior Vice President, Product Management
and Development, in connection with his accepting employment by the Company. The
loan is secured by a second deed of trust on residential real property acquired
by Mr. Saranga in California and was originally due and payable in full on the
earliest of June 2, 1995, the date Mr. Saranga sold certain residential real
property located in Connecticut, or the date Mr. Saranga's employment with the
Company was terminated. In June 1995, Mr. Saranga and the Company amended the
loan to increase the interest rate of 3.56% per annum to 6.55% per annum and to
provide that $30,000 of principal, and accrued interest, would be forgiven on
June 2, 1996 and each anniversary thereafter until the loan is no longer
outstanding, provided that Mr. Saranga remains an employee of the Company. The
loan continues to provide that the full amount of unpaid principal and accrued
interest will become immediately due and payable on the date Mr. Saranga's
employment with the Company is terminated for any reason. In June 1997 and June
1996, respectively, the Company forgave $35,568 and $39,825 of principal and
interest on the loan under the promissory note, respectively (such forgiveness
amounts were not grossed up to satisfy tax obligations). As of December 31,
1997, outstanding principal under the note totaled $90,000.
65
In April 1997, the Company entered into Separation Agreements with Ronald
M. Alvarez, the Company's former Vice President, American Sales, and Edwin C.
Winder, the Company's former Vice President, Japan Operations, in connection
with their resignations as executive officers of the Company. Under the terms of
their respective Separation Agreements, Mr. Alvarez and Mr. Winder received
payments for six months additional salary from the time of their resignations at
the rate of $17,083.33 and $18,250.00 per month, respectively. In addition, Mr.
Alvarez received a bonus in the amount of $7,686.00 for his services during the
Company's first fiscal quarter of 1997. As part of his Separation Agreement,
options to purchase 11,250 shares of Common Stock of the Company held by Mr.
Alvarez continued to vest during the six months subsequent to his resignation
date. The Company also agreed to pay both Mr. Alvarez and Mr. Winder additional
fees for outplacement services and legal fees incurred in connection with the
negotiation of their respective Separation Agreements.
In connection with D. Kenneth Coulter's resignation as Executive Vice
President, Worldwide Field Operations in July 1997, and pursuant to an
Employment Agreement the Company previously entered with Mr. Coulter, the
Company paid Mr. Coulter an aggregate of $106,954 over the five month period
ending December 31, 1997.
In January 1997, the Company made a loan in the principal amount of
$150,000 to Alan Henricks, the Company's former Executive Vice President and
Chief Financial Officer, at an interest rate of seven percent (7.0%) per annum
in connection with his appointment as Chief Financial Officer. Under the terms
of the loan, $50,000 of principal would be forgiven on December 20 of each year
that Mr. Henricks remained an employee of the Company. In connection with Mr.
Henricks' resignation in April 1997, the Company entered into a Separation
Agreement with Mr. Henricks whereby the Company agreed to pay Mr. Henricks nine
months salary at a rate of $25,000.00 per month following his resignation. In
addition, Mr. Henricks agreed to repay the outstanding principal and interest
under the note in equal monthly installments of $17,156.00 through deductions
from Mr. Henricks' monthly severance payments described above.
In connection with David H. Stanley's resignation as Vice President,
Legal and Corporate Services, and General Counsel in October 1997, the Company
entered into a Separation Agreement with Mr. Stanley whereby the Company agreed
to pay Mr. Stanley six months salary at a rate of $16,666.67 per month following
his resignation. In addition, the Company agreed that unvested options to
purchase up to an aggregate of 150,000 shares of Common Stock of the Company
held by Mr. Stanley would continue to vest during a one month transition period.
Under the Separation Agreement the Company also agreed to pay Mr. Stanley up to
$5,000 for outplacement services.
The Company has made certain payments to Phillip E. White, the Company's
former Chairman, President and Chief Executive Officer in connection with his
resignation pursuant to the terms of an employment agreement between the Company
and Mr. White. See "Management--Employment Agreements and Change in Control
Arrangements."
On November 17, 1997, the Company issued 160,000 shares of Series A-1
Preferred in cancellation of and exchange for all of the outstanding Series A
Convertible Preferred Stock previously issued in connection with a Subscription
Agreement, dated August 12, 1997, between Fletcher International Limited and the
Company. The issuance of the Series A-1 Preferred in exchange for the Series A
Preferred was effected in reliance on the exemption under Section 3(a)(9) of the
Securities Act.
In connection with the issuance of the Series B Preferred in November
1997, the Company paid The Shemano a fee of $1,000,000 for financial advisory
services provided in connection with such financing. In addition, the Company
issued Shemano 100,000 shares of its Common Stock. The Company also agreed to
issue Shemano a warrant to purchase up to an additional 50,000 shares of Common
Stock in the event that, as of May 17, 1998, the trading price of the Company's
Common Stock is less than $12.50 (the "Shemano Warrant"). The Shemano Warrant is
exercisable according to the same terms as the Series B Warrants. In February
1998, the Company and Shemano entered a letter agreement pursuant to
66
which the Company agreed to repurchase from Shemano the 100,000 shares of Common
Stock issued in connection with the issuance of the Series B Preferred. The
repurchase price would be determined based on the then-prevailing price on The
Nasdaq Stock Market and would be payable in cash. The Company's obligation to
repurchase such shares will terminate upon the effectiveness with the Commission
of a registration statement covering such shares.
Pursuant to both Article VI of the Company's Bylaws and Section 6 of the
Indemnification Agreement the Company enters into with its executive officers
and directors, the Company advances expenses incurred by indemnified parties in
connection with the investigation, defense, settlement or appeal of threatened,
pending or completed action or suits against such parties in their capacity as
an agent of the Company. Under both the Bylaws and the Indemnification
Agreement, the indemnified party will repay the Company for any advanced
expenses if it is ultimately determined that the indemnified party is not
entitled to be indemnified by the Company. See "Legal Proceedings" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Litigation." As of March 15, 1998, the Company has received invoices
for legal fees of approximately $555,000 incurred by certain of its current and
former executive officers and/or directors in connection with certain actions
and suits discussed in this report. As of the date of this report, the Company
has advanced approximately $370,000 in expenses to its former executive officers
and/or directors incurred in connection with such proceedings. The Company
anticipates advancing the remaining balance of such expenses in the near future.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee during fiscal 1997 were James
L. Koch, Thomas A. McDonnell and Cyril J. Yansouni. Messrs. Koch, McDonnell and
Yansouni were not at any time during the Company's 1997 fiscal year or at any
other time an officer or employee of the Company. No executive officer of the
Company serves as a member of the board of directors or compensation committee
of any entity which has one or more executive officers serving as a member of
the Company's Board of Directors or Compensation Committee.
67
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following are filed as a part of this Annual Report and included in Item
8:
(a)1. FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Auditors............................................................................. F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Operations...................................................................... F-4
Consolidated Statements of Cash Flows...................................................................... F-5
Consolidated Statements of Stockholders' Equity............................................................ F-6
Notes to Consolidated Financial Statements................................................................. F-7
(a)2. FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuation and Qualifying Accounts
(a)3. EXHIBITS
EXHIBIT NO. EXHIBIT TITLE
- ------------- -------------------------------------------------------------------------------------------------
3.1 (3) Certificate of Incorporation of the Registrant, as amended
3.2 (3) Bylaws of the Registrant, as amended
3.3 (4) Certificate of Designation of Series A Convertible Preferred Stock
3.4 (5) Certificate of Designation of Series A-1 Convertible Preferred Stock
3.5 (5) Certificate of Designation of Series B Convertible Preferred Stock
4.1 (6) First Amended and Restated Rights Agreement, dated as of August 12, 1997, between the Registrant
and BankBoston N.A., including the form of Rights Certificate attached thereto as Exhibit A
4.2 (7) Amendment, dated as of November 17, 1997, to the First Amended and Restated Rights Agreement
between the Registrant and BankBoston, N.A.
10.1 (2) Form of Change of Control Agreement
10.2 (9) Form of Amended Indemnity Agreement
10.3 (10) 1989 Outside Directors Stock Option Plan
10.4 (1) Amendment to the 1989 Outside Directors Stock Option Plan
10.5 (2) Form of Nonqualified Stock Option Agreement under the Registrant's 1989 Outside Director's Stock
Option Plan
10.6 (12) 1986 Stock Option Plan, as amended
10.7 (13) 1994 Stock Option and Award Plan
10.8 (1) Form of Stock Option Agreement and Performance Award Agreement under the Registrant's 1994 Stock
Option and Award Plan
10.9 (13) Form of Nonqualified Stock Option Agreement under the Registrant's 1994 Stock Option Plan
10.10 (14) 1997 Employee Stock Purchase Plan
10.11 (2) Enrollment/Change Form under the Registrant's 1997 Employee Stock Purchase Plan
10.12 (15) Employment Agreement, dated July 18, 1997, between the Registrant and Robert J. Finocchio, Jr.
10.13 (15) Offer of Employment Letter, dated September 18, 1997, from the Registrant to Wes Raffel
10.14 (15) Offer of Employment Letter, dated September 24, 1997, from the Registrant to Jean-Yves Dexmier
68
EXHIBIT NO. EXHIBIT TITLE
- ------------- -------------------------------------------------------------------------------------------------
10.15 (2) Separation Agreement, dated April 18, 1987, between the Registrant and Ronald M. Alvarez
10.16 (2) Separation Agreement, dated May 12, 1997, between the Registrant and Edwin C. Winder
10.17 (16) Employment Agreement, dated January 1, 1989, between the Registrant and Phillip E. White
10.18 (2) Contract of Employment, dated December 5, 1996, between the Registrant and Kenneth Coulter
10.19 (2) Employment Letter Agreement, dated November 25, 1996, between the Registrant and Kenneth Coulter
10.20 (4) Subscription Agreement, dated August 12, 1997, between the Company and Fletcher International
Limited
10.21 (17) Exchange Agreement, dated as of November 17, 1997, between the Company and Fletcher International
Limited
10.22 (17) Amendment No. 1 to Subscription Agreement, dated as of November 17, 1997, between the Company and
Fletcher International Limited
10.23 (5) Securities Purchase Agreement, dated as of November 17, 1997, between the Company and the
purchasers listed therein
10.24 (5) Registration Rights Agreement, dated as of November 17, 1997, between the Company and the
purchasers listed therein
10.25 (8) Menlo Oaks Corporate Center Standard Business Lease, dated May 16, 1985, between the Registrant
and Amarok Bredero Partners for office space at 4100 Bohannon Drive, Menlo Park, California
10.26 (8) Lease Amendment #1, dated July 2, 1986, between the Registrant and Amarok Bredero Partners for
office space at 4100 Bohannon Drive, Menlo Park, California
10.27 (18) Second Amendment to Lease, dated November 7, 1986 between the Registrant and Amarok Bredero
Partners for office space at 4100 Bohannon Drive, Menlo Park, California
10.28 (19) Third Amendment to Lease, dated June 18, 1991, between the Registrant and Menlo Oaks Partners,
L.P. for office space at 4100 Bohannon Drive, Menlo Park, California
10.29 (2) Fourth Amendment to Lease, dated June 30, 1997, between the Registrant and Menlo Oaks Partners,
L.P. for office space at 4100 Bohannon Drive, Menlo Park, California
10.30 (9) Menlo Oaks Corporate Center Standard Business Lease, dated September 4, 1987 between the
Registrant and Menlo Oaks Partners, L.P. for office space at 4300/4400 Bohannon Drive, Menlo
Park, California
10.31 (2) Side Letter Agreement, dated August 31, 1987, between the Registrant and Menlo Oaks Partners,
L.P. for office space at 4300/4400 Bohannon Drive, Menlo Park, California
10.32 (2) Side Letter Agreement, dated October 27, 1987, between the Registrant and Menlo Oaks Partners,
L.P. for office space at 4300/4400 Bohannon Drive, Menlo Park, California
10.33 (19) First Amendment to Lease, dated June 18, 1991, between the Registrant and Menlo Oaks Partners,
L.P. for office space at 4300/4400 Bohannon Drive, Menlo Park, California
10.34 (20) Second Amendment to Lease, dated July 17, 1992, between the Registrant and Menlo Oaks Partners,
L.P. for office space at 4300/4400 Bohannon Drive, Menlo Park, California
10.35 (2) Third Amendment to Lease, dated June 8, 1993 between the Registrant and Menlo Oaks Partners, L.P.
for office space at 4300/4400 Bohannon Drive, Menlo Park, California
69
EXHIBIT NO. EXHIBIT TITLE
- ------------- -------------------------------------------------------------------------------------------------
10.36 (21) Fourth Amendment to Lease, dated February 10, 1994, between the Registrant and Menlo Oaks
Partners, L.P. for office space at 4300/4400 Bohannon Drive, Menlo Park, California
10.37 (2) Fifth Amendment to Lease, dated June 30, 1997 between the Registrant and Menlo Oaks Partners,
L.P. for office space at 4300/4400 Bohannon Drive, Menlo Park, California
10.38 (21) Menlo Oaks Corporate Center Standard Business Lease, dated February 10, 1994 between the
Registrant and Menlo Oaks Partners, L.P. for office space at 4600/4700 Bohannon Drive, Menlo
Park, California
10.39 (21) First Amendment to Lease, dated March 17, 1994, between the Registrant and Menlo Oaks Partners,
L.P. for office space at 4600/4700 Bohannon Drive, Menlo Park, California
10.40 (2) Second Amendment to Lease, dated September 22, 1994, between the Registrant and Menlo Oaks
Partners, L.P. for office space at 4600/4700 Bohannon Drive, Menlo Park, California
10.41 (2) Third Amendment to Lease, dated December 28, 1994, between the Registrant and Menlo Oaks
Partners, L.P. for office space at 4600/4700 Bohannon Drive, Menlo Park, California
10.42 (9) Office Lease, dated August 15, 1987, between the Registrant and Southlake Partners #1 for office
space at 15961 College Blvd. and 11170 Lakeview Avenue, Lenexa, Kansas
10.43 (2) First Amendment to Office Lease, dated April 15, 1988, between the Registrant and Southlake
Partners #1 for office space at 15901 College Blvd., Lenexa, Kansas
10.44 (2) Amendment to Office Lease, dated October 20, 1997, between the Registrant and Southlake Partners
#1 for office space at 15901 College Blvd. (now 16011 College Blvd) Lenexa, Kansas
10.45 (2) Office Lease, dated October 20, 1997, between the Registrant and Southlake Partners #1 for office
space at 11170 Lakeview Avenue, Lenexa, Kansas
10.46 (2) Senior Secured Credit Agreement, dated December 31, 1997, among Informix Software, Inc., certain
banks and other financial institutions that either now or in the future are parties to the
agreement, BankBoston, N.A. and Canadian Imperial Bank of Commerce
10.47 (2) Pledge Agreement, dated December 31, 1997, by and between the Registrant and BankBoston, N.A.
10.48 (2) Pledge and Security Agreement, dated as of December 31, 1997, between Informix Software, Inc. and
BankBoston, N.A.
10.49 (2) Continuing Guaranty, dated as of December 31, 1997, by the Registrant
10.50 (1) 1997 Non-Statutory Stock Option Plan and form of Stock Option Agreement thereunder
10.51 (1) Offer of Employment Letter, dated January 23, 1998, from the Registrant to Susan T. Daniel
10.52 (1) Offer of Employment Letter, dated January 19, 1998, from the Registrant to Gary Lloyd
10.53 (1) Offer of Employment Letter, dated March 11, 1998, from the Registrant to Diane L. Fraiman
10.54 (1) Office Lease, dated November 10, 1994, between WVP Income Plus III and Siebel Systems, L.P.
(assigned to Informix Corporation) for office space at 4005 Bohannon Drive, including addenda and
amendments thereto.
10.55 (1) Office Lease, dated April 10, 1995, between the Registrant and 3905 Bohannon Partners for office
space at 3905 Bohannon Drive, including addenda thereto.
21.1 (23) Subsidiaries of the Registrant
23.1 (1) Consent of Ernst & Young LLP, Independent Auditors
70
EXHIBIT NO. EXHIBIT TITLE
- ------------- -------------------------------------------------------------------------------------------------
24.1 (2) Power of Attorney (set forth on signature page)
27.1 (1) Financial Data Schedule
27.2 (1) Financial Data Schedule for fiscal years end December 31, 1996, 1995 and 1994
27.3 (1) Financial Data Schedule for quarters in the fiscal year end December 31, 1997
27.4 (1) Financial Data Schedule for quarters in the fiscal year end December 31, 1996
- ------------------------
(1) Filed herewith
(2) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (333-43991)
(3) Incorporated by reference to exhibits filed with the Registrant's quarterly
report on Form 10-Q for the fiscal quarter ended July 2, 1995
(4) Incorporated by reference to exhibits filed with the Registrant's report on
Form 8-K filed with the Commission on August 25, 1997
(5) Incorporated by reference to exhibits filed with the Registrant's report on
Form 8-K filed with the Commission on December 4, 1997
(6) Incorporated by reference to exhibits filed with the amendment to the
Registrant's Registration Statement on Form 8-A/A (File No. 000-15325)
filed with the Commission on September 3, 1997
(7) Incorporated by reference to exhibits filed with the amendment to the
Registrant's Registration Statement on Form 8-A/A (File No. 000-15325)
filed with the Commission on December 3, 1997.
(8) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 33-8006)
(9) Incorporated by reference to exhibit filed with the Registrant's annual
report on Form 10-K for the fiscal year ended December 31, 1988
(10) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (File No. 33-31116)
(11) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (File No. 33-50608)
(12) Incorporated by reference to exhibits filed with Registrant's Registration
Statements on Form S-8 (File Nos: 33-22862, 33-31117 and 33-506-10)
(13) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-31369) filed with the
Commission on July 16, 1997.
(14) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-31371) filed with the
Commission on July 16, 1997
(15) Incorporated by reference to exhibits filed with the Registrant's
quarterly report on Form 10-Q for the fiscal quarter ended September 28,
1997
(16) Incorporated by reference to exhibits filed with Registrant's annual
report on Form 10-K for the fiscal year ended December 31, 1989
(17) Incorporated by reference to exhibits filed with Registrant's report on
Form 8-K filed with the Commission on December 2, 1997
(18) Incorporated by reference to exhibits filed with Registrant's annual
report on Form 10-K for the fiscal year ended December 31, 1986
71
(19) Incorporated by reference to exhibits filed with Registrant's annual
report on Form 10-K for the fiscal year ended December 31, 1991
(20) Incorporated by reference to exhibits filed with Registrant's annual
report on Form 10-K for the fiscal year ended December 31, 1992
(21) Incorporated by reference to exhibits filed with Registrant's annual
report on Form 10-K for the fiscal year ended December 31, 1993
(22) Incorporated by reference to exhibits filed with the Registrant's
amendment to its annual report on Form 10-K/A for the fiscal year ended
December 31, 1996 filed with the Commission on November 18, 1997
(23) Incorporated by reference to exhibits filed with the Registrant's annual
report on Form 10-K for the fiscal year ended December 31, 1996
(b) Financial Statement Schedule
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable.
(b) Reports on Form 8-K
i. Report on Form 8-K filed December 2, 1997 in connection with the
issuance of 160,000 shares of Series A-1 Convertible Preferred Stock in
cancellation of and exchange for all of the outstanding Series A
Convertible Preferred Stock previously issued by the Registrant.
ii Report on Form 8-K filed December 4, 1997 in connection with the
issuance of 50,000 shares of the Registrant's Series B Convertible
Preferred Stock.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Menlo Park, State of California, on the 31st day of
March, 1998.
INFORMIX CORPORATION
By: /s/ ROBERT J. FINOCCHIO, JR.
------------------------------------------
Robert J. Finocchio, Jr.
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE
APPEARS BELOW HEREBY CONSTITUTES AND APPOINTS JEAN-YVES DEXMIER AND KAREN
BLASING AND EACH ONE OF THEM, ACTING INDIVIDUALLY AND WITHOUT THE OTHER, AS HIS
ATTORNEY-IN-FACT, EACH WITH FULL POWER OF SUBSTITUTION, FOR HIM IN ANY AND ALL
CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS TO THIS REPORT ON FORM 10-K AND TO
FILE THE SAME, WITH EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION
THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, HEREBY RATIFYING AND
CONFIRMING ALL THAT EACH OF SAID ATTORNEYS-IN-FACT, OR HIS SUBSTITUTE OR
SUBSTITUTES MAY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT ON FORM 10-K HAS BEEN SIGNED ON BEHALF OF THE REGISTRANT BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
Signature Title Date
- ------------------------------ -------------------------- -------------------
/s/ (ROBERT J. FINOCCHIO, Chairman, President and
JR.) Chief Executive Officer
- ------------------------------ (Principal Executive March 31, 1998
(Robert J. Finocchio, Jr.) Officer) and Director
Executive Vice President
/s/ (JEAN-YVES DEXMIER) and Chief Financial
- ------------------------------ Officer (Principal March 31, 1998
(Jean-Yves Dexmier) Financial Officer)
/s/ (LESLIE G. DENEND)
- ------------------------------ Director March 31, 1998
(Leslie G. Denend)
/s/ (ALBERT F. KNORP, JR.)
- ------------------------------ Director March 31, 1998
(Albert F. Knorp, Jr.)
/s/ (JAMES L. KOCH)
- ------------------------------ Director March 31, 1998
(James L. Koch)
/s/ (THOMAS A. MCDONNELL)
- ------------------------------ Director March 31, 1998
(Thomas A. McDonnell)
/s/ (CYRIL J. YANSOUNI)
- ------------------------------ Director March 31, 1998
(Cyril J. Yansouni)
Vice President and
/s/ (KAREN BLASING) Corporate Controller
- ------------------------------ (Principal Accounting March 31, 1998
(Karen Blasing) Officer)
73
INFORMIX CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Auditors............................................................................. F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Operations...................................................................... F-4
Consolidated Statements of Cash Flows...................................................................... F-5
Consolidated Statements of Stockholders' Equity............................................................ F-6
Notes to Consolidated Financial Statements................................................................. F-7
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders--
Informix Corporation
We have audited the accompanying consolidated balance sheets of Informix
Corporation as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Informix Corporation at December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
March 2, 1998
F-2
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(IN THOUSANDS, EXCEPT
SHARE AND PER-SHARE
AMOUNTS)
ASSETS
Current Assets:
Cash and cash equivalents.................................................................... $ 139,396 $ 226,508
Short-term investments....................................................................... 16,069 34,512
Accounts receivable, less allowance for doubtful accounts of $33,807 in 1997 and $21,429 in
1996....................................................................................... 142,048 194,499
Deferred taxes............................................................................... 12,249 42,133
Other current assets......................................................................... 26,243 35,662
----------- -----------
Total current assets........................................................................... 336,005 533,314
----------- -----------
Property and equipment, at cost
Computer equipment........................................................................... 189,985 225,336
Office equipment and leasehold improvements.................................................. 73,084 67,982
Less accumulated depreciation and amortization............................................. (167,057) (106,591)
----------- -----------
96,012 186,727
Software costs, less accumulated amortization of $22,786 in 1997 and $41,559 in 1996........... 40,854 54,486
Deferred taxes................................................................................. 56,345 10,542
Long-term investments.......................................................................... -- 6,639
Intangible assets, net......................................................................... 8,277 34,693
Other assets................................................................................... 25,751 55,597
----------- -----------
Total Assets................................................................................... $ 563,244 $ 881,998
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................................................. $ 36,155 $ 65,446
Accrued expenses............................................................................. 64,538 59,723
Accrued employee compensation................................................................ 49,154 57,626
Income taxes payable......................................................................... 3,031 5,757
Deferred maintenance revenue................................................................. 100,828 94,981
Advances on unearned license revenue......................................................... 180,048 239,506
Accrued restructuring costs.................................................................. 26,597 --
Other current liabilities.................................................................... 15,802 7,138
----------- -----------
Total current liabilities...................................................................... 476,153 530,177
----------- -----------
Other non-current liabilities.................................................................. 6,311 2,359
Deferred taxes................................................................................. 21,716 24,158
Commitments and contingencies
Stockholders' Equity:
Preferred stock, par value $.01 per share--5,000,000 shares authorized
Series A-1 convertible preferred stock, 160,000 shares issued and outstanding, aggregate
liquidation preference of $40,000........................................................ 2 --
Series B convertible preferred stock, 50,000 shares issued and outstanding, aggregate
liquidation preference of $50,301........................................................ 1 --
Common stock, par value $.01 per share--500,000,000 shares authorized, 152,587,000 and
150,782,000 shares issued and outstanding in 1997 and 1996, respectively................... 1,526 1,508
Additional paid-in capital................................................................... 349,484 243,564
Retained earnings (accumulated deficit)...................................................... (280,046) 78,723
Unrealized gain (loss) on available-for-sale securities, net of tax.......................... (767) 11,690
Foreign currency translation adjustment...................................................... (11,136) (10,181)
----------- -----------
Total stockholders' equity..................................................................... 59,064 325,304
----------- -----------
Total Liabilities and Stockholders' Equity..................................................... $ 563,244 $ 881,998
----------- -----------
----------- -----------
See Notes to Consolidated Financial Statements.
F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
------------ ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Net Revenues
Licenses................................................................. $ 376,570 $ 496,039 $ 458,284
Services................................................................. 285,728 231,810 174,486
------------ ---------- ----------
662,298 727,849 632,770
Costs and Expenses
Cost of software distribution............................................ 63,027 46,786 37,593
Cost of services......................................................... 166,916 144,850 91,540
Sales and marketing...................................................... 417,162 413,689 301,932
Research and development................................................. 139,310 120,211 85,643
General and administrative............................................... 87,498 64,416 51,114
Write-off of goodwill and other long-term assets......................... 30,473 -- --
Write-off of acquired research and development........................... 7,000 -- --
Restructuring charges.................................................... 108,248 -- --
Expenses related to Illustra merger...................................... -- 5,914 --
------------ ---------- ----------
1,019,634 795,866 567,822
------------ ---------- ----------
Operating income (loss).................................................... (357,336) (68,017) 64,948
Interest income.......................................................... 5,623 9,868 8,148
Interest expense......................................................... (7,811) (5,784) (2,522)
Other income, net........................................................ 10,474 2,899 120
------------ ---------- ----------
Income (loss) before income taxes.......................................... (349,050) (61,034) 70,694
Income taxes............................................................. 7,817 12,531 32,094
------------ ---------- ----------
Net income (loss).......................................................... (356,867) (73,565) 38,600
Preferred stock dividend................................................... (301) -- --
Value assigned to warrants................................................. (1,601) -- --
------------ ---------- ----------
Net income (loss) applicable to common stockholders........................ $ (358,769) $ (73,565) $ 38,600
------------ ---------- ----------
------------ ---------- ----------
Net income (loss) per common share:
Basic.................................................................... $ (2.36) $ (0.49) $ 0.27
------------ ---------- ----------
------------ ---------- ----------
Diluted.................................................................. $ (2.36) $ (0.49) $ 0.26
------------ ---------- ----------
------------ ---------- ----------
Shares used in per share calculations:
Basic.................................................................... 151,907 149,310 145,062
------------ ---------- ----------
------------ ---------- ----------
Diluted.................................................................. 151,907 149,310 150,627
------------ ---------- ----------
------------ ---------- ----------
See Notes to Consolidated Financial Statements.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
Operating Activities
Net income (loss)............................................................. $ (356,867) $ (73,565) $ 38,600
Adjustments to reconcile net income (loss) to cash and cash equivalents
provided by (used in) operating activities:
License revenue paid in advance............................................. (64,797) (58,206) (34,237)
Depreciation and amortization............................................... 65,639 47,207 28,949
Amortization of capitalized software........................................ 21,437 14,626 12,041
Write-off of capitalized software........................................... 14,749 -- --
Write-off of long term assets............................................... 6,799 -- --
Write-off of intangibles.................................................... 20,033 -- --
Write-off of acquired research and development.............................. 7,000 -- --
Foreign currency transaction gains.......................................... 3,243 (5,349) (4,609)
Gain on sales of strategic investments...................................... (5,007) (3,856) --
Loss on disposal of property and equipment.................................. 10,815 2,393 605
Deferred tax expense........................................................ (328) (3,965) (16,577)
Provisions for losses on accounts receivable................................ 19,929 14,983 8,508
Restructuring charges....................................................... 77,196 -- --
Stock-based employee compensation........................................... 7,501 -- --
Changes in operating assets and liabilities:
Accounts receivable....................................................... 42,596 (45,426) (47,045)
Other current assets...................................................... 40,530 89 (8,441)
Accounts payable and accrued expenses..................................... (58,867) 52,077 64,294
Deferred maintenance revenue.............................................. 3,618 29,590 17,197
---------- ---------- ----------
Net cash and cash equivalents provided by (used in) operating activities...... (144,781) (29,402) 59,285
---------- ---------- ----------
Investing Activities
Investments of excess cash:
Purchases of held-to-maturity securities.................................... -- -- (144,517)
Purchases of available-for-sale securities.................................. (35,255) (152,179) (4,303)
Maturities of held-to-maturity securities................................... -- -- 83,159
Maturities of available-for-sale securities................................. 14,468 126,137 6,104
Sales of available-for-sale securities...................................... 45,957 83,696 27,261
Purchases of strategic investments............................................ (3,250) (12,737) (1,000)
Proceeds from sales of strategic investments.................................. 10,454 7,299 --
Purchases of land, and property and equipment................................. (93,786) (148,270) (56,500)
Proceeds from disposal of land, and property and equipment.................... 62,371 1,929 288
Additions to software costs................................................... (20,776) (32,381) (23,977)
Business combinations, net of cash acquired................................... (9,749) (4,340) (38,413)
Other......................................................................... (33,500) (14,434) (5,757)
---------- ---------- ----------
Net cash and cash equivalents used in investing activities.................... (63,066) (145,280) (157,655)
---------- ---------- ----------
Financing Activities
Advances on unearned license revenue.......................................... 21,787 207,218 109,338
Proceeds from issuance of common stock, net................................... 9,239 24,357 27,898
Proceeds from issuance of preferred stock, net................................ 87,600 -- --
Principal payments on capital leases.......................................... (3,388) (1,025) (442)
Acquisition of common stock................................................... -- (2,388) --
Reissuance of treasury stock.................................................. -- 578 --
---------- ---------- ----------
Net cash and cash equivalents provided by financing activities................ 115,238 228,740 136,794
---------- ---------- ----------
Effect of exchange rate changes on cash and cash equivalents.................. 5,497 8,145 (6,402)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents.............................. (87,112) 62,203 32,022
Cash and cash equivalents at beginning of year................................ 226,508 164,305 132,283
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 139,396 $ 226,508 $ 164,305
---------- ---------- ----------
---------- ---------- ----------
See Notes to Consolidated Financial Statements.
F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK
--------------------------------------------------
COMMON
SERIES A-1 SERIES B STOCK
------------------------ ------------------------ ---------
SHARES AMOUNT SHARES AMOUNT SHARES
----------- ----------- ----------- ----------- ---------
(IN THOUSANDS)
Balances at December 31, 1994............................. $ $ 140,154
Exercise of stock options................................. 4,377
Sale of stock to employees under employee stock purchase
plan.................................................... 349
Issuance of stock, net of costs........................... 2,571
Tax benefits related to stock options.....................
Acquisition of STG........................................ 533
Change in unrealized gain (loss) on available-for-sale
securities, net of tax..................................
Foreign currency translation adjustment...................
Net income................................................
--- --- --- --- ---------
Balances at December 31, 1995............................. 147,984
Exercise of stock options................................. 2,182
Sale of stock to employees under employee stock purchase
plan.................................................... 616
Acquisition of treasury stock.............................
Reissuance of treasury stock..............................
Tax benefits related to stock options.....................
Change in unrealized gain (loss) on available-for-sale
securities, net of tax..................................
Foreign currency translation adjustment...................
Net loss..................................................
--- --- --- --- ---------
Balances at December 31, 1996............................. 150,782
Exercise of stock options................................. 1,132
Sale of stock to employees under employee stock purchase
plan.................................................... 573
Stock-based compensation expense resulting from stock
options.................................................
Issuance of Series A-1 convertible preferred stock and
warrants, net........................................... 160 2
Issuance of Series B convertible preferred stock and
warrants, net........................................... 50 1
Common stock issued for services rendered in connection
with the Series B convertible preferred stock offering.. 100
Accretion of discount on preferred stock issuances........
Accrual of 5% cumulative preferred dividends on Series B
convertible preferred stock.............................
Change in unrealized gain (loss) on available-for-sale
securities..............................................
Foreign currency translation adjustment...................
Net loss..................................................
--- --- --- --- ---------
Balance at December 31, 1997.............................. 160 $ 2 50 $ 1 152,587
--- --- --- --- ---------
--- --- --- --- ---------
RETAINED
ADDITIONAL TREASURY STOCK EARNINGS
PAID-IN ---------------------- (ACCUMULATED
AMOUNT CAPITAL SHARES AMOUNT DEFICIT)
----------- ----------- ----------- --------- ------------
Balances at December 31, 1994............................. $ 1,400 $ 153,343 $ -- $ -- $ 115,668
Exercise of stock options................................. 44 13,712
Sale of stock to employees under employee stock purchase
plan.................................................... 3 6,603
Issuance of stock, net of costs........................... 28 7,508
Tax benefits related to stock options..................... 21,291
Acquisition of STG........................................ 5 1,991 (170)
Change in unrealized gain (loss) on available-for-sale
securities, net of tax..................................
Foreign currency translation adjustment...................
Net income................................................ 38,600
----------- ----------- --- --------- ------------
Balances at December 31, 1995............................. 1,480 204,448 -- -- 154,098
Exercise of stock options................................. 22 13,343
Sale of stock to employees under employee stock purchase
plan.................................................... 6 10,986
Acquisition of treasury stock............................. (100) (2,388)
Reissuance of treasury stock.............................. 100 2,388 (1,810)
Tax benefits related to stock options..................... 14,787
Change in unrealized gain (loss) on available-for-sale
securities, net of tax..................................
Foreign currency translation adjustment...................
Net loss.................................................. (73,565)
----------- ----------- --- --------- ------------
Balances at December 31, 1996............................. 1,508 243,564 -- -- 78,723
Exercise of stock options................................. 11 3,563
Sale of stock to employees under employee stock purchase
plan.................................................... 6 5,659
Stock-based compensation expense resulting from stock
options................................................. 7,501
Issuance of Series A-1 convertible preferred stock and
warrants, net........................................... 37,598
Issuance of Series B convertible preferred stock and
warrants, net........................................... 49,196
Common stock issued for services rendered in connection
with the Series B convertible preferred stock offering.. 1 802
Accretion of discount on preferred stock issuances........ 1,601 (1,601)
Accrual of 5% cumulative preferred dividends on Series B
convertible preferred stock............................. (301)
Change in unrealized gain (loss) on available-for-sale
securities..............................................
Foreign currency translation adjustment...................
Net loss.................................................. (356,867)
----------- ----------- --- --------- ------------
Balance at December 31, 1997.............................. $ 1,526 $ 349,484 -- $ -- $ (280,046)
----------- ----------- --- --------- ------------
----------- ----------- --- --------- ------------
UNREALIZED
GAIN (LOSS)
ON FOREIGN
AVAILABLE CURRENCY
FOR-SALE TRANSLATION
SECURITIES ADJUSTMENT TOTALS
----------- ----------- ----------
Balances at December 31, 1994............................. $ 665 $ (1,676) $ 269,400
Exercise of stock options................................. 13,756
Sale of stock to employees under employee stock purchase
plan.................................................... 6,606
Issuance of stock, net of costs........................... 7,536
Tax benefits related to stock options..................... 21,291
Acquisition of STG........................................ 1,826
Change in unrealized gain (loss) on available-for-sale
securities, net of tax.................................. 3,399 3,399
Foreign currency translation adjustment................... (4,667) (4,667)
Net income................................................ 38,600
----------- ----------- ----------
Balances at December 31, 1995............................. 4,064 (6,343) 357,747
Exercise of stock options................................. 13,365
Sale of stock to employees under employee stock purchase
plan.................................................... 10,992
Acquisition of treasury stock............................. (2,388)
Reissuance of treasury stock.............................. 578
Tax benefits related to stock options..................... 14,787
Change in unrealized gain (loss) on available-for-sale
securities, net of tax.................................. 7,626 7,626
Foreign currency translation adjustment................... (3,838) (3,838)
Net loss.................................................. (73,565)
----------- ----------- ----------
Balances at December 31, 1996............................. 11,690 (10,181) 325,304
Exercise of stock options................................. 3,574
Sale of stock to employees under employee stock purchase
plan.................................................... 5,665
Stock-based compensation expense resulting from stock
options................................................. 7,501
Issuance of Series A-1 convertible preferred stock and
warrants, net........................................... 37,600
Issuance of Series B convertible preferred stock and
warrants, net........................................... 49,197
Common stock issued for services rendered in connection
with the Series B convertible preferred stock offering.. 803
Accretion of discount on preferred stock issuances........ --
Accrual of 5% cumulative preferred dividends on Series B
convertible preferred stock............................. (301)
Change in unrealized gain (loss) on available-for-sale
securities.............................................. (12,457) (12,457)
Foreign currency translation adjustment................... (955) (955)
Net loss.................................................. (356,867)
----------- ----------- ----------
Balance at December 31, 1997.............................. $ (767) $ (11,136) $ 59,064
----------- ----------- ----------
----------- ----------- ----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the filing of its Annual Report on Form 10-K for the year
ended December 31, 1996 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 in 1996,
1995 and 1994. 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 thoses
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, for 1996, 1995 and 1994.
Accordingly, such financial statements have been restated as follows:
1996 1995 1994
----------------------- ----------------------- -----------------------
AS REPORTED RESTATED AS REPORTED RESTATED AS REPORTED RESTATED
----------- ---------- ----------- ---------- ----------- ----------
Net revenues
Licenses.......................... $ 708,035 $ 496,039 $ 539,733 $ 458,284 $ 364,661 $ 346,518
Services.......................... 231,276 231,810 174,486 174,486 105,451 105,451
----------- ---------- ----------- ---------- ----------- ----------
939,311 727,849 714,219 632,770 470,112 451,969
Operating income (loss)............. 137,344 (68,017) 145,826 64,948 95,091 77,229
Income taxes........................ 50,391 12,531 55,164 32,094 34,074 29,250
Net income (loss)................... 97,818 (73,565) 97,644 38,600 61,948 48,293
Net income (loss) per share:
Basic............................. $ 0.66 $ (0.49) $ 0.67 $ 0.27 $ 0.45 $ 0.35
Diluted........................... $ 0.63 $ (0.49) $ 0.65 $ 0.26 $ 0.43 $ 0.34
Retained earnings................... $ 322,805 $ 78,723 $ 226,797 $ 154,098 $ 129,323 $ 115,668
Advances on unearned license
revenue........................... $ -- $ 239,506 $ -- $ 83,553 $ -- $ 18,556
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 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
F-7
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
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 is implementing 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 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
an internal audit function reporting to the Company's Board of Directors.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS. The Company is a multinational supplier of
high-performance, parallel processing database technology for open systems. The
Company's products also include application development tools for creating
client/server production applications, decision-support systems, ad-hoc query
interfaces, and software that allows information to be shared transparently from
personal computers to mainframes within the corporate computing environment. In
addition to software products, the Company offers training, consulting, and
post-contract support to its customers.
The principal geographic markets for the Company's products are North
America, Europe, Asia/ Pacific, and Latin America. Customers include large-,
medium- and small-sized corporations in the manufacturing, financial services,
telecommunications, retail/wholesale, hospitality, and government services
sectors.
USE OF ESTIMATES. The preparation of financial statements in conformity
with general accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Informix Corporation and its wholly owned subsidiaries. All
material intercompany balances and transactions have been eliminated in
consolidation.
FOREIGN CURRENCY TRANSLATION. For foreign operations with the local
currency as the functional currency, assets and liabilities are translated at
year-end exchange rates, and statements of operations are translated at the
average exchange rates during the year. Exchange gains or losses arising from
translation of foreign entity financial statements are included as a component
of stockholders' equity.
For foreign operations with the U.S. dollar as the functional currency,
certain assets and liabilities are remeasured at the year-end or historical
exchange rates as appropriate. Statements of operations are remeasured at the
average exchange rates during the year. Gains and losses resulting from the
remeasurement of these foreign entity's financial statements and other foreign
currency transaction gains and losses are included in other income, net. Foreign
currency transaction gains, net of losses, were $8.0 million, $.3 million and
$.2 million for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company enters into forward foreign exchange contracts primarily to
hedge the value of accounts receivable or accounts payable denominated in
foreign currencies (mainly European and Asian foreign currencies) against
fluctuations in exchange rates until such receivables are collected or such
payables are disbursed. The Company does not enter into forward foreign exchange
contracts for speculative or trading purposes. The Company's accounting policies
for these contracts are based on the
F-8
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company's designation of the contracts as hedges of firm foreign currency
commitments. Gains and losses on forward foreign exchange contracts are deferred
and recognized in income in the same period as losses and gains on the
underlying transactions are recognized and generally offset. If an underlying
hedged transaction is terminated earlier than initially anticipated, the
offsetting gain or loss on the related forward foreign exchange contract would
be recognized in income in the same period. Subsequent gains or losses on the
related contract would be recognized in income in each period until the contract
matures, is terminated or sold. The Company operates in certain countries in
Latin America, Eastern Europe, and Asia Pacific where there are limited forward
currency exchange markets and thus the Company has unhedged transaction
exposures in these currencies. However, such exposures are not material to the
Company's financial statements for any period presented.
REVENUE RECOGNITION
LICENSE REVENUE. The Company 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. However, as previously discussed in Note 1, because
the Company is unable to estimate the amount of allowances for transactions
entered into with resellers, 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 all other sales
allowances on an estimated basis.
SERVICE REVENUE. Maintenance contracts generally call for the Company to
provide technical product support and software updates to customers. Maintenance
contract revenue is recognized ratably over the term of the maintenance
contract, generally on a straight-line basis. Where maintenance revenue is not
separately invoiced, it is unbundled from license fees and deferred for revenue
recognition purposes. Other service revenue, primarily training and consulting,
is generally recognized at the time the service is performed.
ADVANCES ON UNEARNED LICENSE REVENUE. At December 31, 1997 and 1996,
"advances on unearned license revenue" reflect amounts received from customers
and third-party financial institutions in advance of revenue being recognized.
The Company may receive cash, either from the customer, or from a financing
entity to whom the customer payment streams are sold, prior to the time the
license fee is recognized as earned revenue.
The Company's license agreements with customers provide contractually for
a non-refundable fee payable by the customer in single or multiple
installment(s) at the initiation or over the term of the license arrangement. If
the Company fails to comply with the contractual terms of a specific license
agreement, the Company could be required to refund to the customer or the
financial institution the amount(s) received. The refund of amounts received
would not, however, have a material effect on the Company's results of operation
as revenue has not been recognized for amounts recorded as "Advances on Unearned
License Revenue."
The Company's arrangements for financing of license contracts with
customers frequently take the form of a non-recourse sale of the future payment
streams. When such customer contracts are sold to a third-party financing
entity, they are typically sold at a discount which represents the financing
cost. Such discounts are charged to expense immediately in cases where the
license has been recorded as a sale. For
F-9
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
transactions where the financing is received prior to the recognition of
revenue, the financing discount has been charged to interest expense over the
financing period based on the contractual terms on a straight-line basis, which
approximates the "interest method."
CONCURRENT TRANSACTIONS. Principally during 1996, the Company entered into
software license agreements with certain computer and service vendors where the
Company concurrently committed to acquire goods and services in the aggregate of
approximately $130 million. If the agreement is with a reseller, revenue is
recognized as earned on these transactions as the licenses are resold by the
customer. If the agreement is with an end user, revenue is generally recognized
as earned upon delivery of software. The computer equipment and services are
recorded at their fair value. These concurrent transactions for 1996 included
license agreements of approximately $170 million. Concurrent transactions in
1997 included software license agreements of approximately $21 million and
commitments by the Company to acquire goods and services in the aggregate of
approximately $50 million.
INVENTORIES. Inventories, which consist primarily of software product
components, finished software products, and marketing and promotional materials,
are carried at the lower of cost (first in, first out) or market value, and are
included in other current assets.
SOFTWARE COSTS. The Company capitalizes software development costs incurred
in developing a product once technological feasibility of the product has been
determined. Software costs also include amounts paid for purchased software and
outside development on products which have reached technological feasibility.
All software costs are amortized as a cost of software distribution either on a
straight-line basis over the remaining estimated economic life of the product or
on the basis of each product's projected revenues, whichever results in greater
amortization. Capitalized software costs are generally amortized over three
years. The Company recorded amortization of $21.4 million, $14.6 million, and
$12.0 million of software costs in 1997, 1996 and 1995, respectively, in cost of
software distribution.
PROPERTY AND EQUIPMENT. Depreciation of property and equipment is
calculated using the straight-line method over its estimated useful life,
generally the shorter of the applicable lease term or three-to-seven years for
financial reporting purposes.
BUSINESSES ACQUIRED. The purchase price of businesses acquired, accounted
for as purchase business combinations, is allocated to the tangible and
specifically identifiable intangible assets acquired based on their estimated
fair values with any amount in excess of such allocations being designated as
goodwill. Intangible assets are amortized over their estimated useful lives,
which to date have been five to seven years. The carrying values of goodwill and
specified intangible assets are reviewed if the facts and circumstances suggest
that they may be impaired. If this review indicates that the asset will not be
recoverable, as determined based on the undiscounted cash flows of the acquired
business over the remaining amortization period, the Company's carrying value is
reduced to net realizable value. During 1997, the Company wrote down $30.5
million of impaired long-term assets related to the shortfall in business
activity of its Japanese subsidiary (see Note 13). There were no writedowns of
intangible assets in 1996 or 1995. As of December 31, 1997 and 1996, the Company
had $19.2 million and $50.6 million of intangible assets, with accumulated
amortization of $10.9 million and $15.9 million, respectively, as a result of
these acquisitions.
CONCENTRATION OF CREDIT RISK. The Company designs, develops, manufactures,
markets, and supports computer software systems to customers in diversified
industries and in diversified geographic locations.
F-10
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral.
No single customer accounted for 10% or more of the consolidated revenues
of the Company in 1997, 1996 or 1995.
CASH, CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, AND LONG-TERM
INVESTMENTS. The Company considers liquid investments purchased with a maturity
of three months or less to be cash equivalents. The Company considers
investments with a maturity of more than three months but less than one year to
be short-term investments. Investments with an original maturity of more than
one year are considered long-term investments. Short-term and long-term
investments are classified as available-for-sale and are carried at fair value.
Cash equivalents are carried at amortized cost.
The Company invests its excess cash in accordance with its short-term and
long-term investments policy, which is approved by the Board of Directors. The
policy authorizes the investment of excess cash in government securities,
municipal bonds, time deposits, certificates of deposit with approved financial
institutions, commercial paper rated A-1/P-1 (a small portion of the portfolio
may consist of commercial paper rated A-2/P-2), and other specific money market
instruments of similar liquidity and credit quality. The Company has not
experienced any significant losses related to these investments.
SECURITIES HELD-TO-MATURITY AND AVAILABLE-FOR-SALE. Management determines
the appropriate classification of debt securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. Debt securities are
classified as held-to-maturity when the Company has the positive intent and the
ability to hold the securities until maturity. Held-to-maturity securities are
stated at amortized cost, adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization, as well as any interest on the
securities, is included in interest income.
Marketable equity securities and debt securities not classified as
held-to-maturity are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses, net
of tax, reported in a separate component of stockholders' equity. The amortized
cost of debt securities in this category is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in other
expense, net. The cost of securities sold is based on the specific
identification method. Interest on securities classified as available-for-sale
are included in interest income. The Company realized gross gains of
approximately $8.5 million and $5.2 million and gross losses of approximately
$1.2 million and $1.3 million on the sale of available-for-sale equity
securities during 1997 and 1996, respectively. Realized gains and losses were
not material in 1995.
FAIR VALUE OF FINANCIAL INSTRUMENTS. Fair values of cash, cash equivalents,
short and long term investments, other assets, and currency forward contracts
are based on quoted market prices.
RECLASSIFICATIONS. Certain prior period amounts have been reclassified to
conform to the current period presentation.
F-11
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--FINANCIAL INSTRUMENTS
The following is a summary of available-for-sale debt and equity securities:
AVAILABLE-FOR-SALE SECURITIES
------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
DECEMBER 31, 1997 COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------- ---------- ----------- ----------- ----------
(IN THOUSANDS)
U.S. treasury securities......................................... $ 3,701 $ 1 $ -- $ 3,702
Commercial paper, corporate bonds and medium-term notes.......... 49,664 18 -- 49,682
Municipal bonds.................................................. 11,903 -- (3) 11,900
Repurchase agreements............................................ 23,262 -- -- 23,262
---------- ----------- ----------- ----------
Total debt securities.......................................... $ 88,530 $ 19 $ (3) $ 88,546
U.S. equity securities........................................... 13,309 -- (851) 12,458
---------- ----------- ----------- ----------
$ 101,839 $ 19 $ (854) $ 101,004
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Amounts included in cash and cash equivalents.................... $ 72,460 $ 18 $ (1) $ 72,477
Amounts included in short-term investments....................... 16,070 1 (2) 16,069
Amounts included in other assets................................. 13,309 -- (851) 12,458
---------- ----------- ----------- ----------
$ 101,839 $ 19 $ (854) $ 101,004
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
DECEMBER 31, 1996
- -----------------------------------------------------------------
U.S. treasury securities......................................... $ 61,308 $ -- $ (20) $ 61,288
Commercial paper................................................. 15,872 14 (2) 15,884
Municipal bonds.................................................. 27,317 10 (48) 27,279
Auctioned preferred stock........................................ 4,504 -- (4) 4,500
---------- ----------- ----------- ----------
Total debt securities.......................................... 109,001 24 (74) 108,951
U.S. equity securities........................................... 15,404 18,490 -- 33,894
---------- ----------- ----------- ----------
$ 124,405 $ 18,514 $ (74) $ 142,845
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Amounts included in cash and cash equivalents.................... $ 67,806 $ -- $ (6) $ 67,800
Amounts included in short-term investments....................... 34,548 19 (55) 34,512
Amounts included in long-term investments........................ 6,647 5 (13) 6,639
Amounts included in other assets................................. 15,404 18,490 -- 33,894
---------- ----------- ----------- ----------
$ 124,405 $ 18,514 $ (74) $ 142,845
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
F-12
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into forward foreign exchange contracts primarily to
hedge the value of accounts receivable or accounts payable denominated in
foreign currencies against fluctuations in exchange rates until such receivables
are collected or payables are disbursed. The purpose of the Company's foreign
exchange exposure management policy and practices is to attempt to minimize the
impact of exchange rate fluctuations on the value of the foreign currency
denominated assets and liabilities being hedged. Substantially all forward
foreign exchange contracts entered into by the Company have maturities of 360
days or less. The Company's practice is to settle all foreign exchange contracts
within ten calendar days of year end and thus there is no material difference
between the contract value and the fair value of the contracts at December 31,
1997 and 1996. At December 31, 1997 and 1996, the Company had approximately
$102.7 million and $168.6 million of forward foreign currency exchange contracts
outstanding, respectively. The table below summarizes by currency the
contractual amounts of the Company's forward foreign exchange contracts at
December 31, 1997 and December 31, 1996.
The restatement of the 1996, 1995 and 1994 financial statements resulted
in a change in the Company's foreign currency denominated intercompany accounts
payable and accounts receivable balances. As a result, certain foreign currency
transaction gains and losses realized due to fluctuation in the related asset
and liability currency exchange rates were not offset by underlying gains and
losses on forward foreign currency exchange contracts used to hedge those
foreign currency exposures. The Company recorded net foreign currency
transaction gains and (losses) of approximately $7.5 million, $(0.7) million,
$0.1 million, and $(0.5) million in 1997, 1996, 1995, and 1994, respectively,
due to the restatement.
FORWARD CONTRACTS
AT DECEMBER 31, 1997
- ------------------------------------------------------------------------------- CONTRACT
VALUE
-------------
(IN
THOUSANDS)
Forward currency contracts sold:
British Pound................................................................ $ 55,740
Deutsche Mark................................................................ 17,050
French Franc................................................................. 14,139
Italian Lira................................................................. 3,901
Spanish Peseta............................................................... 3,166
Swedish Krona................................................................ 1,682
Other (individually less than $1 million).................................... 2,090
-------------
Total.......................................................................... $ 97,768
-------------
-------------
Forward currency contracts purchased:
Swiss Franc.................................................................. $ 1,636
Dutch Guilder................................................................ 1,096
Other (individually less than $1 million).................................... 2,208
-------------
Total.......................................................................... $ 4,940
-------------
-------------
Grand Total.................................................................... $ 102,708
-------------
-------------
F-13
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
AT DECEMBER 31, 1996
- -------------------------------------------------------------------------------
CONTRACT
VALUE
-------------
(IN
THOUSANDS)
Forward currency contracts sold:
Deutsche Mark................................................................ $ 55,815
Japanese Yen................................................................. 41,384
British Pound................................................................ 16,051
French Franc................................................................. 8,252
Malaysian Ringgit............................................................ 5,914
Taiwanese NT................................................................. 5,609
Italian Lira................................................................. 4,555
Singapore Dollar............................................................. 3,600
Dutch Guilder................................................................ 3,558
Sweden Krona................................................................. 2,246
Swiss Franc.................................................................. 1,622
Portuguese Escudo............................................................ 1,574
Other (individually less than $1 million).................................... 2,240
-------------
Total.......................................................................... $ 152,420
-------------
-------------
Forward currency contracts purchased:
British Pound................................................................ $ 10,501
Deutsche Mark................................................................ 4,198
Other (individually less than $1 million).................................... 1,472
-------------
Total.......................................................................... $ 16,171
-------------
-------------
Grand Total.................................................................... $ 168,591
-------------
-------------
While the contract amounts provide one measure of the volume of these
transactions, they do not represent the amount of the Company's exposure to
credit risk. The amounts (arising from the possible inabilities of
counterparties to meet the terms of their contracts) are generally limited to
the amounts, if any, by which the counterparties' obligations exceed the
obligations of the Company. The Company controls credit risk through credit
approvals, limits and monitoring procedures.
As of December 31, 1997, other than foreign forward exchange contracts
discussed immediately above, the Company does not currently invest in or hold
any other derivative financial instruments.
NOTE 5--NET INCOME (LOSS) PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (FAS 128), "Earnings per Share." FAS
128 supersedes Accounting Principles Board Opinion No. 15 (APB 15), "Earnings
per Share," and other related Interpretations and is effective for the periods
ending after December 15, 1997. Under FAS 128, basic earnings per share are
computed using the weighted average number of common shares outstanding during
the period. Diluted earnings per common share includes the incremental shares
issuable upon the assumed exercise of stock options, warrants, and convertible
preferred stock, when the effect is dilutive. As required by FAS 128, all prior
year net income (loss) per share amounts have been restated.
F-14
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--NET INCOME (LOSS) PER COMMON SHARE (CONTINUED)
The following table sets forth computation of basic and diluted net
income (loss) per common share:
1997 1996 1995
-------------- -------------- --------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Numerator:
Net income (loss)................................... $ (356,867) $ (73,565) $ 38,600
Preferred stock dividends........................... (301) -- --
Value assigned to warrants.......................... (1,601) -- --
-------------- -------------- --------------
Numerator for basic and diluted net income (loss)
per common share.................................. $ (358,769) $ (73,565) $ 38,600
-------------- -------------- --------------
Denominator:
Denominator for basic net income (loss) per common
share--weighted-average shares.................... 151,907,041 149,310,000 145,062,000
Effect of dilutive securities:
Employee stock options............................ -- -- 5,565,000
-------------- -------------- --------------
Denominator for diluted net income (loss) per common
share--adjusted weighted-average shares and
assumed conversions............................... 151,907,041 149,310,000 150,627,000
-------------- -------------- --------------
-------------- -------------- --------------
Basic net income (loss) per common share.............. $ (2.36) $ (0.49) $ 0.27
Diluted net income (loss) per common share............ $ (2.36) $ (0.49) $ 0.26
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average employee stock options to acquire 4,776,124 and
6,263,000 were outstanding in fiscal 1997 and 1996, respectively, but were not
included in the computation of diluted earnings per share because the effect was
antidilutive. In addition, at December 31, 1997, 8,341,238 shares of convertible
preferred stock were also excluded from the computation of diluted earnings per
share because the effect was antidilutive. See Notes 6 and 7.
NOTE 6--PREFERRED STOCK
In August 1997, the Company sold 160,000 shares of newly authorized Series A
Convertible Preferred Stock, face value $250 per share, which shares are
generally not entitled to vote on corporate matters, to a private investor for
aggregate net proceeds of $37.6 million and issued a warrant to the same
investor to purchase up to an additional 140,000 shares of Series A Convertible
Preferred Stock at an aggregate purchase price of up to $35 million. In November
1997, the Company canceled the Series A Convertible Preferred Stock in exchange
for the same number of shares of a substantially identical Series A-1
Convertible Stock (the "A-1 Preferred") issued to the same investor, with a
corresponding change to the warrant shares. The warrant may be exercised from
August 13, 1997 through April 15, 1999.
The A-1 Preferred shares are convertible into common shares at any time,
at the holder's option, at a per share price equal to 101% of the average price
of the Company's common stock for the thirty days ending five trading days prior
to conversion, but not greater than the lesser of (i) 105% of the common stock's
average price of the first five trading days of such thirty day period, or (ii)
$12 per share. If not converted prior, the A-1 Preferred will automatically
convert into common shares eighteen months after their issuance, subject to
extension of the automatic conversion date in certain defined circumstances of
F-15
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--PREFERRED STOCK (CONTINUED)
default. However, if at the time of conversion, the aggregate number of shares
of common stock already issued and to be issued as a result of the conversion of
the shares of the A-1 Preferred were to exceed 19.9% of the total number of
shares of then outstanding common stock, then such excess does not convert
unless or until stockholder approval is obtained.
The mandatory redemption provisions of the new A-1 Preferred differ from
the Series A Convertible Preferred Stock. The redemption provisions in the A-1
Preferred effectively preclude the Company from having to redeem the preferred
stock except by actions solely within its control. Accordingly, the Consolidated
Balance Sheet reflects the A-1 Preferred under stockholder's equity. On February
13, 1998, the Series A-1 convertible preferred stockholders exercised their
conversion privileges. See Note 17--Subsequent Events.
In November 1997, the Company sold 50,000 shares of newly authorized
Series B Convertible Preferred Stock ("Series B Preferred"), face value $1,000
per share, which shares are generally not entitled to vote on corporate matters,
to private investors for aggregate proceeds of $50.0 million (excluding a $1.0
million fee paid to a financial advisor of the Company). In connection with the
sale, the Company also agreed to issue a warrant to such investors upon
conversion of such Series B Preferred to purchase 20% of the shares of Common
Stock into which the Series B Preferred is convertible, but no less than
1,500,000 shares at a per share exercise price which is presently indeterminable
and will depend on the trading price of the Common Stock of the Company in the
period prior to the conversion of the Series B Preferred. The Company also
agreed to issue additional warrants to purchase up to an aggregate of 200,000
shares at a per share exercise price which is presently indeterminable and will
depend on the trading price of the Common Stock of the Company in the period
prior to the conversion of the Series B Preferred. The Series B Preferred is
convertible at the election of the holder into shares of Common Stock beginning
six months after issuance, and upon the occurrence of certain events, including
a merger. The Series B Preferred will automatically convert into Common Stock
three years following the date of its issuance. Each Series B Preferred share is
convertible into the number of shares of Common Stock at a per share price equal
to the lowest of (i) the average of the closing prices for the Common Stock for
the 22 days immediately prior to the 180th day following the initial issuance
date, (ii) 101% of the average closing price for the 22 trading days prior to
the date of actual conversions, or (iii) 101% of the lowest closing price for
the Common Stock during the five trading days immediately prior to the date of
actual conversion. The conversion price of the Series B Preferred is subject to
modification and adjustment upon the occurrence of certain events. The Series B
Preferred accrues cumulative dividends at an annual rate of 5% of per share face
value. The dividend is generally payable upon the conversion or redemption of
the Series B Preferred, and may be paid in cash or, at the holder's election, in
shares of Common Stock. The Series B is junior to the Company's outstanding A-1
Preferred in respect to the right to receive dividend payments and liquidation
preferences.
The Company reserved 26.0 million shares of Common Stock for issuance
upon conversion of the A-1 Preferred (including shares of A-1 Preferred issuable
upon exercise of the Series A-1 Warrant). Of those 26.0 million shares, the
Company issued 12.8 million shares in February 1998 in connection with the
conversion of 220,000 shares of A-1 Preferred (see Note 17). The Company has
reserved 22.8 million shares of Common Stock for issuance upon conversion of the
Series B Preferred and upon exercise of the Series B Warrants.
The fair value of the warrants issued in connection with the A-1
Preferred and Series B Preferred are deemed to be a discount to the conversion
price of the respective equity instruments available to the
F-16
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--PREFERRED STOCK (CONTINUED)
preferred stockholders. The discounts are being recognized as a return to the
preferred stockholders (similar to a dividend) over the minimum period during
which the preferred stockholders can realize this return, immediate for the A-1
Preferred and six months for the Series B Preferred. The portion of the discount
applicable to fiscal 1997 has been accreted to retained earnings (accumulated
deficit) in the Company's December 31, 1997 financial statements and has been
disclosed as a decrease in the amount available to common stockholders on the
face of the statement of operations and for purposes of computing net income
(loss) per share. The fair value assigned to the warrants is based on an
independent appraisal performed by a nationally recognized investment banking
firm.
In connection with the issuance of the Series B Convertible Preferred
Stock in November 1997, the Company paid a fee of $1,000,000 for financial
advisory services provided in connection with such financing. In addition, the
Company issued 100,000 shares of its Common Stock, and also agreed to issue a
warrant to purchase an additional 50,000 shares of the Company's Common Stock to
the service provider in the event that, as of May 17, 1998, the trading price of
the Company's Common Stock is less than $12.50 per share. Such warrant will be
exercisable according to the same terms as the warrants issued in connection
with the issuance of the Series B Convertible Preferred Stock.
NOTE 7--EMPLOYEE BENEFIT PLANS
OPTION PLANS
Under the Company's 1986 Employee Stock Option Plan, options are granted
at fair market value on the date of the grant. Options are generally exercisable
in cumulative annual installments over three to five years. Payment for shares
purchased upon exercise of options may be by cash or, with Board approval, by
full recourse promissory note or by exchange of shares of the Company's common
stock at fair market value on the exercise date. Unissued options under the 1986
Plan expired on July 29, 1996, which was 10 years after adoption of the plan.
Additionally, 1,600,000 shares were authorized for issuance under the
1989 Outside Directors Stock Option Plan, whereby non-employee directors are
automatically granted non-qualified stock options upon election or re-election
to the Board of Directors. At December 31, 1997, 645,000 shares were available
for grant under this Plan.
In April 1994, the Company adopted the 1994 Stock Option and Award Plan;
8,000,000 shares were authorized for grant under this Plan. Options can be
granted to employees on terms substantially equivalent to those described above.
The 1994 Stock Option and Award Plan also allows the Company to award
performance shares of the Company's common stock to be paid to recipients on the
achievement of certain performance goals set with respect to each recipient. In
May 1997, the Company's stockholders approved an additional 8,000,000 shares to
be reserved for issuance under the Company's 1994 Stock Option and Award Plan.
At December 31, 1997, 4,009,476 shares were available for grant under this Plan.
In July 1997, the Company's Board of Directors approved a resolution
authorizing the grant of a maximum of 500,000 non-statutory stock options to
executives and other employees, as determined by the Board, under the newly
created 1997 Non-Statutory Stock Option Plan ("the 1997 Stock Plan"). The
authorization of such shares for grant under the 1997 Stock Plan is not subject
to stockholder approval. Terms of each option are determined by the Board or
committee delegated such duties by the Board. Concurrent with the authorization
of the 1997 Stock Plan, the Board granted the Company's current chief
F-17
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--EMPLOYEE BENEFIT PLANS (CONTINUED)
executive officer 500,000 options to purchase the Company's common stock
thereunder. Such options vest ratably over five years beginning with the first
anniversary of the date of grant.
In September 1997, the Company's Board of Directors authorized the
repricing of outstanding options to purchase Common Stock under the Company's
stock option plans. Employees were eligible to participate only if they remained
actively employed at the effective date of the repricing and were only permitted
to exchange options granted and outstanding prior to May 1, 1997. The
repricing/option exchange was effective November 21, 1997 (the "Repricing
Effective Date"). The repricing program offered eligible employees the
opportunity to exchange eligible outstanding options with exercise prices in
excess of the closing sales price of the Company's Common Stock on the Repricing
Effective Date for a new option with an exercise price equal to such price.
Other than the exercise price, each new option issued upon exchange has terms
substantially equivalent to the surrendered option, including the number of
shares, vesting terms and expiration except that options issued in connection
with the exchange may not be exercised for a period of one year from the
Repricing Effective Date. In addition, officers of the Company participating in
the option exchange were required to forfeit 20% of the shares subject to each
option being surrendered. The exercise price for repriced options was $7.1563,
the closing sales price of the Company's Common Stock on the Repricing Effective
Date.
Following is a summary of activity for all stock option plans for the
three years ended December 31, 1997:
NUMBER OF OPTIONS
SHARES PRICE PER SHARE
------------ -----------------
Outstanding at December 31, 1994....................................... 15,013,772 $ 0.06 to $14.44
Options granted and assumed............................................ 5,456,927 0.19 to 34.00
Options exercised...................................................... (3,852,697) 0.19 to 13.88
Options canceled....................................................... (864,920) 0.06 to 32.75
------------ -----------------
Outstanding at December 31, 1995....................................... 15,753,082 $ 0.06 to $34.00
WEIGHTED AVERAGE
PRICE
-----------------
Options granted and assumed........................................... 5,850,225 $ 24.3456
Options exercised..................................................... (2,927,260) 4.6069
Options canceled...................................................... (1,561,800) 17.1483
------------- --------
Outstanding at December 31, 1996...................................... 17,114,247 13.4495
Options granted and assumed........................................... 13,137,338 8.5926
Options exercised..................................................... (1,132,484) 2.9266
Options canceled...................................................... (10,008,150) 18.8573
------------- --------
Outstanding at December 31, 1997...................................... 19,110,951 $ 7.9906
------------- --------
------------- --------
F-18
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes information about options outstanding at
December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
NUMBER WEIGHTED NUMBER
OUTSTANDING AT WEIGHTED AVERAGE AVERAGE EXERCISABLE WEIGHTED
DECEMBER 31, REMAINING CONTRACTUAL EXERCISE AT DECEMBER AVERAGE
RANGE OF EXERCISE PRICES 1997 LIFE PRICE 31, 1997 EXERCISE PRICE
- ------------------------------ -------------- --------------------- ------------- ------------- ---------------
$0.2000 - $0.3900............. 843,276 7.19 $ 0.2927 843,276 $ 0.2927
$0.4844 - $1.7800............. 942,176 2.40 $ 0.7486 942,176 $ 0.7486
$1.8906 - $4.2188............. 1,711,539 4.35 $ 3.6708 1,707,139 $ 3.6696
$4.2500 - $7.1563............. 5,531,029 8.43 $ 7.0768 58,728 $ 5.6288
$7.2500 - $7.5000............. 1,350,140 7.19 $ 7.4560 845,890 $ 7.4929
$7.5625 - $8.6250............. 1,577,025 5.34 $ 8.6010 1,541,875 $ 8.6050
$8.6875 - $9.7813............. 4,148,565 9.33 $ 9.0885 158,500 $ 9.7069
$9.9063 - $18.2500............ 2,438,057 8.61 $ 12.7550 779,961 $ 16.1924
$18.5625 - $24.5000........... 489,921 8.24 $ 23.4102 342,310 $ 23,4008
$24.6250 - $34.2500........... 79,223 7.97 $ 30.4673 67,723 $ 30.6235
-------------- --- ------------- ------------- ---------------
$0.2000 - $34.2500............ 19,110,951 7.58 $ 7.9906 7,287,577 $ 7.0538
-------------- --- ------------- ------------- ---------------
-------------- --- ------------- ------------- ---------------
In connection with all stock option plans, 23,765,427 shares of Common
Stock were reserved for issuance as of December 31, 1997, and 7,287,577 options
were exercisable. At December 31, 1996, 18,750,708 shares of Common Stock were
reserved for issuance, and 7,988,176 options were exercisable.
EMPLOYEE STOCK PURCHASE PLAN
The Company also has a qualified Employee Stock Purchase Plan (ESPP)
under which 7,600,000 shares of common stock, in the aggregate, have been
authorized for issuance. Under the terms of the Plan, employees may contribute,
through payroll deductions, up to 10 percent of their base pay and purchase up
to 500 shares per quarter (with the limitation of purchases of $25,000 annually
in fair market value of the shares). Employees may elect to withdraw from the
Plan during any quarter and have their contributions for the period returned to
them. Also, employees may elect to reduce the rate of contribution one time in
each quarter. The price at which employees may purchase shares is 85 percent of
the lower of the fair market value of the stock at the beginning or end of the
quarter. The Plan is qualified under Section 423 of the Internal Revenue Code of
1986, as amended. During 1997, 1996, and 1995, the Company issued 573,343
shares, 616,128 shares, and 347,743 shares, respectively, under this Plan. The
Plan was terminated on July 1, 1997, which was 10 years after the offering date
for the Plan's first offering period.
In May 1997, the Company's stockholders approved the 1997 Employee Stock
Purchase Plan (the "1997 ESPP"). The Company has reserved 4,000,000 shares of
Common Stock for issuance under the 1997 ESPP. The 1997 ESPP permits
participants to purchase Common Stock through payroll deductions of up to 15
percent of an employee's compensation, including commissions, overtime, bonuses
and other incentive compensation. The price of Common Stock purchased under the
1997 ESPP is equal to 85 percent of the lower of the fair market value of the
Common Stock at the beginning or at the end of each calendar quarter in which an
eligible employee participates. The Plan qualifies as an employee stock purchase
plan under Section 423 of the Internal Revenue Code of 1986, as amended. As of
December 31, 1997, the Company has not issued any shares of Common Stock under
the 1997 ESPP.
F-19
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK-BASED COMPENSATION
As permitted under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (FAS 123), the Company has elected to continue to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) in accounting for stock-based awards to employees. Under APB
25, the Company generally recognizes no compensation expense with respect to
such awards.
Pro forma information regarding the net income (loss) and net income
(loss) per share is required by FAS 123 for awards granted or modified after
December 31, 1994 as if the Company had accounted for its stock based awards to
employees under the fair value method of FAS 123. The fair value of the
Company's stock-based awards to employees was estimated using a Black-Scholes
option pricing model.
The fair value of the Company's stock-based awards was estimated assuming
no expected dividends and the following weighted-average assumptions:
OPTIONS ESPP
------------------------------------------ ----------------------------------------------
1997 1996 1995 1997 1996 1995
---------- -------------- -------------- -------------- -------------- --------------
Expected life
(years)............. 4.5 years 4.5 years 4.5 years .25 years .25 years .25 years
Expected volatility
(percent)........... .7900 .5822 - .6327 .5642 - .6239 .5066 - .8954 .5765 - .9662 .4170 - .7295
Risk-free interest
rate (percent)...... 5.71 5.20 - 6.09 5.82 - 7.72 5.23 - 5.40 5.01 - 5.85 5.49 - 6.07
For pro forma purposes, the estimated fair value of the Company's stock
based awards is amortized over the award's vesting period (for options) and the
three month purchase period (for stock purchases under the ESPP). The Company's
pro forma information follows, (in thousands except for per share information):
1997 1996 1995
----------- ------------- -------------
Net income (loss) applicable to common stockholders.... As reported $ (358,769) $ (73,565) $ 38,600
Pro forma (387,594) (94,196) 28,652
Net income (loss) per common share:
Basic................................................ As reported $ (2.36) $ (0.49) $ 0.27
Pro forma (2.55) (0.63) 0.20
Diluted.............................................. As reported $ (2.36) $ (0.49) $ 0.26
Pro forma (2.55) (0.63) 0.19
Calculated under FAS 123, the weighted-average fair value of the options
granted during fiscal 1997, 1996 and 1995 was $5.26, $13.04 and $10.39 per
share, respectively. The weighted average fair value of employee stock purchase
rights granted under the ESPP during fiscal 1997, 1996 and 1995 were $3.83,
$7.47 and $5.27, respectively.
F-20
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--EMPLOYEE BENEFIT PLANS (CONTINUED)
401(K) PLAN
The Company has a 401(k) plan covering substantially all of its U.S.
employees. Under this plan, participating employees may defer up to 15 percent
of their pre-tax earnings, subject to the Internal Revenue Service annual
contribution limits. In fiscal 1997, the Company matched 50 percent of each
employee's contribution up to a maximum of $2,000. The Company's matching
contributions to this 401(k) plan for 1997, 1996 and 1995 were $4.2 million,
$3.8 million and $2.5 million, respectively.
NOTE 8--COMMITMENTS
The Company leases certain computer and office equipment under capital
leases having terms of three-to-five years. Amounts capitalized for such leases
are included on the consolidated balance sheets as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
(IN THOUSANDS)
Computer equipment..................................... $ 6,939 $ 8,825
Office equipment....................................... 349 2,474
------ -------
7,288 11,299
Less: accumulated amortization......................... 1,489 8,985
------ -------
$ 5,799 $ 2,314
------ -------
------ -------
During fiscal 1997, 1996 and 1995, the Company financed approximately
$10.5 million, $1.8 million and $1.7 million, respectively, of equipment
purchases under capital lease arrangements. Amortization of the cost of leased
equipment is included in depreciation expense.
The Company leases certain of its office facilities and equipment under
non-cancelable operating leases and total rent expense was $34.7 million, $42.4
million and $19.7 million in 1997, 1996 and 1995, respectively.
In November 1996, the Company leased approximately 200,000 square feet of
office space in Santa Clara, California. The lease term is for fifteen years and
minimum lease payments amount to $96.0 million over the term. The minimum lease
payments increase within a contractual range based on changes in the Consumer
Price Index. In the fourth quarter of 1997, the Company assigned the lease to an
unrelated third party. The Company remains contingently liable for minimum lease
payments under this assignment.
F-21
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMITMENTS (CONTINUED)
Future minimum payments, by year and in the aggregate, under the capital
and non-cancelable operating leases as of December 31, 1997, are as follows:
CAPITAL NON-CANCELABLE
YEAR ENDING DECEMBER 31 LEASES OPERATING LEASES
- ------------------------------------------------------------ ------------- ----------------
(IN THOUSANDS)
1998........................................................ $ 4,838 $ 34,329
1999........................................................ 3,904 26,944
2000........................................................ 1,887 21,430
2001........................................................ -- 17,427
2002........................................................ -- 12,875
Thereafter.................................................. -- 4,364
------------- --------
Total payments.............................................. 10,629 $ 117,369
--------
--------
Less: amount representing interest.......................... 1,185
-------------
Present value of minimum lease payments..................... 9,444
Less current portion........................................ 3,627
-------------
$ 5,817
-------------
-------------
F-22
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMITMENTS (CONTINUED)
As of December 31, 1997, the Company was contractually obligated to
purchase approximately $4.4 million of various computer equipment.
The Company has several active software development and service provider
contracts with third-party technology providers. These agreements contain
financial commitments by the Company of $15.1 million, $11.4 million, $10.4
million, $7.3 million and $3.5 million in fiscal 1998, 1999, 2000, 2001 and
2002, respectively.
NOTE 9--GEOGRAPHIC INFORMATION
Net revenues, operating income (loss), and identifiable assets for the
Company's North America, European, Asia/Pacific and Latin American operations
are summarized below by year:
NORTH LATIN
AMERICA EUROPE ASIA/PACIFIC AMERICA ELIMINATIONS TOTAL
----------- ---------- ----------- --------- ------------ -----------
(IN THOUSANDS)
1997:
Net revenues......................... $ 357,568 $ 220,024 $ 81,129 $ 50,064 $ (46,487) $ 662,298
Operating income (loss).............. (228,747) (78,635) (49,067) 3,541 (4,428) (357,336)
Identifiable assets.................. 555,476 130,174 61,875 38,948 (223,229) 563,244
1996:
Net revenues......................... $ 410,549 $ 229,588 $ 93,622 $ 50,829 $ (56,741) $ 727,847
Operating income (loss).............. (38,331) (24,156) (11,576) 4,693 1,353 (68,017)
Identifiable assets.................. 734,852 218,196 101,203 44,803 (217,058) 881,996
1995:
Net revenues......................... $ 365,647 $ 199,711 $ 80,667 39,549 $ (52,804) $ 632,770
Operating income (loss).............. 69,245 (2,588) (3,005) 2,045 (749) 64,948
Identifiable assets.................. 579,306 216,530 85,158 25,618 (224,699) 681,913
Sales and transfers between geographic areas are accounted for at prices
which the Company believes are arm's length prices, and which in general are in
accordance with the rules and regulations of the respective governing tax
authorities.
Export revenues consisting of sales from the Company's U.S. operating
subsidiary to non-affiliated customers were as follows:
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
Canada........................................................ $ 2,033 $ 7,521 $ 6,299
Latin America................................................. 4,494 6,556 6,817
Asia/Pacific.................................................. 11 3,391 5,887
Other......................................................... 364 3,437 1,301
--------- --------- ---------
Total..................................................... $ 6,902 $ 20,905 $ 20,304
--------- --------- ---------
--------- --------- ---------
F-23
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES
The provision for income taxes applicable to income (loss) before income
taxes consists of the following:
1997 1996 1995
--------- ---------- ----------
(IN THOUSANDS)
Currently payable:
Federal.................................................. $ (2,264) $ 1,540 $ 40,582
State.................................................... -- 565 6,463
Foreign.................................................. 10,415 6,216 9,325
--------- ---------- ----------
8,151 8,321 56,370
Deferred:
Federal.................................................. (3,857) (1,748) (13,747)
State.................................................... (189) (2,983) (1,204)
Foreign.................................................. 3,712 8,941 (9,325)
--------- ---------- ----------
(334) 4,210 (24,276)
--------- ---------- ----------
$ 7,817 $ 12,531 $ 32,094
--------- ---------- ----------
--------- ---------- ----------
In 1996 and 1995, the Company recognized tax benefits related to stock
option plans of $14.8 million and $21.3 million, respectively. Such benefits
were recorded as an increase to additional paid-in capital.
Income (loss) before income taxes consists of the following:
1997 1996 1995
----------- ---------- ----------
(IN THOUSANDS)
Domestic................................................. $ (227,266) $ (26,510) $ 83,937
Foreign.................................................. (121,784) (34,524) (13,243)
----------- ---------- ----------
$ (349,050) $ (61,034) $ 70,694
----------- ---------- ----------
----------- ---------- ----------
F-24
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount computed by
applying the federal statutory income tax rate to income (loss) before income
taxes. The sources and tax effects of the differences are as follows:
1997 1996 1995
------------------------ ----------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- ---------- ----------- ---------- -----------
(IN THOUSANDS)
Computed tax at federal statutory rate........... $ (122,167) (35.0)% $ (21,362) (35.0)% $ 24,743 35.0%
Valuation allowance.............................. 116,978 33.5% 41,192 67.5% 4,239 6.0%
Research and development credits................. -- -- (1,457) (2.4)% (935) (1.3)%
State income taxes, net of federal tax benefit... -- -- (1,572) (2.6)% 3,418 4.8%
Foreign taxes.................................... 10,415 3.0% -- -- -- --
Other, net....................................... 2,591 0.7% (4,270) (7.0)% 629 0.9%
----------- ----- ---------- ----- ---------- ---
$ 7,817 2.2% $ 12,531 20.5% $ 32,094 45.4%
----------- ----- ---------- ----- ---------- ---
----------- ----- ---------- ----- ---------- ---
Deferred taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial statement
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1997 and
1996 are as follows:
1997 1996
----------- ----------
(IN THOUSANDS)
Deferred Tax Assets:
Reserves and accrued expenses........................................ $ 13,457 $ 7,703
Deferred revenue..................................................... 34,786 33,875
Foreign net operating loss carryforwards............................. 77,149 38,067
Domestic net operating loss carryforwards............................ 93,003 9,800
Foreign taxes in excess of taxes at U.S. rate........................ 7,682 9,014
Valuation of investment portfolio under FAS 115...................... 307 --
Other................................................................ 1,632 555
----------- ----------
Total deferred tax assets............................................ 228,016 99,014
Valuation allowance for deferred tax assets.......................... (178,353) (46,339)
----------- ----------
Deferred tax assets, net of valuation allowance...................... 49,663 52,675
Deferred Tax Liabilities:
Capitalized software................................................. 14,051 17,704
Revenue recognition.................................................. 1,612 1,612
Valuation of investment portfolio under FAS 115...................... -- 6,454
----------- ----------
Total deferred tax liabilities....................................... 15,663 25,770
----------- ----------
Net deferred tax assets.............................................. $ 34,000 $ 26,905
----------- ----------
----------- ----------
F-25
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES (CONTINUED)
At December 31, 1997, the Company had approximately $220.4 million, $237.2
million and $159.3 million of foreign, federal and state net operating loss
carryforwards, respectively. The foreign and state net operating loss
carryforwards expire at various dates beginning in 1999. The federal net
operating loss carryforwards expire at various dates beginning in 2007. Income
taxes paid amounted to $11.3 million, $22.7 million and $18.6 million in 1997,
1996 and 1995, respectively. The valuation allowance for deferred tax assets
increased by $132.0 million, $41.2 million and $4.2 million in 1997, 1996 and
1995, respectively.
NOTE 11--BUSINESS COMBINATIONS
In February 1996, the Company acquired Illustra Information Technologies,
Inc. (Illustra), a company that provides dynamic content management database
software and tools for managing complex data in the Internet,
multimedia/entertainment, financial services, earth sciences and other markets.
Approximately 12.7 million shares of Informix common stock were issued to
acquire all outstanding shares of Illustra common stock. An additional 2.3
million shares of Informix common stock were reserved for issuance in connection
the assumption of Illustra's outstanding stock options and warrants. The
transaction has been accounted for as a pooling of interests, and accordingly,
the consolidated financial statements for all prior periods presented have been
restated to include the accounts and operations of Illustra as if the merger was
consummated at the beginning of the earliest period presented. Merger fees of
approximately $5.9 million were recorded in the first quarter of 1996. The
following table presents the separate operating results for Informix Corporation
and Illustra for the periods prior to the acquisition date (because the
operating results of Illustra for the period January 1, 1996 to the effective
date of the merger were immaterial to the combined Company, for the purposes of
this table an acquisition date of January 1, 1996 is assumed).
1995
--------------
(IN THOUSANDS)
Net revenues
Informix.................................................................... $ 627,536
Illustra.................................................................... 5,234
--------------
Combined.................................................................... $ 632,770
--------------
--------------
Net income (loss)
Informix.................................................................... $ 46,289
Illustra.................................................................... (7,689)
--------------
Combined.................................................................... $ 38,600
--------------
--------------
In January 1995, the Company acquired a 90 percent interest in the
database division of ASCII Corporation ("ASCII"), a distributor of its products
in Japan. The Company acquired the remaining 10 percent interest in January
1996. The total purchase price, which consisted of cash and direct acquisition
costs, was approximately $46.0 million, of which approximately $35.4 million
exceeded the net tangible assets acquired. Intangible assets acquired included
customer lists, sales and marketing workforce, business tradenames, and
goodwill. These intangible assets are being amortized over seven years.
In April 1995, the Company acquired an 80 percent interest in the
database division of Daou Corporation ("Daou"), a distributor of its products in
Korea. The Company acquired the remaining
F-26
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--BUSINESS COMBINATIONS (CONTINUED)
20 percent interest in January 1997. The total purchase price, which consisted
of cash and direct acquisition costs, was approximately $7.6 million, of which
approximately $7.0 million exceeded the net tangible assets acquired. Intangible
assets acquired included customer lists, sales and marketing workforce, business
tradenames, and goodwill. These intangible assets are being amortized over seven
years.
In February 1997, the Company acquired all of the outstanding capital
stock of CenterView Software, Inc. ("CenterView"), a privately-owned company
which develops and sells software application development tools. The aggregate
purchase price paid was approximately $8.7 million, which included cash and
direct acquisition costs. The transaction has been accounted for as a purchase
and, based on an independent appraisal of the assets acquired and liabilities
assumed, the purchase price has been allocated to the net tangible and
intangible assets acquired including developed software technology, acquired
workforce, in-process technology, and goodwill. The in-process technology, which
based on the independent appraisal has been valued at $7 million, had not, at
the date of acquisition, reached technological feasibility and had no
alternative future uses in other research and development projects.
Consequently, its value was charged to operations in the period the acquisition
was consummated (the first quarter of 1997). The remaining identifiable
intangible assets are being amortized over five years.
The operating results of these businesses have not been material in
relation to those of the Company and are included in the Company's consolidated
results of operations from the date of acquisition.
NOTE 12--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 the 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 these derivative actions would accrue to the benefit of the
Company.
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
under its policies is limited. Moreover, although the directors' and officers'
insurance 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, the Company does not
have insurance to cover the costs of its own defense or to cover any liability
F-27
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--LITIGATION (CONTINUED)
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.
NOTE 13--NONRECURRING CHARGES
In accordance with Financial Accounting Standards Board Statement No. 121
(FAS 121), "Accounting for the Impairment of Long Lived Assets and for
Long-Lived Assets to be Disposed of," the Company records impairment losses on
long-lived assets used in its operations when events and circumstances indicate
that the assets might be impaired and the estimated future undiscounted cash
flows to be generated by those assets are less than the assets' carrying
amounts. During the first quarter of 1997, the Company's Japanese subsidiary
experienced a significant shortfall in business activity compared to historical
levels. 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 using estimated future discounted cash flows
and/or estimated resale values as appropriate.
In February 1997 the Company acquired CenterView Software (see Note 11)
and, as a direct result, revised its database application tool business strategy
to incorporate CenterView's developed technology and "Data Director" product.
This revision to the tools business strategy significantly altered the Company's
current and future marketing plans for its own NewEra family of application
tools including projected future NewEra product revenues. As a result, the
Company reevaluated the net realizable value of its NewEra products and found it
to be significantly below the net balance of related capitalized software
development costs. Accordingly, the Company recorded a charge during the first
quarter 1997 of $14.7 million to reduce the carrying value of these capitalized
product development costs to the revised estimated net realizable value of the
NewEra products.
In June and again in September 1997, the Company approved plans to
restructure its operations in order to bring expenses in line with forecasted
revenues. In connection with these restructurings, the Company substantially
reduced its worldwide headcount and consolidated facilities and operations to
F-28
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--NONRECURRING CHARGES (CONTINUED)
improve efficiency. The following analysis sets forth the significant components
of the restructuring reserve at December 31, 1997:
RESTRUCTURING NON-CASH CASH ACCRUAL BALANCE AT
EXPENSE COSTS PAYMENTS DECEMBER 31, 1997
------------- ----------- ----------- -------------------
(IN MILLIONS)
Severance and benefits......................... $ 21.9 $ -- $ 19.5 $ 2.4
Write-off of assets............................ 48.2 48.2 -- --
Facility charges............................... 34.7 7.7 3.8 23.2
Other.......................................... 3.4 2.2 .2 1.0
------ ----- ----- -----
$ 108.2 $ 58.1 $ 23.5 $ 26.6
------ ----- ----- -----
------ ----- ----- -----
Severance and benefits represent the reduction of approximately 670
employees, primarily sales and marketing personnel, on a worldwide basis.
Temporary employees and contractors were also reduced. Write-off of assets
include the 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 the write-offs and write-downs
consists primarily of computer servers, workstations, and personal computers
that will no longer be utilized in the Company's operations. These assets were
written down to their fair value less cost to sell. Facility charges include
early termination costs associated with the closing of certain domestic and
international sales offices.
The total Restructuring Expense decreased by $1.2 million during the
fourth quarter of 1997 primarily due to adjusting the original estimate of the
loss to be incurred on the sale of land to the actual loss.
The Company expects to complete most of the actions associated with its
restructuring by the end of the second quarter of fiscal 1998.
NOTE 14--SENIOR SECURED CREDIT AGREEMENT
In December 1997, the Company entered into a Senior Secured Credit Agreement
with a syndicate of commercial banks, 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 certain eligibility criteria. 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 December 31,
1997, no borrowings were outstanding under the Credit Facility, the Company's
net accounts receivable totaled $142 million and its borrowing base under the
Credit Facility was $47 million. The term of the Credit Facility is two years
and is secured by all of the assets of Informix Software and the capital stock
of the Company's domestic subsidiaries. The availability of the Credit Facility
is subject to the Company's compliance with certain covenants, including the
following financial covenants requiring the Company to: (a) maintain a ratio of
1.25 to 1.00 in respect of the sum of cash and acounts receivable to the
difference of current liabilities less deferred and unearned revenues, (b)
maintain quarterly revenues of $150 million through June 1998 and $160 million
thereafter, (c) maintain quarterly operating loss of no more than $10 million
through the quarter ending March 31, 1998 and a quarterly operating profit of at
F-29
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--SENIOR SECURED CREDIT AGREEMENT (CONTINUED)
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 greater than the sum of restated revenue,
capitalized software costs, capital expenditures, cash outlays in respect of
accrued expenses arising from restructuring charges, and the sum of depreciation
and amortization, (e) 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 million, less any carry forward amount, and
(g) refrain from entering into any merger, consolidation, reorganization or
other transaction resulting in a fundamental change. At December 31, 1997, the
Company was in compliance with all financial covenants under the Credit
Facility.
NOTE 15--SUMMARY QUARTERLY INFORMATION (UNAUDITED)
FIRST QUARTER SECOND QUARTER THIRD QUARTER
------------------------ ----------------------- -----------------------
AS REPORTED RESTATED AS REPORTED RESTATED AS REPORTED RESTATED
------------ ---------- ------------ --------- ------------ ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Year ended December 31, 1997
Net revenues............................... $ 133,664 $ 149,223 $ 182,012 -- $ 149,911 --
Gross profit (1)(2)........................ 63,185 78,937 123,527 -- 97,625 --
Net income (loss) (1)(2)................... (140,107) (144,161) (111,377) -- (110,523) --
Preferred stock dividend................... -- -- -- -- -- --
Value assigned to warrants................. -- -- -- -- -- --
------------ ---------- ------------ --------- ------------ ---------
Net income (loss) applicable to common
stockholders............................. (140,107) (144,161) (111,377) -- (110,523) --
Net income (loss) per common share:
Basic.................................... $ (0.93) $ (0.95) $ (0.73) -- $ (0.73) --
Diluted.................................. (0.93) (0.95) (0.73) -- (0.73) --
Year ended December 31, 1996
Net revenues............................... $ 204,021 $ 164,605 $ 226,282 $ 159,323 $ 238,180 $ 187,073
Gross profit............................... 160,584 121,378 178,474 112,074 189,003 138,092
Net income (loss).......................... 15,891 (15,377) 21,628 (34,083) 26,181 (17,095)
Net income (loss) per share:
Basic.................................... $ 0.11 $ (0.10) $ 0.15 $ (0.23) $ 0.17 $ (0.11)
Diluted.................................. 0.10 (0.10) 0.14 (0.23) 0.17 (0.11)
Year ended December 31, 1995
Net revenues............................... $ 148,037 $ 146,120 $ 164,068 $ 141,175 $ 182,701 $ 166,929
Gross profit............................... 121,893 120,138 134,042 111,226 150,183 136,595
Net income (loss).......................... 17,646 16,177 20,184 (2,731) 23,896 7,759
Net income (loss) per share:
Basic.................................... $ 0.12 $ 0.11 $ 0.14 $ (0.02) $ 0.16 $ 0.05
Diluted.................................. 0.12 0.11 0.14 (0.02) 0.16 0.05
Year ended December 31, 1994
Net revenues............................... $ 96,242 $ 92,763 $ 106,214 $ 96,217 $ 117,081 $ 111,428
Gross profit............................... 81,429 77,950 89,765 79,768 98,106 92,453
Net income (loss).......................... 11,540 8,922 12,210 4,686 15,446 11,191
Net income (loss) per share:
Basic.................................... $ 0.09 $ 0.07 $ 0.09 $ 0.03 $ 0.11 $ 0.08
Diluted.................................. 0.08 0.06 0.09 0.03 0.11 0.08
FOURTH QUARTER
-----------------------
AS REPORTED RESTATED
------------ ---------
Year ended December 31, 1997
Net revenues............................... $ 181,152 --
Gross profit (1)(2)........................ 132,266 --
Net income (loss) (1)(2)................... 9,194 --
Preferred stock dividend................... (301) --
Value assigned to warrants................. (1,601) --
------------ ---------
Net income (loss) applicable to common
stockholders............................. 7,292 --
Net income (loss) per common share:
Basic.................................... $ 0.05 --
Diluted.................................. 0.04 --
Year ended December 31, 1996
Net revenues............................... $ 270,828 $ 216,848
Gross profit............................... 218,342 164,669
Net income (loss).......................... 34,118 (7,010)
Net income (loss) per share:
Basic.................................... $ 0.23 $ (0.05)
Diluted.................................. 0.22 (0.05)
Year ended December 31, 1995
Net revenues............................... $ 219,413 $ 178,546
Gross profit............................... 178,396 137,678
Net income (loss).......................... 35,918 17,372
Net income (loss) per share:
Basic.................................... $ 0.24 $ 0.12
Diluted.................................. 0.23 0.11
Year ended December 31, 1994
Net revenues............................... $ 150,575 $ 151,561
Gross profit............................... 129,520 130,506
Net income (loss).......................... 22,752 23,494
Net income (loss) per share:
Basic.................................... $ 0.16 $ 0.17
Diluted.................................. 0.16 0.16
- ------------------------
(1) The Company recorded in the second quarter and again in the third quarter of
1997, restructuring charges of $59.6 million and $49.7 million,
respectively. The total restructuring expense decreased by $1.2 million
during the fourth quarter of 1997 primarily due to adjusting the original
estimate of the loss to be incurred on the sale of land to the actual loss.
(See Note 13)
F-30
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--SUMMARY QUARTERLY INFORMATION (UNAUDITED) (CONTINUED)
(2) In the first quarter of 1997, the Company recorded a charge of $30.5 million
to write down the carrying values of certain of its Japanese subsidiary's
long-lived assets to their fair values. During the same quarter, the Company
also recorded a charge of $14.7 million to write down the carrying value of
capitalized software development costs for certain products to their net
realizable values.
NOTE 16--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (UNAUDITED)
In 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2 (SOP 97-2), "Software Revenue Recognition" as amended
by Statement of Position 98-4 (SOP 98-4). The Company will be required to adopt
the provisions of the SOPs' as of January 1, 1998. The adoption may, in certain
circumstances, result in the deferral of software license revenues that would
have been recognized upon delivery of the related software under preceding
accounting standards. In response to these SOPs', the Company will likely change
its business practices, and, consequently, the Company cannot quantify the
effect the SOPs' will have on its operating results, financial position or cash
flows.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, Reporting Comprehensive Income (FAS No. 130) and Statement No. 131,
Disclosures About Segments of An Enterprise and Related Information (FAS No.
131). FAS No. 130 establishes rules for reporting and displaying comprehensive
income. FAS No. 131 will require the Company to use the "management approach" in
disclosing segment information. Both statements are effective for the Company
during 1998. The Company does not believe that the adoption of either FAS No.
130 or FAS No. 131 will have a material impact on the Company's results of
operations, financial position or cash flows.
NOTE 17--SUBSEQUENT EVENTS (UNAUDITED)
In December 1997, the Company's Board of Directors authorized a second
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
Effective 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. The exercise
price for repriced options was $5.094, the closing sales price of the Company's
Common Stock on the Repricing Effective Date.
On February 13, 1998, the A-1 Preferred Stockholders exercised warrants
to purchase 60,000 additional shares of A-1 Preferred at $250 per share for net
proceeds to the Company of $14.1 million, and simultaneously converted 220,000
shares of A-1 Preferred into 12,769,908 shares of the Company's common stock.
F-31
INFORMIX CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS DEDUCTIONS END OF
OF PERIOD EXPENSES (1) (2) PERIOD
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Allowance for Doubtful Accounts
Year ended December 31, 1997...................... $ 21,429 $ 19,929 $ -- $ 7,551 $ 33,807
Year ended December 31, 1996...................... $ 12,854 $ 15,329 $ (346) $ 6,408 $ 21,429
Year ended December 31, 1995...................... $ 6,049 $ 8,247 $ 261 $ 1,703 $ 12,854
- ------------------------
(1) Charged (credited) to revenues
(2) Uncollectible accounts written off, net of recoveries
S-1
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT TITLE
- ------------- ---------------------------------------------------------------------------------------------
3.1 (3) Certificate of Incorporation of the Registrant, as amended
3.2 (3) Bylaws of the Registrant, as amended
3.3 (4) Certificate of Designation of Series A Convertible Preferred Stock
3.4 (5) Certificate of Designation of Series A-1 Convertible Preferred Stock
3.5 (5) Certificate of Designation of Series B Convertible Preferred Stock
4.1 (6) First Amended and Restated Rights Agreement, dated as of August 12, 1997, between the
Registrant and BankBoston N.A., including the form of Rights Certificate attached thereto as
Exhibit A
4.2 (7) Amendment, dated as of November 17, 1997, to the First Amended and Restated Rights Agreement
between the Registrant and BankBoston, N.A.
10.1 (2) Form of Change of Control Agreement
10.2 (9) Form of Amended Indemnity Agreement
10.3 (10) 1989 Outside Directors Stock Option Plan
10.4 (1) Amendment to the 1989 Outside Directors Stock Option Plan
10.5 (2) Form of Nonqualified Stock Option Agreement under the Registrant's 1989 Outside Director's
Stock Option Plan
10.6 (12) 1986 Stock Option Plan, as amended
10.7 (13) 1994 Stock Option and Award Plan
10.8 (1) Form of Stock Option Agreement and Performance Award Agreement under the Registrant's 1994
Stock Option and Award Plan
10.9 (13) Form of Nonqualified Stock Option Agreement under the Registrant's 1994 Stock Option Plan
10.10 (14) 1997 Employee Stock Purchase Plan
10.11 (2) Enrollment/Change Form under the Registrant's 1997 Employee Stock Purchase Plan
10.12 (15) Employment Agreement, dated July 18, 1997, between the Registrant and Robert J. Finocchio,
Jr.
10.13 (15) Offer of Employment Letter, dated September 18, 1997, from the Registrant to Wes Raffel
10.14 (15) Offer of Employment Letter, dated September 24, 1997, from the Registrant to Jean-Yves
Dexmier
10.15 (2) Separation Agreement, dated April 18, 1987, between the Registrant and Ronald M. Alvarez
10.16 (2) Separation Agreement, dated May 12, 1997, between the Registrant and Edwin C. Winder
10.17 (16) Employment Agreement, dated January 1, 1989, between the Registrant and Phillip E. White
10.18 (2) Contract of Employment, dated December 5, 1996, between the Registrant and Kenneth Coulter
10.19 (2) Employment Letter Agreement, dated November 25, 1996, between the Registrant and Kenneth
Coulter
10.20 (4) Subscription Agreement, dated August 12, 1997, between the Company and Fletcher International
Limited
10.21 (17) Exchange Agreement, dated as of November 17, 1997, between the Company and Fletcher
International Limited
10.22 (17) Amendment No. 1 to Subscription Agreement, dated as of November 17, 1997, between the Company
and Fletcher International Limited
10.23 (5) Securities Purchase Agreement, dated as of November 17, 1997, between the Company and the
purchasers listed therein
10.24 (5) Registration Rights Agreement, dated as of November 17, 1997, between the Company and the
purchasers listed therein
EXHIBIT NO. EXHIBIT TITLE
- ------------- ---------------------------------------------------------------------------------------------
10.25 (8) Menlo Oaks Corporate Center Standard Business Lease, dated May 16, 1985, between the
Registrant and Amarok Bredero Partners for office space at 4100 Bohannon Drive, Menlo Park,
California
10.26 (8) Lease Amendment #1, dated July 2, 1986, between the Registrant and Amarok Bredero Partners
for office space at 4100 Bohannon Drive, Menlo Park, California
10.27 (18) Second Amendment to Lease, dated November 7, 1986 between the Registrant and Amarok Bredero
Partners for office space at 4100 Bohannon Drive, Menlo Park, California
10.28 (19) Third Amendment to Lease, dated June 18, 1991, between the Registrant and Menlo Oaks
Partners, L.P. for office space at 4100 Bohannon Drive, Menlo Park, California
10.29 (2) Fourth Amendment to Lease, dated June 30, 1997, between the Registrant and Menlo Oaks
Partners, L.P. for office space at 4100 Bohannon Drive, Menlo Park, California
10.30 (9) Menlo Oaks Corporate Center Standard Business Lease, dated September 4, 1987 between the
Registrant and Menlo Oaks Partners, L.P. for office space at 4300/4400 Bohannon Drive, Menlo
Park, California
10.31 (2) Side Letter Agreement, dated August 31, 1987, between the Registrant and Menlo Oaks Partners,
L.P. for office space at 4300/4400 Bohannon Drive, Menlo Park, California
10.32 (2) Side Letter Agreement, dated October 27, 1987, between the Registrant and Menlo Oaks
Partners, L.P. for office space at 4300/4400 Bohannon Drive, Menlo Park, California
10.33 (19) First Amendment to Lease, dated June 18, 1991, between the Registrant and Menlo Oaks
Partners, L.P. for office space at 4300/4400 Bohannon Drive, Menlo Park, California
10.34 (20) Second Amendment to Lease, dated July 17, 1992, between the Registrant and Menlo Oaks
Partners, L.P. for office space at 4300/4400 Bohannon Drive, Menlo Park, California
10.35 (2) Third Amendment to Lease, dated June 8, 1993 between the Registrant and Menlo Oaks Partners,
L.P. for office space at 4300/4400 Bohannon Drive, Menlo Park, California
10.36 (21) Fourth Amendment to Lease, dated February 10, 1994, between the Registrant and Menlo Oaks
Partners, L.P. for office space at 4300/4400 Bohannon Drive, Menlo Park, California
10.37 (2) Fifth Amendment to Lease, dated June 30, 1997 between the Registrant and Menlo Oaks Partners,
L.P. for office space at 4300/4400 Bohannon Drive, Menlo Park, California
10.38 (21) Menlo Oaks Corporate Center Standard Business Lease, dated February 10, 1994 between the
Registrant and Menlo Oaks Partners, L.P. for office space at 4600/4700 Bohannon Drive, Menlo
Park, California
10.39 (21) First Amendment to Lease, dated March 17, 1994, between the Registrant and Menlo Oaks
Partners, L.P. for office space at 4600/4700 Bohannon Drive, Menlo Park, California
10.40 (2) Second Amendment to Lease, dated September 22, 1994, between the Registrant and Menlo Oaks
Partners, L.P. for office space at 4600/4700 Bohannon Drive, Menlo Park, California
10.41 (2) Third Amendment to Lease, dated December 28, 1994, between the Registrant and Menlo Oaks
Partners, L.P. for office space at 4600/4700 Bohannon Drive, Menlo Park, California
10.42 (9) Office Lease, dated August 15, 1987, between the Registrant and Southlake Partners #1 for
office space at 15961 College Blvd. and 11170 Lakeview Avenue, Lenexa, Kansas
EXHIBIT NO. EXHIBIT TITLE
- ------------- ---------------------------------------------------------------------------------------------
10.43 (2) First Amendment to Office Lease, dated April 15, 1988, between the Registrant and Southlake
Partners #1 for office space at 15901 College Blvd., Lenexa, Kansas
10.44 (2) Amendment to Office Lease, dated October 20, 1997, between the Registrant and Southlake
Partners #1 for office space at 15901 College Blvd. (now 16011 College Blvd) Lenexa, Kansas
10.45 (2) Office Lease, dated October 20, 1997, between the Registrant and Southlake Partners #1 for
office space at 11170 Lakeview Avenue, Lenexa, Kansas
10.46 (2) Senior Secured Credit Agreement, dated December 31, 1997, among Informix Software, Inc.,
certain banks and other financial institutions that either now or in the future are parties
to the agreement, BankBoston, N.A. and Canadian Imperial Bank of Commerce
10.47 (2) Pledge Agreement, dated December 31, 1997, by and between the Registrant and BankBoston, N.A.
10.48 (2) Pledge and Security Agreement, dated as of December 31, 1997, between Informix Software, Inc.
and BankBoston, N.A.
10.49 (2) Continuing Guaranty, dated as of December 31, 1997, by the Registrant
10.50 (1) 1997 Non-Statutory Stock Option Plan and form of Stock Option Agreement thereunder
10.51 (1) Offer of Employment Letter, dated January 23, 1998, from the Registrant to Susan T. Daniel
10.52 (1) Offer of Employment Letter, dated January 19, 1998, from the Registrant to Gary Lloyd
10.53 (1) Offer of Employment Letter, dated March 11, 1998, from the Registrant to Diane L. Fraiman
10.54 (1) Office Lease, dated November 10, 1994, between WVP Income Plus III and Siebel Systems, L.P.
(assigned to Informix Corporation) for office space at 4005 Bohannon Drive, including addenda
and amendments thereto.
10.55 (1) Office Lease, dated April 10, 1995, between the Registrant and 3905 Bohannon Partners for
office space at 3905 Bohannon Drive, including addenda thereto.
21.1 (23) Subsidiaries of the Registrant
23.1 (1) Consent of Ernst & Young LLP, Independent Auditors
24.1 (2) Power of Attorney (set forth on signature page)
27.1 (1) Financial Data Schedule
27.2 (1) Financial Data Schedule for fiscal years end December 31, 1996, 1995 and 1994
27.3 (1) Financial Data Schedule for quarters in the fiscal year end December 31, 1997
27.4 (1) Financial Data Schedule for quarters in the fiscal year end December 31, 1996
- ------------------------
(1) Filed herewith
(2) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (333-43991)
(3) Incorporated by reference to exhibits filed with the Registrant's quarterly
report on Form 10-Q for the fiscal quarter ended July 2, 1995
(4) Incorporated by reference to exhibits filed with the Registrant's report on
Form 8-K filed with the Commission on August 25, 1997
(5) Incorporated by reference to exhibits filed with the Registrant's report on
Form 8-K filed with the Commission on December 4, 1997
(6) Incorporated by reference to exhibits filed with the amendment to the
Registrant's Registration Statement on Form 8-A/A (File No. 000-15325)
filed with the Commission on September 3, 1997
(7) Incorporated by reference to exhibits filed with the amendment to the
Registrant's Registration Statement on Form 8-A/A (File No. 000-15325)
filed with the Commission on December 3, 1997.
(8) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 33-8006)
(9) Incorporated by reference to exhibit filed with the Registrant's annual
report on Form 10-K for the fiscal year ended December 31, 1988
(10) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (File No. 33-31116)
(11) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (File No. 33-50608)
(12) Incorporated by reference to exhibits filed with Registrant's Registration
Statements on Form S-8 (File Nos: 33-22862, 33-31117 and 33-506-10)
(13) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-31369) filed with the
Commission on July 16, 1997.
(14) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-31371) filed with the
Commission on July 16, 1997
(15) Incorporated by reference to exhibits filed with the Registrant's
quarterly report on Form 10-Q for the fiscal quarter ended September 28,
1997
(16) Incorporated by reference to exhibits filed with Registrant's annual
report on Form 10-K for the fiscal year ended December 31, 1989
(17) Incorporated by reference to exhibits filed with Registrant's report on
Form 8-K filed with the Commission on December 2, 1997
(18) Incorporated by reference to exhibits filed with Registrant's annual
report on Form 10-K for the fiscal year ended December 31, 1986
(19) Incorporated by reference to exhibits filed with Registrant's annual
report on Form 10-K for the fiscal year ended December 31, 1991
(20) Incorporated by reference to exhibits filed with Registrant's annual
report on Form 10-K for the fiscal year ended December 31, 1992
(21) Incorporated by reference to exhibits filed with Registrant's annual
report on Form 10-K for the fiscal year ended December 31, 1993
(22) Incorporated by reference to exhibits filed with the Registrant's
amendment to its annual report on Form 10-K/A for the fiscal year ended
December 31, 1996 filed with the Commission on November 18, 1997
(23) Incorporated by reference to exhibits filed with the Registrant's annual
report on Form 10-K for the fiscal year ended December 31, 1996