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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-15325
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INFORMIX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3011736
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4100 BOHANNON DRIVE, MENLO PARK, CA 94025
(Address of principal executive office)
650-926-6300
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $0.01
PAR VALUE
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
the 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K/A. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 26, 1999 based on the closing sales price of the
Company's Common Stock, as reported on The Nasdaq Stock Market, was
approximately $1,654,026,369. Shares of Common Stock held by each officer and
director have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of February 26, 1999, Registrant had 189,031,585 shares of Common Stock
issued and outstanding.
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INFORMIX CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I................................................................................................... 1
ITEM 1. BUSINESS................................................................................. 1
ITEM 2. PROPERTIES............................................................................... 11
ITEM 3. LEGAL PROCEEDINGS........................................................................ 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................... 13
PART II.................................................................................................. 14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................... 14
ITEM 6. SELECTED FINANCIAL DATA.................................................................. 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.... 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................... 46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................. 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..... 47
PART III................................................................................................. 49
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT........................................... 49
ITEM 11. EXECUTIVE COMPENSATION................................................................... 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................... 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... 49
PART IV.................................................................................................. 50
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................... 50
SIGNATURES............................................................................................... 54
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PART I
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER
"FACTORS THAT MAY AFFECT FUTURE RESULTS" UNDER "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN, OR
INCORPORATED BY REFERENCE INTO, THIS REPORT.
ITEM 1. BUSINESS
Informix Corporation is a leading supplier of information management
software and solutions to governments and enterprises worldwide. We design,
develop, manufacture, market and support
- Relational database management systems
- Connectivity interfaces and gateways
- Graphical and character-based application development tools for building
database applications that allow customers to access, retrieve and
manipulate business data
We also offer complete solutions, which include our database management
software, our own and third-party software, and our consulting services, to help
customers design and deploy data warehouses, Web-based enterprise repositories
and electronic commerce applications.
On December 31, 1998, we expanded our ability to deliver data warehousing
solutions by acquiring Red Brick Systems, Inc. We issued approximately 7.6
million shares of our Common Stock to the former stockholders of Red Brick in
exchange for all of the outstanding shares of Red Brick stock. In addition, we
assumed all of the outstanding options to purchase shares of Red Brick common
stock. Red Brick's data mart technology is offered as part of our data
warehousing solution. See "Products--Solutions" below.
BACKGROUND
Today's organizations generate and store ever-increasing amounts of
information. Databases and database management systems were developed to
electronically store, manage, retrieve and analyze information (data) in the
most efficient way possible. In general, databases represent large aggregations
of data records, such as sales transactions, inventories, and customer profiles.
Database management systems ("DBMS") control the organization, storage,
retrieval, security and integrity of data in a database. By managing user
read/write authorizations, the DBMS also allows concurrent access to the stored
data by multiple users without corrupting the underlying data.
Relational databases, developed in 1970, address the issues of data
redundancy and data dependence common in pre-relational or hierarchical
databases. By organizing the data into pre-defined and related tables,
relational database management systems ("RDBMS") protect the integrity of the
data and improve the efficiency of the database. A relational database also has
the important advantage of being easy to extend with new data categories.
Organizations commonly employ RDBMS software for use in storing, managing
and retrieving the large amounts of data necessary to support four types of
systems:
- Internal management information systems, such as accounting, human
resources and manufacturing
- Mission-critical online transaction processing ("OLTP") systems that
process business information from a large number of locations or users
- Data warehousing/data mart systems that aggregate data from multiple OLTP
systems and perform sophisticated analyses to support business decisions
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- Internet applications, including dynamic site publishing, information
retrieval and electronic commerce.
We believe that technological advances, including the development and
commercialization of the Internet, will lead to increasingly sophisticated
customer requirements for data storage and management beyond the functionality
offered by conventional RDBMS products. In recent years, the types and
quantities of data required to be stored and managed has grown increasingly
complex and includes audio, video, text and three dimensional graphics in
addition to conventional character data. Since 1996, we have devoted substantial
resources to the development of object-relational database management systems,
which provide RDBMS functionality for complex data such as images, video, audio
and spatial data, and tools for applications in multimedia and entertainment,
digital media publishing, retail and financial services.
We market our products to end-users on a worldwide basis directly through
our sales force and indirectly through application resellers, original equipment
manufacturers ("OEMs") and distributors. The principal geographic markets for
our products are North America, Europe, the Asia/Pacific region, and Latin
America. In recent years, approximately half of our total revenues have been
generated outside North America. Our customers include businesses ranging from
small corporations to Fortune 1000 companies, principally in the manufacturing,
financial services, telecommunications, media, retail/wholesale, hospitality and
government services sectors. We also market our products to state, local and
national governments.
PRODUCTS
Our products can be divided into three main categories:
- SOFTWARE PRODUCTS, which include our database management systems, tools,
and connectivity products
- SERVICES, including maintenance, consulting, education and training and
customer support
- SOLUTIONS, which combine both software and services into business
solutions for data warehousing, web-based enterprise repositories and
electronic commerce
SOFTWARE PRODUCTS
INFORMIX DYNAMIC SERVER
The core of our product offering is Informix Dynamic Server-TM- ("IDS"), our
powerful, multithreaded enterprise database server designed for scalability,
manageability, and performance. IDS offers full RDBMS functionality across
various hardware architectures (uniprocessor, symmetric multiprocessor,
symmetric multiprocessor clusters, and massively parallel processing
architectures) and database models (relational and object-relational) to enable
seamless migration of applications, data and skills. As an open system built to
support industry standards, IDS uses a single architecture for the Windows NT,
UNIX and Linux operating systems.
We also provide workgroup, personal and developer versions of IDS, which
have been adapted for workgroup, single-user and development environments.
Based on our Dynamic Scalable Architecture-TM-, IDS features parallel data
processing capability, replication and connectivity options built into its core.
IDS is available in a variety of configurations based upon adding one or more of
the configuration options described below.
ADVANCED DECISION SUPPORT OPTION-TM- extends IDS with a variety of data
warehousing functions including summarization, sampling, and "top-N."
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EXTENDED PARALLEL OPTION-TM- adapts IDS to work within loosely coupled,
share-nothing computing architectures, including clusters of symmetric
multiprocessing systems and parallel processing systems.
UNIVERSAL DATA OPTION-TM- adds extensibility to IDS and support for SQL3 and
DataBlade-Registered Trademark- modules. Extensibility includes the ability to
add new objects and data types, such as images, audio, video and spatial data,
business specific procedures and logic, and new indexing search methods to the
server. DataBlade modules encapsulate specific datatypes and logic for easy
integration with IDS so that organizations can quickly extend the functionality
of the database to support datatypes unique to an organization. We offer
DataBlade modules for text, rich content, unicode, video, geodetic, spatial and
time series data. Additional DataBlade modules are available from third parties,
including DataBlade modules for local languages, advanced search and retrieval
capabilities, digital media, spatial and geo-spatial applications, messaging,
data warehousing (data cleansing, qualification and queries), bio-informatics
and medical imaging and security.
INFORMIX METACUBE-REGISTERED TRADEMARK- adds to IDS a business analysis
environment for data warehouses. This option provides a multidimensional view of
data without the constraints of a two dimensional (row and table) data model.
This option also includes MetaCube Explorer; MetaCube Scheduler for batch
processing; MetaCube Queryback for running queries in the background; MetaCube
Aggregator for creating and maintaining aggregates in a data warehouse; MetaCube
for Excel which enables data warehouse analysis in an Excel spreadsheet
environment; and MetaCube for the Web which extends analysis capabilities to
intranets. MetaCube currently supports both Informix's and Oracle's databases.
WEB INTEGRATION OPTION-TM- delivers an open platform that provides
high-performance connectivity between Web servers and IDS. This option enables
developers to create intelligent web applications based upon data stored in a
database to deliver tailored, multimedia Web pages to users.
CONNECTIVITY AND GATEWAY PRODUCTS
Connectivity and gateway products provide for the integration of our
database servers with business applications and data from other databases. Our
family of connectivity products includes INFORMIX-Client SDK-TM-, a package of
several application programming interfaces ("APIs") that allow developers to
write applications in the language (Java, C++, C, or ESQL) with which they are
most familiar, as well as specialized connectivity products supporting the ESQL
and C languages, Open Database Connectivity standards, object-oriented APIs, and
Java. Our gateway products allow tools and applications to access data from
Oracle, Sybase, IBM and other non-Informix databases.
DATABASE TOOLS
We provide a comprehensive array of application development tools that are
tightly integrated with IDS and which enable the creation of powerful business
applications for the IDS environment. Using our development tools, application
developers can quickly create a wide range of applications, including Web-ready,
dynamic content management and Java-based systems. Our application development
tools include:
INFORMIX-4GL PRODUCT FAMILY: The INFORMIX-4GL product family includes
INFORMIX-4GL Rapid Development System, INFORMIX-4GL Interactive Debugger and
INFORMIX-4GL Compiler. Together they form a comprehensive fourth-generation
application development and production environment that provides abundant power
and flexibility without the need for third-generation languages like C or COBOL.
In 1998, a new release of INFORMIX-4GL added Global Language Support, allowing
developers to deploy a single application worldwide, and DBCENTURY, providing a
simple upgrade path for applications that were initially coded to support two
digit year fields.
INFORMIX DYNAMIC 4GL: Informix Dynamic 4GL is the latest addition to the
INFORMIX 4GL product family and enables transformation of character-based 4GL
programs into Windows and Motif Graphical User Interface database applications,
with a simple recompile. Informix Dynamic 4GL offers
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customers a choice of deployment options from character, Windows 3.11, Windows
95, Windows NT and X11 Window System (UNIX and Macintosh) clients, to NT and
UNIX servers. Informix Dynamic 4GL's "thin client" three-tier architecture,
combined with these flexible deployment options, allows customers to deploy new,
state-of-the-art Graphical User Interface applications within existing desktop
and network infrastructures.
INFORMIX DATA DIRECTOR-TM- FAMILY: The INFORMIX Data Director product suite
is an advanced solution for building Web-ready, dynamic content management
applications for IDS. Data Director greatly reduces the amount of application
code developers need to write for client/server solutions by automating all of
the data access operations of the client application. INFORMIX Data Director for
Visual Basic is a powerful, model-driven data access and data management
platform that enables Visual Basic developers to create scalable database-aware
forms. INFORMIX Data Director for Web is a robust and visually intuitive
development environment that enables developers to quickly prototype, build, and
deploy dynamic Web applications that are optimized for IDS.
INFORMIX VISIONARY-TM-: Visionary is a no-code, enabling technology that
brings powerful visual information and exploration capabilities to IDS with
Universal Data Option. Informix Visionary provides a window, or portal, into all
corporate data through the creation of "worlds" or applications. Users can
explore each of these worlds or applications to see ever-increasing levels of
detail. The full product suite includes Visionary Studio, a no-code authoring
environment, and a runtime viewer that can be embedded as an ActiveX control,
providing seamless integration with other best-of-breed development tools.
SERVICES
We maintain field-based and centralized corporate technical staffs to
provide a comprehensive range of assistance to our customers. These services
include pre-sales and post-sales technical assistance, consulting, product and
sales training and technical support services. Consultants and trainers provide
services to customers to assist them in the use of our products and the design
and development of applications that utilize our products.
We provide post-sales support to our customers on an optional basis for
annual fees which generally range from 16% to 24% of the license fees paid by
the customer. These support services usually include product updates.
SOLUTIONS
In 1998 we announced plans to offer complete solutions, including our
database engines, related application software and consulting services, for data
warehousing, Web-based enterprise repositories and electronic commerce.
INFORMIX DECISION FRONTIER-TM- SOLUTION SUITE is our integrated suite of
products for deploying data warehouses and data marts. Informix Decision
Frontier consists of:
- INFORMIX DYNAMIC SERVER WITH ADVANCED DECISION SUPPORT AND EXTENDED
PARALLEL OPTIONS--our core database system with features designed to
support large general purpose data warehouses
- RED BRICK WAREHOUSE--our database designed specifically for single-purpose
data marts
- INFORMIX METACUBE-REGISTERED TRADEMARK---our relational online analytical
processing (ROLAP) business analysis environment for Informix and Oracle
databases. Metacube provides a multidimensional view of warehouse data so
it can be compared and analyzed over various combinations of business
dimensions, such as time and geography
- INFORMIX DATASTAGE--an extract, transfer and load tool for extracting data
from multiple sources and loading it into the data warehouse
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- SEAGATE CRYSTAL INFO--a distributed report creation system that presents
data analysis results flexibly and attractively
- INFORMIX DECISION FASTSTART-TM---a consulting and service package that
helps customers reduce the timetable for designing and implementing data
warehouses
INFORMIX I.REACH is our Web-based enterprise repository solution that allows
organizations to manage enterprise information across intranet, extranet and
Internet environments. Informix i.Reach allows content authors to publish and
distribute their own content, reducing the time and cost associated with
managing and maintaining corporate information. It is a rapidly deployable
solution that includes Informix Dynamic Server with Universal Data Option, the
Web Integration Option, Informix DataBlade technology and our enterprise
consulting services for value-based delivery.
INFORMIX I.SELL scheduled for general release in April 1999, is our
electronic storefront solution that integrates our database technology with
application server technology and application software to provide a complete,
rapidly deployable E-Commerce solution. E-Commerce Web sites built with Informix
i.Sell are capable of dynamically merchandising products tailored to each
shopper, handling large numbers of transactions, and collecting and analyzing
customer data to improve profitability.
MARKETING AND CUSTOMERS
We distribute our products through the channels of direct end-user
licensing, OEMs, application vendors addressing specific markets, and
distributors. We have chosen a multiple channel distribution strategy to
maintain broad market coverage and product availability. We have generally
avoided exclusive relationships with our licensees and other resellers of our
products. Discount policies and reseller licensing programs are intended to
support each distribution channel with a minimum of channel conflict. For fiscal
1998, sales of licenses directly to end users accounted for 69% of our total
license revenues and sales to OEMs and sales through distributors and resellers
accounted for 31% of our total license revenues.
At December 31, 1998, our sales, marketing and support staff totaled 1,128
employees in the North America region; 179 employees in the Latin America
region; 606 employees in Europe, the Middle East and Africa; and 370 employees
in the Asia/Pacific region.
LICENSING
END-USER LICENSING
We license our products to organizations worldwide through our direct sales
force, value-added resellers and telemarketing. We believe that the common core
technology of our database management system products, based on standard
operating systems and the SQL database language, helps us sell into major
corporations and government agencies that wish to standardize their diverse
computing environments. As a result, certain of these end-user organizations
have entered into general purchasing agreements with us which offer volume
discounts.
APPLICATION VENDOR AND OEM LICENSING
Since our inception, we have licensed application vendors to distribute our
products. A typical application vendor develops an application (E.G., an
insurance agency management system) using one of our products. The application
vendor purchases a license for the use of our product to develop the application
program. Depending on the application developed, the vendor may purchase a
run-only license, a full version license or multiple product licenses. In
addition, the application vendor may resell our products to end users for use in
conjunction with its own applications.
Application vendors develop applications using a wide array of application
development tools, including our products such as Informix-4GL and Informix-SQL,
as well as products offered by third
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parties. Applications developed using our products are generally portable across
various brands of computers and different operating systems.
We have specialized programs to support the application vendor distribution
channel. Under these programs, we provide to selected application vendors a
combination of marketing development services, consulting and technical
marketing support and discounts.
Our products are also distributed by hardware manufacturers under original
equipment manufacturer (OEM) licenses as an embedded part of the their product.
DISTRIBUTOR LICENSING
We have established a network of full service international distributors who
provide local service and support, as well as our products, to their respective
national markets. We use distributors to supplement our direct sales force,
which enables us to increase our worldwide market coverage.
PRODUCT DEVELOPMENT
The computer software industry is highly competitive and rapidly changing.
Consequently, we dedicate considerable resources to research and development
efforts to enhance our existing product lines and to develop new products to
meet new market opportunities. Most of our current software products have been
developed internally; however, we have acquired certain software products from
others and plan to do so again in the future.
Major product releases resulting from research and development projects in
fiscal 1998 included new releases of IDS and the Advanced Decision Support
Option; IDS support for the NT, Linux, and Solaris 7 operating environments;
IDS, Personal Edition; Informix Dynamic 4GL; enhancements to the Informix 4GL
development tool; a new version of Informix Data Director; and the Decision
Frontier Solution Suite.
Our current product development efforts are focused on:
- Improving and enhancing current products and developing new products, with
particular emphasis on parallel computer architecture, user-defined
database extensions, Web technology integration, graphical desk top and
system administration, analytical templates, and support for industry
standard and emerging development tools
- Improving our products to provide greater speed and support for larger
numbers of concurrent users
- Adapting new products to the broad range of computer brands and operating
systems that we currently support, and adapting current products to new
brands of computers and operating systems that represent attractive market
opportunities for our products
As of December 31, 1998, we had 1,079 regular employees engaged in research
and development. The market for qualified development engineers remains highly
competitive.
Our research and development expenditures for fiscal 1998, 1997 and 1996
were $146.3 million, $139.3 million, and $120.2 million, respectively,
representing approximately 20%, 21%, and 16% of net revenues for these periods.
In addition, during fiscal 1998, 1997 and 1996, we capitalized product
development costs of $18.6 million, $21.8 million, and $28.4 million,
respectively, in accordance with Statement of Financial Accounting Standards No.
86. See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
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COMPETITION
Competitors in the RDBMS market compete primarily on the basis of product
price and performance characteristics, name recognition, technical product
support, product training and services. With respect to product performance, we
believe that the principal competitive factors include:
- Application development productivity (I.E., the speed with which
applications can be built)
- Database performance (I.E., the speed at which database storage and
retrieval functions are executed)
- Product function and features
- The ability to support large warehouses of information
- Reliability, availability and serviceability
- The distribution of software applications and data across networks of
computers from multiple suppliers
- The ability to manage complex data and solve more complex business
problems based on such data
The RDBMS software market is extremely competitive and subject to rapid
technological change and frequent new product introductions and enhancements.
Our competitors in the market include several large vendors that develop and
market databases, applications, development tools or decision support products.
Our principal competitors include Computer Associates International, Inc.; IBM;
Microsoft; NCR/Teradata; Oracle and Sybase. Additionally, as we expand our
business into the data warehousing and Web/E-commerce markets, we expect to
compete with companies offering highly specialized products in each of these
market segments.
INTELLECTUAL PROPERTY
Our success depends on proprietary technology. To protect our proprietary
rights, we rely primarily on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality procedures, contractual provisions
contained in our license agreements and technical measures. We seek to protect
our software, documentation and other written materials under trade secret and
copyright laws, which provide only limited protection. We hold seven United
States patents and several pending applications.
Our products are generally licensed to end-users on a "right-to-use" basis
pursuant to a license that restricts the use of the products for the customer's
internal business purposes. We also rely on "shrink wrap" and "click wrap"
licenses, which include a notice informing the end-user that, by opening the
product packaging or, in the case of an online transaction, by downloading the
product, the end-user agrees to be bound by our license agreement printed on the
package or displayed on the customer's computer screen. Despite such
precautions, it may be possible for unauthorized third parties to copy aspects
of our current or future products or to obtain and use information that we
regard as proprietary. In particular, we have licensed the source code of our
products to certain customers under certain circumstances and for restricted
uses. We have also entered into source code escrow agreements with a number of
our customers that generally require release of source code to the customer in
the event of our bankruptcy, liquidation or otherwise ceasing to conduct
business.
EMPLOYEES
As of December 31, 1998, Informix and its subsidiaries employed 3,984
regular employees worldwide, including 2,283 in sales, marketing and support,
1,079 in research and development, 84 in operations and 538 in administration
and finance. Of our total employees at December 31, 1998, approximately 1,561
were located outside North America. None of our employees located in the United
States are represented by a labor union. A small number of employees located
outside the United States are represented by labor
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unions, and the degree and scope of representation varies from country to
country. We have not experienced any work stoppages either domestically or
internationally.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning our executive
officers as of December 31, 1998, with the exception of Howard A. Bain, III, our
Executive Vice President and Chief Financial Officer, who joined us in January,
1999.
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
Robert J. Finocchio, Jr. ................. 47 President, Chief Executive Officer and Chairman of the Board of
Directors
Howard A. Bain, III....................... 53 Executive Vice President and Chief Financial Officer
Jean-Yves F. Dexmier...................... 47 Executive Vice President, Field Operations
Karen Blasing............................. 42 Vice President, Business Development Finance
Susan T. Daniel........................... 57 Vice President, Human Resources
James F. Engle............................ 52 Vice President and Treasurer
Diane L. Fraiman.......................... 43 Vice President, Corporate Marketing
James F. Hendrickson, Jr. ................ 59 Vice President, Customer Services, and Lenexa (Kansas) Site
General Manager
Stephen E. Hill........................... 40 Vice President and General Manager, Tools Business Unit
Donald W. Hunt............................ 43 Vice President, North American Field Operations
Gary Lloyd................................ 51 Vice President, Legal, General Counsel and Secretary
Leonard Palomino.......................... 39 Vice President and General Manager, Data Warehousing
Wesley Raffel............................. 43 Vice President and General Manager, Web and E-Commerce
Stephanie P. Schwartz..................... 50 Vice President, Corporate Controller
Michael R. Stonebraker.................... 55 Vice President and Chief Technology Officer
F. Steven Weick........................... 53 Vice President, Research & Development
ROBERT J. FINOCCHIO, JR. has served as our Chairman, President and Chief
Executive Officer since July 1997. From December 1988 until May 1997, Mr.
Finocchio was employed with 3Com Corporation ("3Com"), a global data networking
company, where he held various positions, most recently serving as President,
3Com Systems. Prior to his employment with 3Com, Mr. Finocchio held various
executive positions in sales and service with Rolm Communications, a
telecommunications and networking company, most recently as Vice President of
Rolm Systems Marketing. Mr. Finocchio also serves as a director of Latitude
Communications, a teleconferencing company, and UpShot Corporation, a web
technology company. Mr. Finocchio is also a Regent of Santa Clara University.
Mr. Finocchio holds a B.S. in economics from Santa Clara University and an
M.B.A. from the Harvard Business School.
HOWARD A. BAIN, III has served as our Executive Vice President and Chief
Financial Officer since January 1999. Prior to joining us, Mr. Bain held various
positions at Symantec Corporation, since October 1991. Most recently Mr. Bain
was Vice President, Worldwide Operations and CFO at Symantec Corporation. Mr.
Bain graduated from California Polytechnic University in 1971 with a B.S. in
business and is a Certified Public Accountant.
JEAN-YVES F. DEXMIER has served as our Executive Vice President, Field
Operations since January 1999. He served as our Executive Vice President and
Chief Financial Officer from October 1997 to January 1999. Mr. Dexmier also
served as our Secretary from October 1997 to February 1998. Mr. Dexmier served
as a strategy consultant to high technology companies from February 1997 to
September 1997. From November 1995 until February 1997, Mr. Dexmier served as
Senior Vice President and Chief Financial Officer of Octel Communications
Corporation, a provider of voice messaging systems ("Octel"). From April 1995 to
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October 1995, Mr. Dexmier served as Chief Financial Officer for Kenetech
Corporation, a wind energy company. From May 1994 to March 1995, Mr. Dexmier
served as Chief Financial Officer for Air Liquide America Corporation, a U.S.
subsidiary of the French-based group Air Liquide, a worldwide producer of
industrial gases. From January 1991 to January 1994, Mr. Dexmier served as Chief
Financial Officer for Thomson Consumer Electronics, Inc., a subsidiary of
Thomson SA, a worldwide electronics manufacturer. Mr. Dexmier holds a B.S. in
mathematics from Lycee Pasteur, a Ph.D. in electronics from the Ecole Nationale
Superieure de l'Aeronautique et de l'Espace and an M.B.A. in economics and
finance from the Ecole Polytechnique. In addition, he attended the executive
management program at the University of Michigan School of Business
Administration.
KAREN BLASING has served as our Vice President, Business Development Finance
since May 1998. Prior to that time, Ms. Blasing served as our Corporate
Controller since June 1996 and as a Vice President of Informix since August 1997
before resigning from such positions in April 1998. Ms. Blasing joined Informix
in November 1992 as its Director of Financial Reporting and Analysis. From
January 1989 to October 1992, Ms. Blasing was a Senior Financial Manager at
Oracle Corporation, a provider of information management software and services.
Ms. Blasing holds a B.S. in both economics and business from the University of
Montana and an M.B.A. from the University of Washington.
SUSAN T. DANIEL has served as our Vice President, Human Resources since
February 1998. From March 1981 until February 1998, Ms. Daniel served in a
variety of positions at Advanced Micro Devices, Inc., a semiconductor
manufacturer, most recently as Vice President, Human Resource Operations. Ms.
Daniel holds a B.A. in History from Queens College, an M.A. in social studies
from Syracuse and J.D. from Santa Clara University.
JAMES F. ENGLE has served as our Vice President and Treasurer since December
1997. Mr. Engle served as our acting Corporate Controller from April 1998 until
June 1998. From 1991 until December 1997, Mr. Engle served as a Vice President
and the Corporate Treasurer of Octel. Mr. Engle holds a B.A. in economics from
the University of Missouri and an M.B.A. in international business and corporate
finance from the Columbia University Graduate School of Business.
DIANE L. FRAIMAN has served as our Vice President, Corporate Marketing since
April 1998. From September 1996 to March 1998, Ms. Fraiman served as Vice
President, Marketing Video & Networking Division, at Tektronix, Inc., a producer
of hardware and software networking and video products. From May 1994 to August
1996, Ms. Fraiman was Director of Marketing at Sequent, a manufacturer of large-
scale multiprocessor systems. From 1978 to April 1994, Ms. Fraiman worked in a
variety of positions at Digital Equipment Corporation, a global networking
company, most recently as its Director, Corporate Digital/Microsoft Alliance.
Ms. Fraiman holds a B.S. in biomedical engineering from Vanderbilt University.
JAMES F. HENDRICKSON, JR. has served as our Vice President, Customer
Services, since July 1992 and as our Lenexa (Kansas) Site General Manager since
February 1995. From 1991 until the time he joined us, Mr. Hendrickson was Senior
Vice President of Sales and Support at Image Business Systems, a developer of
document image management software for client/server systems. Mr. Hendrickson
holds a B.S. in mechanical engineering from Stanford University and an M.B.A. in
business and administration from the University of California, Los Angeles.
STEPHEN E. HILL resigned as our Vice President and General Manager, Tools
Business Unit, on December 31, 1998, a position which Mr. Hill had held since
January 1998. Prior to assuming that position, Mr. Hill served as our Vice
President, Advanced Technology since December 1995. Mr. Hill had been employed
with us since 1985 and served in various strategic planning and marketing
positions. Prior to joining us, Mr. Hill held various product development
positions at General Electric Company, a diversified electronics and
manufacturing company, Software Publishing Corporation, a supplier of business
productivity software, and Human Edge Software, a business software company. Mr.
Hill holds a B.S. in electrical engineering from the University of Vermont.
9
DONALD W. HUNT resigned as our Vice President, North American Sales, on
December 31, 1998, a position which Mr. Hunt had held since August 1998.
Previous to August 1998, Mr. Hunt was our Vice President, North America End User
Sales. Mr. Hunt joined us in February 1997 as Vice President and General Manager
responsible for business sales in the Eastern United States and Canada. Prior to
joining us, Mr. Hunt held key positions at both Open Market, a provider of
electronic commerce on the Internet, and Sun Microsystems. At Open Market, he
held the position of Vice President of the Americas, and at Sun Microsystems he
held the position of Director of Independent Software Vendors for North America.
Mr. Hunt's career started at Digital Equipment Corporation, where he held
various sales and marketing management positions. Mr. Hunt holds a B.S. in
business administration from Salem State College, Salem, Massachusetts.
GARY LLOYD has served as our Vice President, Legal and General Counsel since
January 1998 and as our Secretary since February 1998. From November 1997 until
January 1998, Mr. Lloyd served as our interim General Counsel. From March 1994
until October 1997, Mr. Lloyd was with the law firm of Farella Braun & Martel
L.L.P. From 1984 until February 1994, Mr. Lloyd served in a variety of positions
at the Securities and Exchange Commission, most recently as its Assistant
Director, Division of Enforcement. Mr. Lloyd holds a B.A. in political science
and English from Kent State University and a J.D. from Case Western Reserve
University.
LEONARD PALOMINO has served as our Vice President and General Manager,
Datawarehousing since August 1998. From November 1996 to August 1998, Mr.
Palomino served as our Vice President, Enterprise Services. Since January 1991,
Mr. Palomino held various other positions including Vice President, Advanced
Technology Group, Executive Director of Client Services and Director of Client
Services. Prior to joining us, Mr. Palomino held various positions at Century
Analysis, Inc., including Support Manager. Mr. Palomino holds an A.S. in
Computer Science from Spokane Falls College.
WESLEY RAFFEL has served as our Vice President and General Manager,
i.Informix since August 1998. From September 1997 to August 1998, Mr. Raffel
served as our Vice President, North American Field Operations. From January 1996
to January 1997, Mr. Raffel served as Senior Vice President, Sales and
Marketing, and was the acting Chief Executive Officer, of AssureNet Pathways,
Inc., a network security company. From October 1992 to September 1995, Mr.
Raffel was Vice President, Sales, of Global Village Communication, Inc., a
designer of integrated communications products for personal computers. Prior to
joining Global Village, Mr. Raffel held a variety of positions at 3Com, most
recently as its Vice President, Intercontinental Operations. Mr. Raffel holds a
B.A. in general studies from Harvard University and an M.B.A. from the
University of Chicago Graduate School of Business.
STEPHANIE P. SCHWARTZ has served as our Vice President and Controller since
June 1998. Prior to joining us, Ms. Schwartz served as Chief Financial Officer
of Atalla Corporation, a developer of secure on-line transaction automation
systems and subsidiary of Tandem Computers Inc., a position she had held since
October 1996. Since August 1991, Ms. Schwartz served in a variety of positions
at Tandem, a developer of computer and software systems, most recently as its
Director, Business Development, Asia Pacific Division. Ms. Schwartz holds a B.S.
degree in mathematics from the Massachusetts Institute of Technology and an
M.B.A. in finance from Fairleigh Dickenson University.
MICHAEL A. STONEBRAKER has served as our Vice President and Chief Technology
Officer since February 1996. Dr. Stonebraker co-founded Illustra and served in a
consulting capacity with Illustra as its Chief Technology Officer until February
1996. Dr. Stonebraker is a professor emeritus of Electrical Engineering and
Computer Sciences at the University of California, Berkeley, where he joined the
faculty in 1971. Dr. Stonebraker holds a B.S. in electrical engineering from
Princeton University and an M.S. and Ph.D. in computer information and control
engineering from the University of Michigan.
F. STEVEN WEICK has served as our Vice President of Research and Development
since October 1998, and is responsible for all of our core research and
development, including server development, Datablade module engineering, client
and system management development, tools, partner engineering and product
10
management. Mr. Weick joined us in 1997 as Vice President of Server Development.
Prior to joining us, Mr. Weick was Vice President of Engineering for MapInfo
Inc., a business mapping solutions company from 1995 to August 1997. Mr. Weick
led development activities for five years at Tandem Computers, the last three as
Vice President of Communications Hardware and Software Products, and earlier led
the Non-Stop SQL server, compiler and tools development groups. Mr. Weick began
his career at IBM in 1965 as a development engineer; he held numerous positions
at IBM, including: chief architect for database products, consultant to the
corporate technical committee, development manager responsible for DB2, and
program manager for compilers. Mr. Weick holds a B.S. in mathematics from Purdue
University and an M.B.A. from Pepperdine University.
ITEM 2. PROPERTIES
Our headquarters and principal marketing, finance, sales, administration,
customer service and research and development operations are located in five
buildings in a corporate office park in Menlo Park, California. We currently
lease approximately 214,000 square feet of space in these buildings. The leases
for spaces in two of the buildings expire in September 2001. The leases for
space in the remaining three of the buildings expire in March 2003. In addition,
we lease space totaling approximately 33,000 square feet in two nearby
buildings. These leases expire in May 2003 and October 2000.
In addition, certain of our research and development facilities, a portion
of our customer service organization, our principal domestic manufacturing
facility and our telemarketing organization are located in a 135,000 square foot
facility in Lenexa, Kansas. The buildings are leased to us under a lease
expiring in April 2003, subject to renewal for up to two additional five-year
terms. We leased the Lenexa, Kansas facility from a partnership of which we held
a 50% partnership interest. In the first quarter of 1998 we sold our interest in
49.9% of the partnership to the other partner.
Some of the research and development operations for our products and a
portion of customer service and sales training are located in Oakland,
California. We lease approximately 130,000 square feet at this site, and the
lease expires in May 2003. We also lease 47,276 square feet in Portland, Oregon,
primarily for our research and development group. The lease on approximately
one-half of this space expires on October 31, 2003. The lease on the remaining
space expires in March 2000.
In December 1998, through the acquisition of Red Brick, we assumed the lease
obligations for a number of facilities in North America, London and Tokyo.
Disposition efforts are currently underway for all of these facilities. We also
lease office space, principally for sales and support offices, in a number of
facilities in the United States, Canada and outside North America. We believe
that our current facilities are adequate to meet our needs through the next
twelve months.
11
ITEM 3. LEGAL PROCEEDINGS
ACTIONS ARISING UNDER FEDERAL AND STATE SECURITIES LAWS
Beginning on or about April 16, 1997, over 20 complaints alleging violations
of the federal securities laws were filed against us, (in some cases) Ernst &
Young LLP ("Ernst & Young"), our former independent accountants and certain of
our current and former officers and directors in the United States District
Court for the Northern District of California. Most of the complaints have been
filed as purported class actions by individuals who allege that they are
individual investors who purchased our common stock during a purported class
period; the alleged class periods vary among the complaints. On August 20, 1997,
the District Court entered an order consolidating all of the separately-filed
class actions pending at that time, designating the action as IN RE INFORMIX
CORPORATION SECURITIES LITIGATION, and designating as "related cases" all cases
brought under the federal securities laws then pending and any that may be filed
after that date.
A related non-class action, TEACHERS' RETIREMENT SYSTEM OF LOUISIANA AND
STATE BOARD OF ADMINISTRATION OF FLORIDA V. INFORMIX CORPORATION ET AL., has
been consolidated with IN RE INFORMIX CORPORATION SECURITIES LITIGATION for all
pre-trial purposes. The LOUISIANA and FLORIDA plaintiffs request a total of
$10.173 million in damages. Another related individual complaint, BERMAN V.
INFORMIX CORPORATION, has also been consolidated.
On or about March 19, 1998, another complaint alleging securities and common
law fraud and misrepresentation causes of action was filed in the United States
District Court for the Northern District of California. This complaint,
captioned WILLIAMS V. INFORMIX CORPORATION, ET AL., alleges both individual and
class claims on behalf of former securities holders of Illustra Information
Technologies, Inc. ("Illustra") who exchanged their Illustra securities for our
securities in February 1996 in connection with our February 1996 acquisition of
Illustra pursuant to an Agreement and Plan of Reorganization. This matter has
been consolidated with IN RE INFORMIX CORPORATION SECURITIES LITIGATION. The
WILLIAMS complaint, like the previously-filed federal complaints, alleges that
we and certain of our former officers and/or directors, and our independent
auditors, issued false or misleading statements regarding our reported financial
results and business prospects.
The existing federal court complaints allege that we, Ernst & Young and the
other named defendants issued or caused to be issued false or misleading
statements in our filings with the Commission, press releases, statements to
securities analysts and other public statements regarding our financial results
and business prospects. In particular, the plaintiffs allege, among other
things, that the defendants overstated our revenue and earnings during the time
period by improperly recognizing revenue from sales of software licenses. All of
these actions allege that the false and misleading statements violate section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. The complaints further allege that the named current and former
officers and directors sold our common stock while in the possession of adverse
material nonpublic information. The complaints, in general, do not specify the
amount of damages that plaintiffs seek.
The District Court has appointed a mediator to conduct settlement
negotiations in an effort to resolve the consolidated federal class action and,
possibly, some or all of the other private securities litigation in which we are
involved. Several meetings to discuss settlement have been held, and the
mediator's efforts are continuing. At this time, we do not know: (i) what the
outcome of the mediation will be; (ii) whether there will be a settlement of
some or all of the securities litigation in which we are involved; or (iii) in
the event of a settlement, what our contribution to the settlement will be.
Three purported securities class actions containing allegations similar to
the federal actions were filed in the Superior Court of the State of California,
County of San Mateo between May 19, 1997 and August 25, 1997. The Superior Court
has consolidated these actions into DAYANI V. INFORMIX CORPORATION ET AL. The
amended complaint in DAYANI is identical to its federal court counterpart,
except that it alleges claims under California law. The Superior Court case is
proceeding on a coordinated basis with its federal court counterpart.
12
DERIVATIVE ACTIONS
We also were named as a nominal defendant in eight derivative actions,
purportedly brought on our behalf, filed in the Superior Court of the State of
California, County of San Mateo. The cases have been consolidated under the
caption IN RE INFORMIX CORPORATION DERIVATIVE LITIGATION. The consolidated,
amended complaint alleges that, based upon the facts alleged in the federal and
state securities class actions, defendants breached their fiduciary duties to
Informix, engaged in abuses of their control of Informix, were unjustly enriched
by their sales of our common stock, engaged in insider trading in violation of
California law and published false financial information in violation of
California law. The consolidated, amended complaint names as defendants Ernst &
Young, the current or former officers named in the class action cases, and
Albert F. Knorp, Jr., James L. Koch, Thomas A. McDonnell and Cyril J. Yansouni,
our non-management directors. The plaintiff seeks unspecified damages on our
behalf from each of the defendants. Because of the nature of derivative
litigation, any recovery in the action would inure to our benefit.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
In addition, in July 1997, the Securities and Exchange Commission issued a
formal order of investigation of Informix and certain unidentified individuals
associated with Informix with respect to non-specified accounting matters,
financial reports, other public disclosures and trading activity in our
securities. We are cooperating in the investigation and are providing all
information requested by the Commission. We have produced documents and other
information and are facilitating the testimony before the Commission of certain
current and former officers and employees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the
fourth quarter of fiscal 1998.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Our Common Stock is traded on the National Market of The Nasdaq Stock Market
under the symbol "IFMX." The following table lists the high and low closing
sales prices of our Common Stock for the periods indicated.
HIGH LOW
--------- ---------
FISCAL YEAR ENDING DECEMBER 31, 1998:
Fourth Quarter............................................................................... $ 9.88 $ 3.81
Third Quarter................................................................................ 7.75 3.50
Second Quarter............................................................................... 10.06 6.22
First Quarter................................................................................ 8.81 5.09
FISCAL YEAR ENDING DECEMBER 31, 1997:
Fourth Quarter............................................................................... $ 8.03 $ 4.06
Third Quarter................................................................................ 12.20 6.28
Second Quarter............................................................................... 15.13 6.78
First Quarter................................................................................ 24.00 15.25
At December 31, 1998, there were approximately 4,100 stockholders of record
of our Common Stock, as shown in the records of our transfer agent.
DIVIDEND POLICY
We have never declared or paid cash dividends on our Common Stock. We expect
to retain future earnings, if any, for use in the operation of our business and
do not anticipate paying any cash dividends on our Common Stock in the
foreseeable future. The holders of our Series B Convertible Preferred Stock (the
"Series B Preferred") are entitled to receive a cumulative dividend at an annual
rate of 5% of the face value of each share of Series B Preferred, resulting in
an aggregate annual dividend accrual of $1.2 million, based on the 23,300 shares
of Series B Preferred outstanding at December 31, 1998. As of December 31, 1998,
aggregate accrued, but unpaid, dividends of approximately $2.6 million were owed
to the holders of the Series B Preferred. The dividend is generally payable upon
the conversion or redemption of the Series B Preferred and may be paid in cash
or, at our election and subject to certain conditions, in shares of Common
Stock. In addition, the Certificate of Designation of the Series B Preferred
prohibits us from paying any dividend or other distribution on any security
ranking junior to the Series B Preferred.
In the first quarter of 1999, we paid $1.3 million to the Series B Preferred
stockholders as a result of certain contractual provisions under our
Registration Rights Agreement with the Series B Preferred stockholders. This
amount was recognized in fiscal 1998 as an additional dividend to the Series B
Preferred stockholders.
The Series B Preferred is convertible at the election of the holders into
shares of Common Stock. The currently outstanding Series B Preferred was
originally issued on November 19, 1997. The Series B Preferred will
automatically convert into Common Stock three years following the date of its
issuance. Each share of Series B Preferred, which has a face value of $1,000, is
convertible into (i) shares of Common Stock at a per share price equal to the
lowest of (A) the average of the closing bid prices for the Common Stock for the
22 trading days immediately prior to the 180th day following the initial
issuance date of the Series B Preferred, (B) 101% of the average of the closing
bid prices for the Common Stock for the 22 trading days ending five trading days
prior to the date of actual conversion or (C) 101% of the lowest closing bid
price for the Common Stock during the five trading days immediately prior to the
date of actual conversion and (ii) warrants to acquire that number of shares of
Common Stock equal to 20% of the shares determined pursuant to item (i). The
exercise price for these warrants is $7.84 per share. The
14
conversion price of the Series B Preferred is subject to modification and
adjustment upon the occurrence of specified events.
RECENT SALES OF UNREGISTERED SECURITIES
We have issued and sold the following unregistered securities during the
period covered by this report which have not previously been reported in our
quarterly reports on Form 10-Q:
On November 25, 1998, pursuant to a Subscription Agreement dated August 12,
1997, as amended on November 17, 1997, the holder of a warrant to purchase up to
80,000 shares of our Series A-1 Convertible Preferred Stock (the "Series A-1
Preferred") exercised the warrant and we sold 80,000 shares of our Series A-1
Preferred for aggregate gross proceeds of $20,000,000. The Series A-1 Preferred
was convertible into shares of Common Stock at any time after issuance and the
holder immediately converted all of the Series A-1 Preferred into 4,642,525
shares of Common Stock.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act of 1933, as amended, ("Securities Act") in reliance on
Regulation S under the Securities Act, Section 4(2) of the Securities Act,
Regulation D promulgated thereunder or Section 3(a)(9) of the Securities Act as
transactions by an issuer not involving a public offering or as an exchange of
our securities with existing security holders where no commission or other
renumeration is paid or given directly or indirectly for soliciting such
exchange. The recipients of securities in each such transaction represented
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates and warrants issued in such
transactions. All recipients had adequate access, through their relationships
with us, to information about the Registrant.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL OVERVIEW
FIVE-YEAR SUMMARY
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998(1) 1997(2) 1996* 1995* 1994*
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues............................. $ 734,983 $ 663,892 $ 734,540 $ 636,547 $ 451,969
Net income (loss)........................ 57,718 (356,867) (73,565) 38,600 48,293
Preferred stock dividend................. (3,478) (301) -- -- --
Value assigned to warrants............... (1,982) (1,601) -- -- --
Net income (loss) applicable to common
stockholders........................... $ 52,258 $(358,769) $ (73,565) $ 38,600 $ 48,293
Net income (loss) per common share:
Basic.................................. $ 0.31 $ (2.36) $ (0.49) $ 0.27 $ 0.35
Diluted................................ $ 0.30 $ (2.36) $ (0.49) $ 0.26 $ 0.34
Total assets............................. 615,305 563,244 881,998 682,445 447,769
Long-term obligations.................... 3,313 6,311 2,359 2,846 892
Retained earnings (accumulated
deficit)............................... $(220,426) $(278,144) $ 78,723 $ 154,098 $ 115,668
- ------------------------
* Financial data for such fiscal year reflect the information from the
Company's restated financial statements.
(1) In fiscal 1998, we recorded restructuring-related adjustments that increased
operating income by $10.3 million and, in connection with our acquisition of
Red Brick in December 1998, recorded a charge to operations of $2.6 million
for in-process research and development which had not yet reached
technological feasibility and had no alternative future uses.
(2) In fiscal 1997, we recorded a restructuring charge of $108.2 million, a
write-down of certain assets in Japan of $30.5 million and a write-down of
capitalized software of $14.7 million.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE
EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF INFORMIX, WHICH INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING
THOSE SET FORTH UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS," "BUSINESS" AND
ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
RESULTS OF OPERATIONS
The following table and discussion compares the results of operations for
the years ended December 31, 1998, 1997 and 1996.
YEARS ENDED
DECEMBER 31,
------------------
1998 1997 1996
---- ---- ----
PERCENT OF NET
REVENUES
------------------
Net revenues:
Licenses.................................................. 52% 57% 68%
Services.................................................. 48 43 32
Total net revenues...................................... 100 100 100
Cost and expenses:
Cost of software distribution............................. 5 10 6
Cost of services.......................................... 21 25 20
Sales and marketing....................................... 37 63 56
Research and development.................................. 20 21 16
General and administrative................................ 10 13 9
Write-off of goodwill and long-term assets................ -- 5 --
Write-off of acquired research and development............ -- 1 --
Restructuring charges..................................... (1) 16 --
Merger expenses........................................... -- -- 1
Total expenses.......................................... 92 154 108
Operating income (loss)..................................... 8 (54) (8)
Net income (loss)........................................... 8% (54)% (10)%
Our operating results for fiscal 1998 improved over the prior year due to
revenue growth of 11% and a reduction in operating expenses of 34%. The growth
in consolidated revenues was primarily derived in North America as sales
increased by 18% in this region during fiscal 1998, while Latin America and
Europe experienced revenue growth of 7% and 6%, respectively, during the same
period. Revenues in Asia/Pacific in fiscal 1998, while consistent with fiscal
1997 when translated into U.S. dollars, actually increased 16% on a
constant-currency basis. In an effort to keep operating expenses in line with
revenues, and as a result of our restructuring initiated in fiscal 1997, we
reduced total operating expenses as a percent of net revenues from 154% in
fiscal 1997 to 92% in fiscal 1998. The most significant cost-cutting efforts
were achieved in sales and marketing as we were able to reduce these
expenditures, as a percentage of net revenues, from 63% in fiscal 1997 to 37% in
fiscal 1998. In total dollars, sales and marketing expenses decreased from
$417.2 million in fiscal 1997 to $268.5 million in fiscal 1998, or 36%. We
believe that research and development is essential to maintaining our
competitive position in our primary markets and as a result increased research
and development expenditures by 5% in fiscal 1998. Revenue growth combined with
lower operating costs resulted in operating income of $61.1 million for fiscal
1998 compared to an operating loss of $355.7 million in fiscal 1997.
16
REVENUES
We derive revenues from licensing software and providing post-license
technical product support and updates to customers and from consulting and
training services.
LICENSE REVENUES. License revenues may involve the shipment of product by
us or the granting of a license to a customer to manufacture products. Our
products are sold directly to end-user customers or through resellers, including
OEMs, distributors and value added resellers (VAR's).
License revenues for fiscal 1998 increased slightly to $383.5 million from
$378.2 million in fiscal 1997. We believe that this modest increase in license
revenues reflected a number of factors which affected us during fiscal 1998,
including an overall decrease in revenue growth rates in the RDBMS industry
worldwide, continued uncertainty in the Asia/Pacific economies and financial
markets as well as changes to our European management.
License revenues declined by 25% to $378.2 million for fiscal 1997 from
$502.7 million for fiscal 1996. We believe that this decrease was primarily
attributable to slowing growth in the market for RDBMS products and customer
uncertainty about our financial condition at that time. In addition, we
experienced a significant turnover in senior management sales positions during
fiscal 1997, which adversely affected sales.
Our increased focus on reseller channels in fiscal 1996 resulted in a
significant build-up of licenses that had not been resold or utilized by the
resellers. As discussed in Note 1 to our Consolidated Financial Statements for
the year ended December 31, 1998, revenue from license agreements with resellers
is recognized as earned by us when the licenses are resold or utilized by the
reseller and all of our related obligations have been satisfied. Amounts
received from customers and financial institutions in advance of revenue being
recognized are recorded as a liability in "advances from customers and financial
institutions" in our Consolidated Financial Statements. Advances in the amount
of $121.1 million and $180.0 million had not been recognized as earned revenue
as of December 31, 1998 and 1997, respectively. During the year ended December
31, 1998, we received $11.4 million in customer advances and recognized revenue
from resellers with previously recorded customer advances of $66.1 million.
Included in the $66.1 million recognized were $61.7 million of licenses which
were resold or utilized by the reseller and $4.4 million related to contractual
reductions in customer advances. Contractual reductions result from settlements
between us and resellers in which the customer advance contractually expires or
a settlement is structured wherein the rights to resell our products terminate
without sell through or deployment of the software.
As of December 31, 1998, we had reached structured settlements with three
resellers with remaining rights to resell a total of $25.7 million of our
products. In accordance with the settlements, the minimum future reduction in
customer advances totals $18.4 million and $7.3 million for the years ended
December 31, 1999 and 2000, respectively.
In order to properly recognize revenue on arrangements where the reseller
has duplication rights, we rely on accurate and timely reports from resellers of
the quantity of licenses that have been resold or utilized. In instances where a
reseller does not submit a timely report, we accrue royalty revenue through the
end of the reporting period provided we have vendor specific historical
information. From time to time, late or inaccurate reports are identified or
corrected for a variety of reasons, including resellers updating their reports
or as a result of our proactive activities such as audits of the resellers'
royalty reports. As a result, revenue from these late or updated reports, which
was not previously accrued, is recognized in the period during which the reports
are received. Such revenue amounted to approximately $6.0 million for fiscal
1998. We expect that the late or inaccurate reporting of resale or utilization
of licenses by resellers and the resulting fluctuations will continue for the
foreseeable future.
Our license transactions can be relatively large in size and difficult to
forecast both in timing and dollar value. As a result, license transactions have
caused fluctuations in net revenues and net income
17
(loss) because of the relatively high gross margin on such revenues. As is
common in the industry, a disproportionate amount of our license revenue is
derived from transactions that close in the last weeks or days of a quarter. The
timing of closing large license agreements also increases the risk of
quarter-to-quarter fluctuations. We expect that these types of transactions and
the resulting fluctuations in revenue will continue.
SERVICE REVENUES. Service revenues are comprised of maintenance, consulting
and training revenues. Service revenues increased 23% to $351.4 million for
fiscal 1998 from $285.7 million for fiscal 1997. Service revenues also increased
23% in fiscal 1997 as compared to $231.8 million for fiscal 1996. Service
revenues accounted for 48%, 43% and 32% of total revenues in fiscal 1998, 1997
and 1996, respectively. The increase in service revenues, both in absolute
dollars and as a percentage of total revenues, is attributable primarily to
higher initial year maintenance fees and the renewal of maintenance contracts in
connection with our installed customer base. As our products continue to grow in
complexity, more support services are expected to be required. We intend to
satisfy this requirement through internal support, third-party services and OEM
support.
Consulting and training revenues remained flat at $97.9 million for fiscal
1998 as compared to $97.6 million in fiscal 1997. Consulting and training
revenues increased 34% to $97.6 million in fiscal 1997 from $72.8 million in
fiscal 1996. The growth in the consulting and training practice in fiscal 1997
was driven by increased demand for consulting services primarily in North
America and in Europe. In addition, some significant large consulting contracts
were executed in fiscal 1997 and contributed to the significant increase of
consulting revenues compared to the prior year.
COST OF SOFTWARE DISTRIBUTION
1998 CHANGE 1997 CHANGE 1996
--------- ----------- --------- ----------- ---------
(DOLLARS IN MILLIONS)
Total cost of software distribution...................... $ 35.4 (44)% $ 63.0 35% $ 46.8
Percentage of license revenues........................... 9% 17% 9%
Cost of software distribution consists primarily of: (1) manufacturing and
related costs such as media, documentation, product assembly and purchasing
costs, freight, customs and third party royalties; and (2) amortization of
previously capitalized software development costs and any write-offs of
previously capitalized software.
Cost of software distribution decreased to $35.4 million in fiscal 1998 from
$63.0 million and $46.8 million in fiscal 1997 and fiscal 1996, respectively.
Cost of software distribution as a percentage of license revenue was 9%, 17% and
9% in fiscal 1998, 1997 and 1996, respectively. The decrease in fiscal 1998,
both in absolute dollars and as a percentage of license revenue, was primarily
caused by a write-down in fiscal 1997 of $14.7 million to net realizable value
of certain of our database tool products related to our acquisition of
CenterView Software, Inc. in the first quarter of fiscal 1997, a decrease in
third party software royalties, the write-off of certain unused application
software in the second quarter of fiscal 1997 and a reduction in labor,
materials and shipping costs. Amortization of capitalized software remained
relatively flat at $20.7 million in fiscal 1998 compared to $21.4 million in
fiscal 1997 and increased 47% in fiscal 1997 as compared to $14.6 million for
fiscal 1996. The increase in amortization of capitalized software in fiscal 1997
over fiscal 1996 was due primarily to the release of our object-relational
Universal Data Option product in the fourth quarter of fiscal 1996. The
amortization of capitalized software will vary from period to period as new
products are released and other products become fully amortized.
18
COST OF SERVICES
1998 CHANGE 1997 CHANGE 1996
--------- ------------- --------- ------------- ---------
(DOLLARS IN MILLIONS)
Cost of services.................................................. $ 155.3 (7)% $ 166.9 15% $ 144.9
Percentage of service revenues.................................... 44% 58% 62%
Cost of services consists primarily of maintenance, consulting and training
expenses. Cost of services for fiscal 1998 decreased by 7% to $155.3 million as
compared to $166.9 million in fiscal 1997 and decreased as a percentage of net
service revenues to 44% for fiscal 1998 compared to 58% for fiscal 1997. These
decreases were primarily attributable to decreases of 11% in average headcount
for fiscal 1998 over the same period in 1997 as well as improved efficiency and
better control of outsourced expenses. Cost of services increased 15% to $166.9
million for fiscal 1997 from $144.9 million for fiscal 1996. Cost of services
decreased as a percentage of net service revenues to 58% for fiscal 1997
compared to 62% for the same period in 1996. During fiscal 1997, gross margins
increased relative to both support revenue and consulting/training revenue,
particularly in the third and fourth quarters of that year. We believe that the
increased margins during fiscal 1997 were attributable principally to more
efficient delivery of services.
SALES AND MARKETING EXPENSES
1998 CHANGE 1997 CHANGE 1996
--------- ----------- --------- ------------- ---------
(DOLLARS IN MILLIONS)
Sales and marketing expenses...................................... $ 268.5 (36)% $ 417.2 1% $ 413.7
Percentage of net revenues........................................ 37% 63% 56%
Sales and marketing expenses consist primarily of salaries, commissions,
marketing programs and related overhead costs. Sales and marketing expenses
decreased 36% to $268.5 million for fiscal 1998 from $417.2 million for fiscal
1997. Sales and marketing expenses increased less than 1% to $417.2 million for
fiscal 1997 from $413.7 million for fiscal 1996. As a percentage of net
revenues, sales and marketing expenses decreased to 37% in fiscal 1998 from 63%
in fiscal 1997 and 56% in fiscal 1996. The decrease in sales and marketing
expenses in fiscal 1998 in absolute dollars and as a percentage of net revenues,
as compared to fiscal 1997 was primarily the result of a significant reduction
in average sales and marketing headcount worldwide. The slight increase in sales
and marketing expense in fiscal 1997 in absolute dollars compared to fiscal 1996
was a result of continued increased expenses in the early months of fiscal 1997,
offset by a significant reduction in overall sales and marketing expenses in the
second half of fiscal 1997 in connection with our restructuring.
RESEARCH AND DEVELOPMENT EXPENSES
1998 CHANGE 1997 CHANGE 1996
--------- ----------- --------- ----------- ---------
(DOLLARS IN MILLIONS)
Incurred product development expenditures......................... $ 164.9 2% $ 161.1 8% $ 148.6
Expenditures capitalized.......................................... 18.6 (15) 21.8 (23 ) 28.4
Research and development expenses................................. 146.3 5 139.3 16 120.2
Expenditures capitalized as a percentage of incurred.............. 11% 14% 19%
Research and development expenses consist primarily of salaries, project
consulting and related overhead costs for product development. Research and
development expenses increased 5% to $146.3 million for fiscal 1998 from $139.3
million for fiscal 1997. The increase in research and development expenses in
absolute dollars for fiscal 1998 is attributable primarily to increases in
salary and benefits and a
19
15% decrease in the amount of product development expenditures capitalized in
fiscal 1998 compared to fiscal 1997. This decrease in capitalized expenditures
is attributable to the fact that, during the first half of fiscal 1997, a large
portion of expenditures incurred were on products that had reached technological
feasibility but had not yet been commercially released. Research and development
expenses increased 16% to $139.3 million for fiscal 1997 from $120.2 million for
fiscal 1996. The increase in research and development expenses for fiscal 1997
from fiscal 1996 is attributable principally to an increase in headcount, which
occurred during the early part of fiscal 1997, working on new products and
product extensions. The higher capitalization in absolute dollars of product
development expenditures in fiscal 1996 compared to fiscal 1997 also resulted
from an increase in the work involved on products that had already reached
technological feasibility as they neared their release dates.
GENERAL AND ADMINISTRATIVE EXPENSES
1998 CHANGE 1997 CHANGE 1996
--------- ----------- --------- ------------- ---------
(DOLLARS IN MILLIONS)
General and administrative expenses................................... $ 76.1 (13)% $ 87.5 36% $ 64.4
Percentage of net revenues............................................ 10% 13% 9%
General and administrative expenses consist primarily of finance, legal,
information systems, human resources, bad debt expense and related overhead
costs. General and administrative expenses decreased 13% to $76.1 million for
fiscal 1998 from $87.5 million for fiscal 1997 and increased 36% to $87.5
million from $64.4 million for fiscal 1996. The decrease in fiscal 1998 in
absolute dollars and as a percentage of net revenues was primarily the result of
a reduction in bad debt expense due to our efforts to better manage both the
amount and credit risk of our accounts receivable balances, offset by increases
in legal and other professional service fees, consulting fees and average
headcount. The increase in fiscal 1997 when compared to fiscal 1996 was
primarily due to the expansion of our international operations and incremental
legal expenses resulting from the stockholders' litigation and auditing expenses
relating to the restatement of our financial statements.
WRITE-OFF OF GOODWILL AND OTHER LONG-TERM ASSETS
During the first quarter of 1997, our Japanese subsidiary experienced a
significant sales shortfall and operating losses. Accordingly, we evaluated the
ongoing value of the subsidiary's long-lived assets (primarily computer and
other equipment) and goodwill. Based on this evaluation, we determined that the
subsidiary's assets had been impaired and wrote them down by $30.5 million to
their estimated fair values. Fair value was determined by using estimated future
discounted cash flows and/or resale market quotes as appropriate.
WRITE-OFF OF ACQUIRED RESEARCH AND DEVELOPMENT
On December 31, 1998, we acquired Red Brick Systems, Inc. ("Red Brick"), a
provider of scalable decision support solutions for data warehousing, data
marts, OLAP and data mining, in a transaction which has been accounted for as a
purchase. We issued approximately 7.6 million shares of our Common Stock to
acquire all of the outstanding shares of Red Brick common stock. We also
reserved an additional 2.5 million shares of our Common Stock for issuance in
connection with the assumption of Red Brick's outstanding stock options and
warrants.
The purchase price was allocated to the fair value of the acquired assets
and assumed liabilities based on their fair values at the date of acquisition.
The total purchase price of $55.8 million included the issuance of stock and the
assumption of stock options (together $35.9 million, net of issuance costs),
direct acquisition costs of $1.0 million, accrued merger and integration costs
of $7.9 million and liabilities assumed of $11.0 million. Of the total purchase
price, $2.6 million was allocated to in-process research and development expense
that had not yet reached technological feasibility and has no alternative future
uses, $7.8 million was allocated to cash and short-term investments,
approximately $10.2 million was allocated to other tangible assets, $7.4 million
was allocated to capitalized software, $4.7 million was allocated to the
20
acquired workforce and $23.1 million was allocated to goodwill. Goodwill,
capitalized software and the acquired workforce are intangible assets which will
be amortized over their estimated lives, which average five years.
The following two in-process research and development projects were acquired
in the acquisition of Red Brick:
RED BRICK WAREHOUSE ("WAREHOUSE")--a high-performance, client/server RDBMS
software product specifically designed for data warehousing, data mart, data
mining, and OLAP applications. Warehouse has been Red Brick's core product and,
as of December 31, 1998 (the "Valuation Date"), was being sold as version 5.1,
which was released in January 1998. The next version, scheduled for release in
mid-1999, is currently under development and is expected to bring a
substantially new feature set, with web enablement being the most important.
This feature will open Warehouse to environments based on intranet and Internet
technology, thereby substantially extending the usefulness of the product. At
the time of acquisition, the Warehouse project was estimated to be approximately
40% complete and the total cost to complete the project was estimated at $4.0
million.
RED BRICK FORMATION ("FORMATION")--an ETML (Extract, Transfer, Move, Load)
product which was originally released as version 1.3 in September 1998 (the
current version as of the Valuation Date). Formation is considered to be in the
early stages of its product life cycle. New features and functionality are
currently under development and will be added in subsequent releases. Version
1.5, scheduled for release in May 1999, is expected to add international
functionality to the product, thereby allowing Formation to be sold via foreign
sales channels. In the fall of 1999, the expected release of version 1.6 is
expected to add more competitive features to the product, including the ability
to run on dispersed networks as well as an enhancement of the "Move" capability
in ETML which has been unaddressed in most competing products. These new
features constitute a significant improvement to Formation. At the time of
acquisition, the Formation project was estimated to be approximately 30%
complete and the total cost to complete the project was estimated at $4.0
million.
The fair value of the in-process technology was based on a discounted cash
flow model, similar to the traditional Income Approach. The Income Approach
involves five steps: (1) the annual after-tax cash flows the asset will generate
over its remaining useful life are estimated; (2) these cash flows are converted
to their present value equivalents using a required rate of return which
accounts for the relative risk of not realizing the annual cash flows and for
the time value of money; (3) the residual value, if any, of the asset at the end
of its remaining useful life is estimated; (4) the estimated residual value is
converted to its present value equivalent; and (5) the present value of the
estimated annual after-tax cash flows is added to the present value of the
residual value to obtain an estimate of the asset's fair value. The discount
rate used in discounting the estimated cash flows is based on the risks
associated with achieving such estimated cash flows upon successful completion
of the acquired projects. Associated risks include the inherent difficulties and
uncertainties in completing each project and thereby achieving technological
feasibility, and risks related to the impact of potential changes in market
conditions and technology.
In developing cash flow estimates, revenues were forecasted based on
relevant factors, including aggregate revenue growth rates for the business as a
whole, characteristics of the potential market for the technology and the
anticipated life of the underlying technology. Projected annual revenues for the
Warehouse and Formation projects were assumed to increase from product release
through 2000, decline slightly in 2001 and decline significantly in 2002 which
is estimated to be the end of the in-process technology's economic life. Cost of
software distribution and services, sales and marketing expense, research and
development expense and general and administrative expense were estimated as a
percentage of revenues throughout the forecast period. Gross profit was assumed
to be between 74% and 80% for both the Warehouse project and the Formation
project.
As certain other assets contribute to the cash flow attributable to the two
projects, returns to these other assets or capital charges were calculated and
deducted from the after-tax operating income to isolate the cash flow solely
attributable to the two projects. Accordingly, returns were deducted for working
21
capital, fixed assets (i.e. property and equipment) and the workforce in place.
Informix then discounted the estimated cash flows attributable to Warehouse and
Formation using a 18.0% discount rate.
The fair value of the in-process research and development was allocated as
approximately $2.0 million and $0.6 million to the Warehouse and Formation
projects, respectively.
The acquisition of Red Brick was a tax-free reorganization under the
Internal Revenue Code. Therefore, the charge for in-process research and
development and amortization of acquired intangible assets is not deductible for
income tax purposes.
In February 1997, we acquired all of the outstanding capital stock of
CenterView Software, Inc. ("CenterView"), a privately-owned company which
developed and sold software application development tools. The aggregate
purchase price paid was approximately $8.7 million, which included cash and
direct acquisition costs. The transaction was accounted for as a purchase and,
based on an independent appraisal of the assets acquired and liabilities
assumed, the purchase price was allocated to the net tangible and intangible
assets acquired including developed software technology, acquired workforce,
in-process technology, and goodwill. The in-process technology, which, based on
the independent appraisal, was valued at $7 million, had not reached
technological feasibility at the date of acquisition and had no alternative
future uses in other research and development projects. Consequently, its value
was charged to operations in the first quarter of fiscal 1997, the period in
which the acquisition was consummated. The remaining identifiable intangible
assets are being amortized over three to five years.
The in-process research and development project acquired in the acquisition
of CenterView consisted of the client/server software, "Data Director," that
combines the functionality of high-end client/server tools with the price and
openness of visual programming environments. Data Director is an integrated
development extension for Microsoft Visual Basic that enables companies to build
corporate Intranet and client/server applications in a single environment. As of
the date of acquisition, Data Director Version 2.1 was considered developed
technology while Data Director Versions 3.0 and 4.0 were considered in-process
technology which had not reached technological feasibility and did not have any
alternative future uses. Data Director Version 3.0 was scheduled for first
customer release in July 1997 while Version 4.0 was anticipated to reach first
customer release in April 1998, with commercial release to occur approximately
two to three months after first customer introduction of the product. The
expected aggregate costs to complete both Data Director Versions 3.0 and 4.0
were approximately $12.6 million.
The fair value of the in-process technology was based on projected cash
flows which were discounted based on the risks associated with achieving such
projected cash flows upon successful completion of the acquired projects.
Associated risks include the inherent difficulties and uncertainties in
completing each project and thereby achieving technological feasibility, and
risks related to the impact of potential changes in market conditions and
technology. In developing cash flow projections, revenues were forecasted based
on relevant factors, including aggregate revenue growth rates for the business
as a whole and for the database application development market, product family
revenues, the aggregate size of the database application development market,
anticipated product development and product introduction schedules, product
sales cycles, and the estimated life of the underlying technology.
Projected annual revenues for the Data Director in-process development
projects were assumed to increase from product release through 1999, decline
slightly in 2000 and decline significantly in 2001, which was estimated to be
the end of the in-process technology's economic life. Gross profit was assumed
to be 90% throughout the technology life cycle based on percentages estimated in
Informix's aggregate business model. Estimated operating expenses, income taxes
and capital charges to provide a return on other acquired assets were deducted
from gross profit to arrive at net operating income. Operating expenses were
estimated as a percentage of revenue and included general and administrative
expenses, sales and marketing expenses and development costs to maintain the
technology once it achieved technological feasibility.
The net cash flows of the in-process research and development projects were
discounted to their present values using a discount rate of 20%. This discount
rate approximated the overall rate of return for the acquisition of CenterView
as a whole and reflected the inherent uncertainties surrounding the
22
successful development of the in-process research and development projects and
the uncertainty of technological advances.
We are currently selling two versions of Data Director, one for Visual Basic
applications and the other for Web applications.
RESTRUCTURING CHARGES
In June and September 1997, we approved plans to restructure our operations
to bring expenses in line with forecasted revenues and substantially reduced our
worldwide headcount and modified operations to improve efficiency. Accordingly,
we recorded restructuring charges totaling $108.2 million for fiscal 1997. The
significant components of these restructuring changes were severance and
benefits, write-off of assets, and facility charges. Severance and benefits
represented the reduction of approximately 670 employees, primarily sales and
marketing personnel, on a worldwide basis. Temporary employees and contractors
were also reduced. Write-off of assets included the write-off or write-down in
carrying value of equipment as a result of our decision to reduce the number of
Information Superstores throughout the world, as well as the write-off of
equipment associated with headcount reductions. The equipment subject to the
write-offs and write-downs consisted primarily of computer servers,
workstations, and personal computers that were no longer utilized in our
operations. Facility charges included early termination costs associated with
the closing of certain domestic and international sales offices.
During fiscal 1998, adjustments of $10.3 million were recorded to the
results of operations. These adjustments, which appear as a credit to
restructuring charges in our Consolidated Statement of Operations for the year
ended December 31, 1998, were due primarily to adjusting the estimated severance
and facility components of the fiscal 1997 restructuring charge to actual costs
incurred. We have substantially completed actions associated with our
restructuring except for subleasing or settling our remaining long-term
operating leases related to vacated properties. The terms of these operating
leases expire at various dates through 2003. Accrued restructuring costs
totaling $5.8 million remained as a liability in our Consolidated Financial
Statements as of December 31, 1998, of which $5.2 million related to facility
charges. (See Note 13 to our Consolidated Financial Statements.)
INTEREST INCOME
Interest income for fiscal 1998 was $11.4 million as compared to $5.6
million and $9.9 million for fiscal 1997 and 1996, respectively. The increase in
fiscal 1998 in comparison to fiscal 1997 resulted from an increase in the
average interest-bearing cash and short-term investment balances in fiscal 1998
due to increased sales and operating income as well as approximately $2.4
million in interest income related to income tax refunds received during fiscal
1998. The reduction in interest income from fiscal 1996 to fiscal 1997 was due
to a reduction in the average interest-bearing cash and short-term investment
balances in fiscal 1997.
INTEREST EXPENSE
Interest expense decreased to $5.8 million for fiscal 1998 from $9.4 million
and $12.5 million for fiscal 1997 and 1996, respectively. Interest expense for
fiscal 1998 consists primarily of interest charges related to payments on
capital leases. Interest expense for fiscal 1997 and fiscal 1996 related to
interest charges incurred in connection with financing of customer accounts
receivable, in addition to interest charges related to payments on capital
leases. We did not enter into any accounts receivable financing transactions in
fiscal 1998.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, decreased to a net other expense of $4.6
million for fiscal 1998 from net other income of $10.5 million and $2.9 million
for fiscal 1997 and 1996, respectively. Other income (expense), included $4.8
million of foreign currency transaction losses and $8.0 million of foreign
currency transaction gains in fiscal 1998 and fiscal 1997, respectively.
Approximately $7.5 million of the $8.0 million of foreign currency transaction
gains recognized in fiscal 1997 resulted primarily from a change in our
23
foreign currency denominated intercompany accounts payable and accounts
receivable balances arising from the restatement of our 1996, 1995 and 1994
financial statements. Other components of other income (expense) included $8.1
million and $3.9 million of net gains on the sale of long-term investments in
fiscal 1997 and fiscal 1996, respectively, as well as the downward adjustment of
$4.5 million to the carrying value of certain investments in fiscal 1997.
INCOME TAXES
In fiscal 1998, income tax expense resulted primarily from foreign
withholding taxes and taxable earnings in certain foreign jurisdictions. We have
provided a valuation allowance for the net deferred tax assets that are
dependent on future taxable income. The expected tax expense of $21.7 million,
computed by applying the federal statutory rate of 35% to the income before
income taxes, was offset primarily by a $13.8 million decrease in the valuation
allowance and a $4.4 million net foreign tax benefit.
In fiscal 1997, income tax expense resulted primarily from foreign
withholding taxes and taxable earnings in certain foreign jurisdictions. The
expected tax benefit computed by applying the federal statutory rate to the loss
before income taxes was substantially offset by a corresponding increase in the
valuation allowance for net deferred tax assets. We have provided a valuation
allowance for the net deferred tax assets in excess of amounts recoverable
through carryback of net operating losses. Accordingly, the net deferred tax
asset at December 31, 1997 of $34 million was provided for anticipated IRS tax
refunds, which were received during fiscal 1998.
QUARTERLY OPERATING RESULTS
FIRST
QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------ -------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year ended December 31, 1998
Net revenues..................................... $ 160,999 $ 174,201 $ 185,211 $ 214,572
Gross profit..................................... 113,741 128,430 138,175 163,943
Net income (loss)................................ $ 1,811 $ 12,315 $ 19,018 $ 24,574
Preferred stock dividend......................... (603) (624) (589) (1,663)
Value assigned to warrants....................... (1,594) (388) -- --
------------ -------------- ------------- --------------
Net income (loss) applicable to common
stockholders................................... $ (386) $ 11,303 $ 18,429 $ 22,911
------------ -------------- ------------- --------------
------------ -------------- ------------- --------------
Net income (loss) per common share:
Basic.......................................... $ (0.00) $ 0.07 $ 0.11 $ 0.13
------------ -------------- ------------- --------------
------------ -------------- ------------- --------------
Diluted........................................ $ (0.00) $ 0.07 $ 0.10 $ 0.13
------------ -------------- ------------- --------------
------------ -------------- ------------- --------------
Year ended December 31, 1997
Net revenues..................................... $ 149,902 $ 182,527 $ 150,184 $ 181,279
Gross profit..................................... 79,616 124,042 97,898 132,393
Net income (loss)................................ $ (144,161) $ (111,377) $ (110,523) $ 9,194
Preferred stock dividend......................... -- -- -- (301)
Value assigned to warrants....................... -- -- -- (1,601)
------------ -------------- ------------- --------------
Net income (loss) applicable to common
stockholders................................... $ (144,161) $ (111,377) $ (110,523) $ 7,292
------------ -------------- ------------- --------------
------------ -------------- ------------- --------------
Net income (loss) per common share:
Basic.......................................... $ (0.95) $ (0.73) $ (0.73) $ 0.05
------------ -------------- ------------- --------------
------------ -------------- ------------- --------------
Diluted........................................ $ (0.95) $ (0.73) $ (0.73) $ 0.04
------------ -------------- ------------- --------------
------------ -------------- ------------- --------------
In the first quarter of fiscal 1997, we experienced a substantial shortfall
in license revenues compared to forecasts, resulting in a substantial loss for
the quarter. The shortfall in revenue was due to slow growth in demand for RDBMS
products as well as our inability to close a number of sales transactions that
24
management anticipated would close by the end of the quarter, especially in
Europe. As a result of the shortfall in license revenues for this quarter, we,
in the second and third quarters of fiscal 1997, initiated two internal
restructurings of our operations intended to reduce operating expenses and
improve our financial condition. These restructurings included reductions in
headcount and leased facilities and the downsizing, elimination or conversion
into solutions labs of our planned Information Superstores. Costs associated
with the restructurings totaled approximately $108.2 million and had a material
adverse impact on our results of operations for fiscal 1997 "See--Restructuring
Charges". Additionally, during fiscal 1997, we had a major restatement for all
of the periods included in the three years ended December 31, 1996, as well as
for the quarter ended March 31, 1997. At that time, our administrative processes
were weak which contributed to the existence of significant weaknesses in our
internal controls. Following these events, customers were concerned about
Informix's viability and, accordingly, our management was concerned about
whether customers would honor their financial obligations to us.
The restructuring activities and the restatement of financial results
impacted the environment in which we operated, and, accordingly, impacted the
estimates and assumptions used by management in the preparation of our financial
statements. As of December 31, 1997, we made certain estimates including
allowances for uncollectable accounts receivable based on the probability of
collections, estimates for product returns associated with ongoing customer
uncertainty about our financial condition and contingencies associated with
continuing issues related to fiscal 1997. These estimates, in the ordinary
course of business, change as a result of management actions and environmental
changes.
During the last quarter of fiscal 1997 and the first two quarters of fiscal
1998, we took a number of actions to help restore customer confidence regarding
the ongoing viability of Informix. These actions included: (i) generating a
total of $63.3 million from an offering of Series B Preferred Stock and the
exercise of warrants related to outstanding Series A-1 Preferred Stock and
increasing the balance of cash, cash equivalents and short term investments;
(ii) visits to key customers by senior management to reinforce our customers'
confidence in us, (iii) signing significant new contracts with existing
customers and winning new customers in a variety of application areas including
data warehousing and Web/content management; (iv) demonstrating continued
ability to generate a meaningful revenue stream; (v) decreasing employee
turnover and increasing the ability to attract new employees and senior
management talent; and (vi) introducing significant new products and increasing
research and development funding. All of these factors contributed to customers
honoring their financial obligations to Informix, while reducing the probability
of product return and collections problems.
Additionally, during the first two quarters of fiscal 1998, the following
actions were taken and improvements made in the quality of our accounts
receivable balances. The actions taken included: (i) centralizing European
credit and collections for most countries and outsourcing this function to a
professional credit and collections firm; (ii) improving our Europe region's
accounts receivable aging from a balance of $8.5 million outstanding greater
than 90 days as of December 31, 1997 to a balance of $3.9 million outstanding
greater than 90 days as of June 30, 1998; and (iii) refining our methodology for
estimating general uncollectible accounts receivable over and above specific
accounts receivable reserves.
The improvement in both our financial condition and the credit and
collections processes which resulted from our actions led to a decrease of risk
such that reserves for product return and bad debts were reduced by $1.7 million
and $5.0 million in the first and second quarters of fiscal 1998, respectively.
As of December 31, 1997, our accrued liabilities included accruals for
certain claims against us. During the first quarter of fiscal 1998, our lawyers
determined that there was no merit to a specific claim for which we had recorded
a liability of $1.9 million. Accordingly, we reversed this $1.9 million accrual
during the first quarter of fiscal 1998. In addition, we reduced an accrued
liability related to another specific claim by $2.0 million and $0.8 million
during the second and third quarters of fiscal 1998, respectively, based on a
legal opinion and a settlement offer.
We recorded restructuring charges of $59.6 million and $49.7 million in the
second and third quarters of fiscal 1997, respectively. The total restructuring
expense decreased by $1.2 million during the fourth quarter of fiscal 1997
primarily due to adjusting the original estimate of the loss incurred on the
sale of
25
land to the actual loss. We recorded restructuring-related adjustments to
decrease restructuring expense by $3.3 million, $1.4 million, $2.6 million and
$3.0 million in the first, second, third, and fourth quarters of fiscal 1998,
respectively, primarily due to adjusting the estimated severance and facility
charges to actual costs incurred.
In the first quarter of fiscal 1997, we recorded a charge of $30.5 million
to write down the carrying values of certain of our Japanese subsidiary's
long-lived assets to their fair values. During the same quarter, we also
recorded a charge of $14.7 million to write down the carrying value of
capitalized software development costs for certain products to their net
realizable values. In connection with our acquisition of Red Brick in December
1998, we recorded a charge to operations in the fourth quarter of fiscal 1998 of
$2.6 million for in-process research and development which had not yet reached
technological feasibility and had no alternative future uses.
We believe the actions taken by management improved our operating
environment and helped restore customer confidence in our company and its
products.
LIQUIDITY AND CAPITAL RESOURCES
AS OF OR FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
Cash, cash equivalents and short-term investments.................................... $ 221.1 $ 155.5 $ 261.0
Working capital (deficit)............................................................ 27.6 (140.2) 3.1
Cash and cash equivalents provided by (used in) operations........................... 27.8 (144.8) (29.4)
Cash and cash equivalents used for investment activities............................. (55.4) (63.1) (145.3)
Cash and cash equivalents provided by financing activities........................... 56.1 115.2 228.7
OPERATING CASH FLOWS. We generated positive cash flows from operations
totaling $27.8 million for fiscal 1998 as compared to cash used in operations of
$144.8 million and $29.4 million for fiscal 1997 and 1996, respectively. This
significant increase in operating cash flows was due primarily to our improved
profitability in fiscal 1998, offset by significant fluctuations in the effect
of restructuring charges and changes in accounts receivable on operating cash
flows. Net income for fiscal 1998 was $57.7 million as compared to net losses of
$356.9 million and $73.6 million for fiscal 1997 and 1996, respectively. We
recorded a net credit for restructuring charges of $10.3 million in fiscal 1998
as compared to restructuring expense for fiscal 1997 of $108.2 million. Net
accounts receivable increased at December 31, 1998 as compared to December 31,
1997, primarily as a result of an increase of $33.3 million in net revenues in
the fourth quarter of fiscal 1998 when compared to the same quarter in fiscal
1997.
INVESTING CASH FLOWS. Net cash and cash equivalents used in investing
activities decreased by approximately $7.7 million for fiscal 1998 compared with
fiscal 1997 due to our emphasis on controlling costs, including capital
expenditures. The decrease was due in large part to a reduction in capital
expenditures to $20.1 million in fiscal 1998 from $31.4 million in fiscal 1997
(net of cash proceeds from the disposal of land, property and equipment of $62.4
million). This decrease was offset by increased investment in fiscal 1998,
totaling $15.1 million, of excess cash generated from profitable operations.
Significant investing activities during the year also included additions to
software costs of $18.6 million.
FINANCING CASH FLOWS. Net cash and cash equivalents provided by financing
activities in fiscal 1998 and fiscal 1997 consist primarily of proceeds from the
sale of our Common Stock and from the issuance of our Series A-1 Preferred Stock
and Series B Preferred Stock.
Proceeds from the sale of our Common Stock represent stock options exercised
and purchases under our Employee Stock Purchase Plan. The proceeds totaled $16.2
million, $9.2 million and $24.4 million for fiscal 1998, 1997 and 1996,
respectively.
During fiscal 1998, we raised net proceeds of $32.9 million through the
exercise of warrants issued in conjunction with our Series A-1 Preferred Stock.
In February 1998, the Series A-1 Preferred Stockholders
26
exercised warrants to purchase 60,000 additional shares of Series A-1 Preferred
at $250 per share for net proceeds of $14.1 million. In November 1998, the
Series A-1 Preferred Stockholders exercised their remaining warrants in full to
purchase 80,000 shares of Series A-1 Preferred, resulting in $18.8 million in
net proceeds. These warrants were originally issued in August 1997 in connection
with the sale of the 160,000 shares of Series A-1 Preferred, which resulted in
net proceeds of $37.6 million.
During fiscal 1998, 1997 and 1996, we received $11.5 million, $21.8 million
and $207.2 million, respectively, of advances from customers and financial
institutions. We may receive cash, either from the customer, or from a financial
institution to whom the customer payment streams due under software license
arrangements are sold, prior to the time the license fee is recognized as earned
revenue. If we fail to comply with the contractual terms of the specific license
agreement, we could be required to refund to the customer or the financial
institution the amount received. However, we do not believe the refunds of
amounts received, if any, would have a material effect on our results of
operations, financial position, or cash flows.
OTHER. During fiscal 1997, we assigned our leasehold interest and our
related obligations under an office space lease in Santa Clara, California to an
unrelated third party. The lease term was for fifteen years and minimum lease
payments amount to $96.0 million over the term. We remain contingently liable
for minimum lease payments under the terms of the assignment.
We have several active software development and service provider contracts
with third-party technology providers. These agreements contain financial
commitments by us of $12.4 million, $10.2 million, $7.3 million and $2.7 million
in fiscal 1999, 2000, 2001 and 2002, respectively.
SUMMARY. We believe that our current cash, cash equivalents and short-term
investments balances and cash flows from operations will be sufficient to meet
our working capital requirements for at least the next 12 months.
DISCLOSURES ABOUT MARKET RATE RISK
INTEREST RATE RISK. Our exposure to market rate risk for changes in
interest rates relates primarily to our investment portfolio. We do not use
derivative financial instruments in our investment portfolio. We place our
investments with high quality issuers and, by policy, limit the amount of credit
exposure to any one issuer. We are averse to principal loss and ensure the
safety and preservation of our invested funds by limiting default, market and
reinvestment risk. We classify our cash equivalents and short-term investments
as "fixed-rate" if the rate of return on such instruments remains fixed over
their term. These "fixed-rate" investments include fixed-rate U.S. government
securities, municipal bonds, time deposits and certificates of deposits. We
classify our cash equivalents and short-term investments as "variable rate" if
the rate of return on such investments varies based on the change in a
predetermined index or set of indices during their term. These "variable-rate"
investments primarily include money market accounts held at various
27
securities brokers and banks. The table below presents the amounts and related
weighted interest rates of our investment portfolio at December 31, 1998:
AVERAGE
INTEREST RATE COST FAIR VALUE
--------------- --------- -----------
(DOLLARS IN THOUSANDS)
Cash equivalents(1)
Fixed rate................................................................. 5.18% $ 91,401 $ 91,569
Variable rate.............................................................. 4.92% 1,289 1,289
Short-term investments(1)
Fixed rate................................................................. 5.42% 37,087 37,116
Variable rate.............................................................. 0.00% -- --
Long-term investments(1)
Fixed rate................................................................. 5.24% 6,033 6,009
Variable rate.............................................................. 0.00% -- --
- ------------------------
(1) See definition in Note 1 to our Consolidated Financial Statements.
FOREIGN CURRENCY EXCHANGE RATE RISK. We enter into foreign currency forward
exchange contracts to reduce our exposure to foreign currency risk due to
fluctuations in exchange rates underlying the value of intercompany accounts
receivable and payable denominated in foreign currencies (primarily European and
Asian currencies) until such receivables are collected and payables are
disbursed. A foreign currency forward exchange contract obligates us to exchange
predetermined amounts of specified foreign currencies at specified exchange
rates on specified dates or to make an equivalent U.S. dollar payment equal to
the value of such exchange. These foreign exchange forward contracts are
denominated in the same currency in which the underlying foreign receivables or
payables are denominated and bear a contract value and maturity date which
approximate the value and expected settlement date of the underlying
transactions. For contracts that are designated and effective as hedges,
discounts or premiums (the difference between the spot exchange rate and the
forward exchange rate at inception of the contract) are accreted or amortized to
other expenses over the contract lives using the straight-line method while
unrealized gains and losses on open contracts at the end of each accounting
period resulting from changes in the spot exchange rate are recognized in
earnings in the same period as gains and losses on the underlying foreign
currency denominated receivables or payables are recognized, and generally
offset. Contract amounts in excess of the carrying value of our foreign currency
denominated accounts receivable or payable balances are marked to market, with
changes in market value recorded in earnings as foreign exchange gains or
losses. We operate in certain countries in Latin America, Eastern Europe, and
Asia/Pacific where there are limited forward foreign currency exchange markets
and thus we have unhedged transaction exposures in these currencies.
Most of our international revenue and expenses are denominated in local
currencies. Due to the substantial volatility of currency exchange rates, among
other factors, we cannot predict the effect of exchange rate fluctuations on our
future operating results. Although we take into account changes in exchange
rates over time in our pricing strategy, we do 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 cycle for our products is relatively long, depending on a number of
factors including the level of competition and the size of the transaction. We
attempt to reduce this exposure by entering into foreign currency forward
exchange contracts to hedge up to 80% of the forecasted net income of our
foreign subsidiaries of up to one year in the future. These forward foreign
currency exchange contracts do not qualify as hedges and, therefore, are marked
to market, accounting for a significant portion of our net foreign currency
losses of $4.8 million in 1998. These losses are primarily offset by gains
realized in cost of software distribution resulting from these foreign currency
movements. Notwithstanding our efforts to manage foreign exchange risk, there
can be no assurances that our hedging activities will adequately protect us
against the risks associated with foreign currency fluctuations.
28
The table below provides information about our foreign currency forward
exchange contracts. The information is provided in U.S. dollar equivalents and
presents the notional amount (contract amount), the weighted average contractual
foreign currency exchange rates and fair value. Fair value represents the
difference in value of the contracts at the spot rate at December 31, 1998 and
the forward rate, plus the unamortized premium or discount. All contracts mature
within twelve months.
FORWARD CONTRACTS
WEIGHTED AVERAGE
AT DECEMBER 31, 1998 CONTRACT RATE
- -------------------------------------------------------------- CONTRACT AMOUNT ---------------- FAIR VALUE
---------------- ---------------
(IN THOUSANDS) (IN THOUSANDS)
Forward currency to be sold under contract:
Japanese Yen................................................ $ 11,719 118.18 $ (262)
Deutsche Mark............................................... 8,092 1.66 39
Korean Won.................................................. 5,250 1,238.00 (119)
Singapore Dollar............................................ 4,264 1.64 45
British Pound............................................... 3,322 1.66 (30)
Australian Dollar........................................... 2,756 0.61 (2)
Netherland Guilder.......................................... 2,087 1.88 7
Swiss Franc................................................. 2,010 1.35 21
Brazilian Real.............................................. 1,382 1.45 (273)
Other (individually less than $1 million)................... 2,926 * (36)
------- -----
Total......................................................... $ 43,808 $ (610)
------- -----
------- -----
Forward currency to be purchased under contract:
British Pound............................................... $ 42,576 1.67 $ 81
French Franc................................................ 3,046 5.58 (17)
Swedish Krona............................................... 1,493 7.96 (23)
Danish Krone................................................ 1,316 6.35 (3)
Other (individually less than $1 million)................... 1,692 * 24
------- -----
Total......................................................... $ 50,123 $ 62
------- -----
------- -----
Grand Total................................................... $ 93,931 $ (548)
------- -----
------- -----
* Not meaningful
YEAR 2000 COMPLIANCE
GENERAL
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 one year, computer systems and/or
software used by many companies may need to be upgraded to comply with Year 2000
requirements. Significant uncertainty exists in the software industry concerning
the potential effects associated with such compliance.
We are:
- Reviewing and updating the Year 2000 compliance status of the software and
systems used in our internal business processes
- Obtaining appropriate assurances of compliance from the manufacturers of
these products and agreements, as necessary, to modify or replace all
non-compliant products
We expect this work to be substantially complete by the Fall of 1999.
29
In addition, we are considering converting certain of our software and
systems to commercial products from third parties that are known to be Year 2000
compliant. This conversion will require:
- The dedication of substantial time from our administrative and management
information personnel
- The assistance of consulting personnel from third party software vendors
- The training of our personnel using such systems
Based on the information available to date, we believe that we will be able
to complete our Year 2000 compliance review and make necessary modifications
prior to the end of 1999. We made a significant portion of the software or
systems important to our business Year 2000 compliant by the end of 1998, with
the remainder of the mission critical applications scheduled to be Year 2000
compliant by the end of June 1999. To the extent that we are relying on the
products of other vendors to resolve Year 2000 issues, there can be no guarantee
that we will not experience delays in implementing such products. We could incur
substantial costs and disruption of our business if key systems, or a
significant number of systems, were to fail as a result of Year 2000 problems or
if we were to experience delays in implementing Year 2000 compliant software
products.
STATE OF READINESS
Our Year 2000 project is divided into four major sections:
- Product Readiness
- Information Systems Operations & Applications Software (IS Systems)
- Third-party Suppliers
- Global Business Processes (includes Facilities, Legal, Manufacturing,
Technical Support, Sales, Product Management and Development, Marketing
and Finance)
There are five general phases of our Year 2000 Project applicable to each of
the four sections:
- Awareness Phase. Increasing employee awareness through various forms of
communication
- Mission Critical Inventory Phase. Taking an inventory of mission critical
items relevant to Year 2000 (including computer hardware, software,
telecommunications equipment, embedded controllers within our facilities,
and other non-computer related equipment), assigning priorities to
identified items for assessment and possible renovation, and assessing the
status of Year 2000 compliance of items which we have determined to be
material to our business
- Repair or Replace Phase. Repairing or replacing material items that are
not Year 2000 compliant
- Update Testing Phase. Testing of updates given by third party suppliers
- Business Continuity Phase. Designing and implementing contingency and
business continuity plans for each internal organization and location
during the Year 2000 rollover period. Material items are those items that
we believe have a significant negative impact on customer service, involve
a risk to the safety of individuals, may cause damage to property or the
environment, or may significantly affect revenue
In November 1998, we completed the Awareness Phase for each of the four
sections of the project. The Mission Critical Inventory phase for each of the
four sections was completed by the end of 1998. The Repair or Replace phase for
each of the four sections will continue into the first half of 1999 as various
departments perform tests, or receive compliance information from third-party
suppliers. We are performing most of the testing ourselves under the Update
Testing Phase, although we have retained third-parties to test certain of our
key applications. The level of testing is significantly limited by our technical
ability to emulate our complex systems and networks and cost/benefit
considerations.
30
We are working on the Business Continuity phase for each of the four
sections. A working plan of the program should be available during the third
quarter of 1999.
PRODUCT READINESS. All of our currently supported products are Year 2000
compliant, meaning that the use or occurrence of dates on or after January 1,
2000 will not adversely affect the performance or functionality of our products
with respect to four-digit year dates or the ability of our products to
correctly create, store, process, and output information related to such date
data, including Leap Year calculations. However, Year 2000 compliance of our
products may be affected by other parts of the system in which they are being
used, as discussed below.
Our products often depend on data from other parts of the system in which
they are being used. Year 2000 compliance is not effective unless all of the
hardware, operating system, other software, and firmware being used along with
our products correctly interpret and/or translate date data into a four-digit
year date and properly exchange date data with our products.
We are testing our products under different scenarios. Throughout the
remainder of 1999 and beyond, we will continue to improve our testing efforts
with each new release of our software products. From time to time, our Year 2000
Program Office updates the recommended version of each product family when a
Year 2000 or DBCENTURY-related product deficiency is found and fixed in a
certain interim or maintenance release. We have made Year 2000 testing scenarios
part of our standard test suite.
Our Year 2000 Program Office is incorporating the Red Brick product
compliance information and plans into our Year 2000 Program Plan. We expect to
complete this incorporation by the end of the first quarter of 1999.
IS SYSTEMS. Our IS systems consist of all computer hardware, systems
software and telecommunications. Our current hardware inventory includes PC
Desktops, PC Laptops, UNIX servers, UNIX workstations, and NT workgroup servers.
Our current software inventory includes Windows 95 operating system and MS
Office products, Product Development environment tools for UNIX, and various
management systems. Our telecommunications equipment includes both voice and
data services, including PBX systems, voicemail, ACD, video conferencing, local
area networks, wide area networks, and remote access equipment. Testing is
ongoing as hardware or system software is renovated or replaced, although, the
level of testing is significantly limited by our technical ability to emulate
our complex systems and networks and cost/benefit considerations. We began
contingency planning in December 1998 and expect to be completed with such
planning by the third quarter of 1999. We expect that all IS systems will be
compliant by the third quarter of 1999.
We have already made significant portions of our mission critical
applications Year 2000 compliant. Applications supplied by other vendors are
expected to be made compliant, replaced with compliant applications, or retired
by early 1999. None of our other information technology projects have been
delayed due to the implementation of the Year 2000 project. Contingency planning
for this section began in the third quarter of 1998 and is expected to be
completed by mid-1999.
THIRD-PARTY SUPPLIERS. We are identifying and prioritizing critical
suppliers and communicating with them about our plans and progress in addressing
the Year 2000 problem and how their individual compliance can impact our
success. We have begun detailed evaluations of the most critical suppliers.
These evaluations will be followed by the development and implementation of
contingency plans where appropriate, which began, in certain departments, in the
fourth quarter of 1998, with a scheduled completion date of mid 1999. Follow-up
reviews are scheduled through the remainder of 1999.
GLOBAL BUSINESS PROCESSES. We have begun developing plans detailing the
tasks and resources required for the global business processes section. This
section includes the hardware, software and associated embedded computer chips
that are used in the operation of all of our critical facilities. It also
includes readiness in our key business areas, including Finance, Technical
Support, and Legal. All repair
31
and testing of embedded systems, where appropriate, is scheduled to be completed
by year-end 1999. We began contingency planning for this section, where
appropriate, in the first quarter of 1999 and expect to be completed with such
planning by year-end 1999.
COSTS
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to our financial position. The
estimated total cost of the Year 2000 project is approximately $4.5 million. The
total amount expended on the project through December 31, 1998 was less than
$0.3 million. The estimated future cost of completing the Year 2000 project is
estimated to be approximately $4.2 million. We estimate that this amount will be
spent as follows:
- $2.0 million for capital expenditures to repair or replace software and
related hardware
- approximately $0.5 million for capital expenditures to repair or replace
non-IS equipment
- $1.7 million for non-capital expenses for Technical Support, Operations,
IS Operations and Applications, and the Year 2000 Program Office
The Year 2000 Project is expected to significantly reduce our level of
uncertainty about the Year 2000 problem and, in particular, about the Year 2000
compliance and readiness of our material third-party suppliers. We believe that
the possibility of significant interruptions of normal operations will be
reduced with the implementation of new business systems and completion of the
project as scheduled.
EUROPEAN MONETARY CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Economic Community entered into a three-year transition phase during which a
common currency, the "Euro," was introduced. Between January 1, 1999 and January
1, 2002, governments, companies and individuals may conduct business in these
countries in both the Euro and existing national currencies. On January 1, 2002,
the Euro will become the sole currency in these countries.
During the transition phase, we will continue to evaluate the impact of
conversion to the Euro on our business. In particular, we are reviewing:
- Whether our internal software systems can process transactions denominated
either in current national currencies or in the Euro, including converting
currencies using computation methods specified by the European Economic
Community
- The cost to us if we must modify or replace any of our internal software
systems
- Whether we will have to change the terms of any financial instruments in
connection with our hedging activities
Based on current information and our initial evaluation, we do not expect
the cost of any necessary corrective action to have a material adverse effect on
our business. We have reviewed the effect of the conversion to the Euro on the
prices of our products in the affected countries. As a result, we have made some
adjustments to our prices to attempt to eliminate differentials that were
identified. However, we will continue to evaluate the impact of these and other
possible effects of the conversion to the Euro on our business. We cannot
guarantee that the costs associated with conversion to the Euro or price
adjustments will not in the future have a material adverse effect on our
business.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which
establishes guidelines for the accounting for the costs of all computer software
32
developed or obtained for internal use. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. We are currently evaluating the impact of SOP
98-1 on our financial statements and related disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities,"
which establishes standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS 133 is effective for fiscal years beginning after June 15,
1999. Earlier application of SFAS 133 is encouraged but should not be applied
retroactively to financial statements of prior periods. We are currently
evaluating the requirements and impact of SFAS 133.
In December 1998, the AICPA issued Statement of Position 98-9 ("SOP 98-9"),
"Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions." This amendment clarified the specification of what was considered
vendor specific objective evidence of fair value for the various elements in a
multiple element arrangement. SOP 98-9 is effective for all transactions entered
into by us in fiscal year 2000. The adoption of this statement is not expected
to have a material impact on our operating results, financial position or cash
flows.
FACTORS THAT MAY AFFECT FUTURE RESULTS
WE ARE SUBJECT TO INTENSE COMPETITION AND THIS COMPETITION MAY ADVERSELY AFFECT
OUR BUSINESS
We may not be able to compete successfully against current and/or future
competitors and such inability would materially adversely affect our business,
quarterly and annual operating results and financial condition. The market for
our products is highly competitive and diverse. Moreover, we expect that the
technology for RDBMS products will continue to change rapidly. New products are
introduced frequently, and existing products are enhanced continually.
Competition may also result in changes in pricing policies by us or our
competitors which could materially adversely affect our business and future
quarterly and annual operating results. We currently face competition from a
number of sources, including several large vendors that develop and market
databases, applications, development tools or decision support products. Our
principal competitors include Computer Associates, IBM, Microsoft, NCR/Teradata,
Oracle and Sybase. Additionally, as we expand our business in the markets of
data warehousing and web/e-commerce, we expect to compete with a different group
of companies, including small, highly focused companies offering single products
or services that we include as part of an overall solution. Several of our
competitors have significantly greater financial, technical, marketing and other
resources than we do. 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
we can.
COMPETITION MAY AFFECT PRICING OF OUR PRODUCTS WHICH COULD ADVERSELY AFFECT OUR
BUSINESS
Existing and future competition or changes in our product or service pricing
structure or product or service offerings could result in an immediate reduction
in the prices of our products or services. If significant price reductions in
our products or services were to occur and not be offset by increases in sales
volume, our business, results of operations and financial condition would be
adversely affected. If such downward pressure on prices were to occur, our
operating margins would be adversely affected. We may not be able to compete
successfully with existing or new competitors. Several of our 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 our products. In
addition, the following factors could affect the pricing of RDBMS products and
related products:
33
- The industry movement to new operating systems, like Windows NT
- Access to RDBMS products through low-end desktop computers
- Access to data through the Internet
- The bundling of software products for promotional purposes or as a
long-term pricing strategy by certain of our competitors
- Our own practice of bundling our software products for enterprise licenses
or for promotional purposes with our partners
In particular, the pricing strategies of competitors in the industry have
historically been characterized by aggressive price discounting to encourage
volume purchasing by customers. While we have historically participated in this
practice of aggressive price discounting, we are now more closely managing price
discounting to encourage smaller, recurring transactions. We may not be able to
compete effectively against competitors who continue to aggressively discount
the price of their products.
OUR INDUSTRY CHANGES RAPIDLY DUE TO EVOLVING TECHNOLOGY STANDARDS AND FUTURE
SUCCESS WILL DEPEND ON OUR ABILITY TO CONTINUE TO MEET THE SOPHISTICATED NEEDS
OF OUR CUSTOMERS
Our future success will depend on our ability to address the increasingly
sophisticated needs of our customers by supporting existing and emerging
hardware, software, database and networking platforms. We will have to develop
and introduce enhancements to our existing products and new products on a timely
basis to keep pace with technological developments, evolving industry standards
and changing customer requirements. We expect that we will have to respond
quickly to:
- Rapid technological change
- Changing customer needs
- Frequent new product introductions
- Evolving industry standards that may render existing products and services
obsolete
As a result, our position in existing markets or potential markets could be
eroded rapidly by product advances. The life cycles of our products are
difficult to estimate. Our growth and future financial performance will depend
in part upon our ability to:
- Continue to enhance our existing products
- Develop and introduce new applications that keep pace with technological
advances on a timely and cost-effective basis
- Meet changing customer requirements
- Match or exceed the product deliveries of its competitors
We expect that our product development efforts will continue to require
substantial investments. We may not have sufficient resources to make the
necessary investments or be able to attract and retain qualified software
development engineers. Any of these events could materially adversely affect our
business, quarterly and annual operating results and financial condition.
SLOWER GROWTH IN THE RDBMS MARKET WOULD ADVERSELY AFFECT SALES OF OUR PRODUCTS
If RDBMS industry growth rates decline for any reason, the markets for our
products will be adversely affected, which would have a negative impact on our
business, results of operations, financial condition and cash flows. Prior to
fiscal 1997, the RDBMS industry grew significantly, due in part to the
continuing development of new technologies and products responsive to customer
requirements. In fiscal 1997 and 1998, however, growth rates throughout the
industry slowed. Recent instability in the Asian-Pacific and Latin American
economies and financial markets, which had previously been cited as potentially
strong
34
sources of revenue growth for relational database software companies, has
introduced additional uncertainty concerning industry growth rates in the
future.
IF THE OBJECT-RELATIONAL DATABASE MANAGEMENT SYSTEMS ("ORDBMS") MARKET DOES NOT
EVOLVE AS WE ANTICIPATE, OUR BUSINESS WILL BE ADVERSELY AFFECTED
Delays in market acceptance of ORDBMS products offered by us could adversely
effect our results of operations and financial condition. In recent years, the
types and quantities of data required to be stored and managed has grown
increasingly complex and includes, in addition to conventional character data,
audio, video, text and three-dimensional graphics in a high-performance scalable
environment. During 1996, we invested substantial resources in developing our
ORDBMS product line. The market for ORDBMS products is new and evolving, and its
growth depends upon a growing need to store and manage complex data and on
broader market acceptance of our products as a solution for this need. As a
result, organizations may not choose to make the transition from conventional
RDBMS to ORDBMS.
THERE ARE MANY FACTORS, INCLUDING SOME BEYOND OUR CONTROL, THAT MAY CAUSE
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS
Our quarterly operating results have varied greatly in the past and may vary
greatly in the future depending upon a number of factors described below and
elsewhere in this "Factors that May Affect Future Results" section, including
many that are beyond our control. As a result, we believe that quarter-
to-quarter comparisons of our financial results are not necessarily meaningful,
and you should not rely on them as an indication of our future performance.
These factors include:
- Changes in demand for our software, including changes in industry growth
rates for our products
- The size, timing and contractual terms of large orders for our software
products
- The budgeting cycles of our customers and potential customers
- Any downturn in our customers' businesses, in the domestic economy or in
international economies where our customers do substantial business
- Changes in our pricing policies resulting from competitive pressures, such
as aggressive price discounting by our competitors or other factors
- Our ability to develop and introduce on a timely basis new products or
enhanced versions of our software
- Changes in the mix of revenues attributable to domestic and international
sales
- Seasonal buying patterns which tend to peak in the fourth quarter
POTENTIAL CHANGES IN MIX OF LICENSE AND SERVICE REVENUE. Historically, a
majority of our revenue has been attributable to the licensing of our software
products. Changes in the mix of software products and services sold by us,
including the mix between higher margin software products and lower margin
maintenance, consulting and training, could materially adversely affect our
operating results for future quarters.
ANY CANCELLATIONS OR DELAYS IN PLANNED CUSTOMER PURCHASES OF OUR PRODUCTS COULD
MATERIALLY ADVERSELY AFFECT OUR BUSINESS AND QUARTERLY OPERATING RESULTS
CANCELLATIONS OR DELAYS OF PLANNED PURCHASES. Because we do not know when,
or if, our potential customers will place orders and finalize contracts, we
cannot accurately predict our revenue and operating results for future quarters.
If there is a downturn in potential customers' businesses, the domestic economy
in general, or in international economies where we derive substantial revenue,
potential customers may defer or cancel planned purchases of our products, which
could materially adversely affect our business, operating results and financial
condition. Because our operating expenses are based on anticipated
35
revenue levels and because a high percentage of our 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, which could cause net income to fall significantly
short of anticipated levels.
EFFECTS OF HISTORICAL TREND FOR SALES TO OCCUR AT END OF QUARTER. Our
software license revenue in any quarter depends on orders booked and shipped in
the last month, weeks or days of that quarter. At the end of each quarter, we
typically have either minimal or no backlog of orders for the subsequent
quarter. If a large number of orders or several large orders do not occur or are
deferred, our revenue in that quarter could be substantially reduced. This could
materially adversely affect our operating results and could impair our business
in future periods.
SEASONAL TRENDS IN SALES OF OUR SOFTWARE PRODUCTS COULD ADVERSELY AFFECT OUR
QUARTERLY OPERATING RESULTS
Our sales of software products have been affected by seasonal purchasing
trends. We expect these seasonal trends to continue in the future. These
seasonal trends materially affect our quarter-to-quarter operating results.
Revenue and operating results in our quarter ending December 31 are typically
higher relative to our other quarters, because many customers make purchase
decisions based on their calendar year-end budgeting requirements and because of
the effects of our sales incentive plans for sales personnel which are measured
on a calendar year basis. As a result, we have historically experienced a
substantial decline in revenue in the first quarter of each fiscal year relative
to the preceding quarter. Generally, we expect our quarter ending September 30
to reflect the effects of summer slowing of international business activity and
spending activity generally associated with that time of year, particularly in
Europe.
ANY DELAYS IN OUR NORMALLY LENGTHY SALES CYCLES COULD RESULT IN SIGNIFICANT
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS
Our sales cycle typically takes many months to complete and varies depending
on the product, service or solution that we are selling. Any delay in the sales
cycle of a large transaction or a number of smaller transactions could result in
significant fluctuations in our quarterly operating results. The length of the
sales cycle may vary depending on a number of factors over which we may have
little or no control, including the size of a potential transaction and the
level of competition that we encounter in our selling activities. Our sales
cycle can be further extended for sales made through third party distributors.
OUR FUTURE REVENUE IS SUBSTANTIALLY DEPENDENT UPON OUR INSTALLED CUSTOMERS
RENEWING MAINTENANCE AGREEMENTS FOR OUR PRODUCTS AND LICENSING ADDITIONAL
PRODUCTS; OUR FUTURE SERVICES AND MAINTENANCE REVENUE IS DEPENDENT ON FUTURE
SALES OF OUR SOFTWARE PRODUCTS
We depend on our installed customer base for future revenues from services
and licenses of additional products. If our customers fail to renew their
maintenance agreements, this could materially adversely affect our business and
future quarterly and annual operating results. The maintenance agreements are
renewable annually at the option of the customers and there are no minimum
payment obligations or obligations to license additional software. Therefore,
our current customers may not necessarily generate significant maintenance
revenue in future periods. In addition, our customers may not necessarily
purchase additional products or services. Our services revenue and maintenance
revenue are also dependent upon the continued use of these services by our
installed customer base. Any downturn in our software license revenue could
adversely affect the growth of our services revenue in future quarters. License
revenue in fiscal 1997 was $378.2 million and in fiscal 1998 was $383.5 million,
both of which are significantly less than fiscal 1996 when license revenue was
$502.7 million.
36
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND SUCH OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH INFORMIX IN THE FUTURE
The loss of the services of one or more of our senior executive officers or
key employees could materially adversely affect our business, results of
operations and financial condition. Our success will depend to a significant
extent on the continued service of our senior executives and certain other key
employees, including certain sales, consulting, technical and marketing
personnel. If we lost the services of one or more of our senior executives or
key employees, this could materially adversely affect our business, particularly
if one or more of our executives or key employees decided to join a competitor
or otherwise compete directly or indirectly with Informix. Of our senior
officers and key employees, only Mr. Finocchio, our Chairman, President and
Chief Executive Officer, is bound by an employment agreement, the terms of which
are nonetheless at-will. In addition, we do not maintain key man life insurance
on our employees and have no plans to do so.
OUR NEW EXECUTIVE TEAM MAY NOT BE ABLE TO SUCCESSFULLY WORK TOGETHER TO MEET OUR
BUSINESS OBJECTIVES, WHICH COULD ADVERSELY AFFECT OUR BUSINESS
Almost all of our executive officers, including our President and Chief
Executive Officer, our Executive Vice President, Field Operations, and our
Executive Vice President, Finance and Chief Financial Officer, have joined us
since the beginning of fiscal 1997. Since joining us, the new management team
has devoted substantial efforts to restructuring our sales, marketing and
finance organizations after the announcement of the restatement of our financial
results for fiscal 1994, 1995 and 1996 and the first quarter of fiscal 1997 as a
result of errors and irregularities identified with our revenue recognition
practices during these periods. In addition, in fiscal 1998, we announced that
we were restructuring our business to expand our e-commerce and data warehousing
capabilities. Our management team has not worked together previously and may not
be able to successfully implement this strategy. If our management team is
unable to accomplish our business objectives, it could materially adversely
affect our business and our future quarterly and annual operating results.
PENDING LITIGATION COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS
Since April 16, 1997, various holders of our Common Stock have filed over 20
separate lawsuits against us, Ernst & Young LLP (who served as our former
independent auditors), and certain of our current and former officers and
directors. The uncertainty associated with substantial unresolved lawsuits could
materially adversely affect our business and financial condition. In particular,
the lawsuits could harm our relationships with existing customers and our
ability to obtain new customers. The continued defense of the lawsuits could
also result in the diversion of management's time and attention away from
business operations, which could adversely affect our business. The lawsuits
could also have the effect of discouraging potential acquirors from bidding for
us or reducing the consideration they would otherwise be willing to pay in
connection with an acquisition. In addition, although we are unable to determine
the amount, if any, we may be required to pay in connection with the resolution
of these lawsuits, by settlement or otherwise, the size of any such payment
could materially adversely affect our financial condition. Most of the lawsuits
have been filed as purported class actions by persons who claim that they
purchased our Common Stock during a purported class period. The complaints
allege violations of federal and state securities laws, fraud, and violations of
California's unfair business practices statutes. The complaints, in general, do
not specify the amount of damages that plaintiffs seek.
There are pending federal and state securities actions which are in the
early stages of discovery. As a result, we are unable to estimate the possible
range of damages that might be incurred as a result of the lawsuits. We have not
set aside any financial reserves relating to any of these lawsuits.
For a further description of the nature and status of the legal proceedings
in which we are involved see "Item 3--Legal Proceedings."
37
LIMITATIONS OF INFORMIX DIRECTOR AND OFFICER LIABILITY INSURANCE MAY ADVERSELY
AFFECT OUR BUSINESS
Our liability insurance for actions taken by officers and directors during
the period from August 1996 to August 1997, the period during which events
related to securities class action lawsuits against us and certain of our
current and former executive officers occurred, provide only limited liability
protection. If these policies do not adequately cover our expenses related to
those class action lawsuits, it could materially adversely affect our business
and financial condition.
Under Delaware law, our charter documents, and certain indemnification
agreements we entered into with our executive officers and directors, we must
indemnify our current and former officers and directors to the fullest extent
permitted by law. The indemnification covers any expenses and/or liabilities
reasonably incurred in connection with the investigation, defense, settlement or
appeal of legal proceedings. The obligation to provide indemnification does not
apply if the officer or director is found to be liable for fraudulent or
criminal conduct.
For the period in which most of the claims were asserted, we had in place
three director's and officer's liability insurance policies, each providing $5
million in coverage for a total of $15 million. However, our insurance carriers
assert that not all of the actions implicate coverage under our insurance
policies. In addition, these policies do not provide any separate coverage for
us as an entity as opposed to its officers and directors. Moreover, we do not
have separate insurance to cover the costs of Informix's own defense or to cover
any liability for any claims asserted against us during that period.
THE PENDING SEC INVESTIGATION COULD ADVERSELY AFFECT OUR BUSINESS
In July 1997, the SEC issued a formal order of investigation of us and
certain unidentified individuals associated with us. The investigation relates
to non-specified accounting matters, financial reports, other public disclosures
and trading activity in our stock. While we do not know the current status of
the investigation or any possible actions that may be taken against us as a
result of the investigation, any action could adversely affect our business.
WE MAY BE UNABLE TO INTEGRATE RED BRICK INTO OUR BUSINESS SUCCESSFULLY
If we do not successfully integrate Red Brick into our business, this could
materially adversely affect our business and future operating results.
Additionally, we may never achieve the anticipated synergies from the
acquisition of Red Brick, including marketing, distribution or other operational
benefits. Our acquisition of Red Brick, which was completed in December 1998,
requires that we integrate Red Brick's business and operations into our own. We
acquired Red Brick with the intent of expanding our data warehousing
capabilities, including data warehousing consulting and research and development
expertise. Potential problems with this integration could include:
- Impairment of relationships with Red Brick customers
- The inability to retain a sufficient number of Red Brick's key employees,
including its existing sales force and professional service personnel
- Difficulties in standardizing sales quotas, territories and incentive
compensation plans for sales personnel
- Difficulties in integrating Red Brick's distribution channels with our
existing channels
- The lack of focus on achieving our core business objectives if our
management pays excessive attention to the integration process
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THERE ARE A NUMBER OF FACTORS ASSOCIATED WITH INTERNATIONAL OPERATIONS THAT
COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS
Our international operations are, and any expanded international operations
will be, subject to a variety of risks associated with conducting business
internationally that could materially adversely affect our business and future
quarterly and annual operating results, including the following:
- Difficulties in staffing and managing international operations
- Problems in collecting accounts receivable
- Longer payment cycles
- Fluctuations in currency exchange rates
- Seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world
- Uncertainties relative to regional, political and economic circumstances
- Recessionary environments in foreign economies
- Increases in tariffs, duties, price controls or other restrictions on
foreign currencies or trade barriers imposed by foreign countries
International sales represented approximately 52% of our total revenue in
fiscal 1998. In particular, instability in the Asian-Pacific and Latin American
economies and financial markets, which when combined accounted for approximately
19% of our total revenue in fiscal 1998, could materially adversely affect our
operating results in future quarters.
FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN CURRENCY
TRANSACTION LOSSES FOR INFORMIX
Despite our efforts to manage foreign exchange risk, there can be no
assurances that our hedging activities will adequately protect us against the
risks associated with foreign currency fluctuations. As a consequence, our
business, results of operations and financial condition could be materially
adversely affected by fluctuations in foreign currency exchange rates. Most of
our international revenue and expenses are denominated in local currencies. Due
to the substantial volatility of currency exchange rates, among other factors,
we cannot predict the effect of exchange rate fluctuations on our future
operating results. Although we take into account changes in exchange rates over
time in our pricing strategy, we do 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, as noted previously, the
sales cycles for our products is relatively long. 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.
In addition to the hedging program described above, we have implemented a
foreign exchange hedging program consisting principally of the purchase of
forward foreign exchange contracts, which is intended to hedge the value of
intercompany accounts receivable or intercompany 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. Uncertainties
related to the Euro conversion could adversely affect our hedging activities.
39
WE MAY NOT SUCCESSFULLY DEVELOP NEW BUSINESS AREAS WHICH COULD ADVERSELY AFFECT
OUR BUSINESS
We have in recent years expanded our technology into a number of new
business areas to foster long-term growth, including application servers,
Internet/electronic commerce, and data warehousing. These areas are relatively
new to our product development and sales and marketing personnel. We may not be
able to compete effectively or generate significant revenues in these new areas.
DATA WAREHOUSING. In fiscal 1998 we announced that we were entering the
data warehousing market. The acquisition of Red Brick in December 1998 expanded
our presence in this market. Although demand for data warehouse software has
grown in recent years, the market is still emerging. Our future financial
performance in this area will depend to a large extent on:
- Continued growth in the number of organizations adopting data warehouses
- Our success in developing partnering arrangements with developers of
software tools and applications for the data warehouse market
- Existing customers expanding their use of data warehouses
The data warehouse market, however, may not continue to grow and its
customers may not expand their use of data warehouses. A failure of the data
warehouse market to grow, or slower growth than we currently anticipate, could
materially adversely affect our business, operating results and financial
condition.
INTERNET COMPUTING. The success of Internet computing and, in particular,
our current Internet computing software products is difficult to predict because
Internet computing is new to the entire computer industry. The successful
introduction of Internet computing to the market will depend in large measure
on:
- The commitment by hardware and software vendors to manufacture, promote
and distribute Internet access appliances
- The lower cost of ownership of Internet computing relative to
client/server architecture
- The ease of use and administration relative to client/server architecture
In addition, sufficient numbers of vendors may not undertake a commitment to
the market, the market may not accept Internet computing or Internet computing
may not generate significant revenues for our business.
The widespread acceptance and adoption of the Internet by traditional
businesses for conducting business and exchanging information is likely only if
the Internet provides these businesses with greater efficiencies and
improvements. The failure of the Internet to continue to develop as a commercial
or business medium could materially adversely affect our business.
EMERGING AREAS OF COMMERCE SUCH AS THE INTERNET COULD ADVERSELY AFFECT OUR
ABILITY TO SELL OUR PRODUCTS
The impact of emerging areas such as the Internet, on-line services and
electronic commerce on our business and our ability to sell our products is
uncertain and could adversely affect our business. Our product offerings may not
satisfy new customer demands in these areas. In addition, standards for network
protocols, as well as other industry adopted and de facto standards for the
Internet, are evolving rapidly. There can be no assurance that standards chosen
by us will position our products to compete effectively for business
opportunities as they arise on the Internet and other emerging areas.
40
ERRORS IN OUR PRODUCTS OR THE FAILURE OF OUR PRODUCTS TO CONFORM TO CUSTOMER
SPECIFICATIONS OR EXPECTATIONS COULD RESULT IN OUR CUSTOMERS DEMANDING REFUNDS
FROM US OR ASSERTING CLAIMS FOR DAMAGES AGAINST US OR IN DECREASED SALES OF
OUR PRODUCTS
Because our software products are complex, they often contain errors or
"bugs" that can be detected at any point in a product's life cycle. While we
continually test our products for errors and work with customers through our
customer support services to identify and correct bugs in our software, we
expect that errors in our products will continue to be found in the future.
Although many of these errors may prove to be immaterial, certain of these
errors could be significant. Detection of any significant errors may result in,
among other things, loss of, or delay in, market acceptance and sales of our
products, diversion of development resources, injury to our reputation, or
increased service and warranty costs. These problems could materially adversely
affect our business and future quarterly and annual operating results.
A key determinative factor in our future success will continue to be the
ability of our products to operate and perform well with existing and future
leading, industry-standard application software products intended to be used in
connection with RDBMS products. Failure to meet in a timely manner existing or
future interoperability and performance requirements of certain independent
vendors could adversely affect the market for our products.
Commercial acceptance of our 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 us, our
products, business or competitors or by the advertising or marketing efforts of
competitors, or other factors that could adversely affect consumer perception.
PRODUCT LIABILITY CLAIMS ASSERTED AGAINST US IN THE FUTURE COULD ADVERSELY
AFFECT OUR BUSINESS
We may be subject to claims for damages related to product errors in the
future. While we carry insurance policies covering this type of liability, these
policies may not provide sufficient protection should a claim be asserted. A
material product liability claim could materially adversely affect our business.
Our license agreements with our customers typically contain provisions designed
to limit exposure to potential product liability claims. Such limitation of
liability provisions may, however, not be effective under the laws of certain
jurisdictions to the extent local laws treat certain warranty exclusions as
unenforceable. Although we have not experienced any product liability claims to
date, the sale and support of our products entail the risk of such claims. In
particular, issues relating to Year 2000 compliance have increased awareness of
the potential adverse effects of software defects and malfunctions.
WE MAY BE UNABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED
We may be unable to attract, train and retain qualified personnel, and the
failure to do so, particularly in key functional areas such as product
development and sales, could materially adversely affect our business, results
of operations and financial condition. Our future success will likely depend in
large part on our ability to attract and retain additional experienced sales,
technical, marketing and management personnel. Since the first quarter of fiscal
1997, we have experienced a significant number of voluntary resignations and
have taken selective actions to reduce the number of employees in certain
functional areas. In November 1997, we repriced employee stock options in an
effort to retain existing employees and, following further declines in the price
of our Common Stock, effected a second repricing in January 1998. The repricing
programs may not be effective in retaining existing employees. Competition for
such personnel in the computer software industry is intense, and in the past we
have experienced difficulty in recruiting qualified personnel, especially
developers and sales personnel. We expect competition for qualified personnel to
remain intense, and we may not succeed in attracting or retaining such
personnel. In addition, new employees generally require substantial training in
the use of our products. This training will require substantial resources and
management attention.
41
RIGHTS OF SERIES B PREFERRED STOCKHOLDERS MAY ADVERSELY AFFECT OUR COMMON
STOCKHOLDERS
At December 31, 1998, 23,300 shares of Series B Preferred remained
outstanding. Holders of the Series B Preferred shares have certain rights that
may adversely affect holders of our Common Stock.
RIGHTS TO CONSENT TO CORPORATE TRANSACTIONS. Our agreements with the
purchasers of the Series B Preferred contain covenants that could impair our
ability to engage in various corporate transactions in the future, including
financing transactions and certain transactions involving a change-in-control or
acquisition of our assets or equity, or that could otherwise be disadvantageous
to us and the holders of our Common Stock. In particular, an acquisition may not
be affected without the consent of the holders of the outstanding Series B
Preferred or without requiring the acquiring entity to assume the Series B
Preferred or cause the Series B Preferred to be redeemed. These provisions are
likely to make an acquisition more difficult and expensive and could discourage
potential acquirors. We made certain covenants in connection with the issuance
of the Series B Preferred which could limit our ability to obtain additional
financing by, for example, providing the holders of the Series B Preferred
certain rights of first offer and prohibiting us from issuing additional
Preferred Stock without the consent of the Series B Preferred holders.
CONVERSION RIGHTS. The shares of Series B Preferred are convertible into
shares of our Common Stock based on the trading prices of the Common Stock
during future periods that are described in the Series B Preferred financing
agreement. As a result, we are unable to determine the number of shares of our
Common Stock that may ultimately be issued upon conversion. If the conversion
price of the Series B Preferred is determined during a period when the trading
price of our Common Stock is low, the resulting number of shares of our Common
Stock issuable upon conversion of the Series B Preferred could result in greater
dilution to the holders of our Common Stock. We are also obligated to issue upon
conversion of the Series B Preferred additional warrants to acquire shares of
our Common Stock equal to 20% of the total number of shares of Common Stock into
which the Series B Preferred converts. The exercise of these warrants will have
further dilutive effect to the holders of our Common Stock. As of December 31,
1998, Series B Preferred stockholders had converted an aggregate of 26,700
shares of Series B Preferred into 6,471,647 shares of our Common Stock and
warrants to purchase an aggregate of 1,494,319 shares of our Common Stock. At
December 31, 1998, 23,300 shares of Series B Preferred remained outstanding and
assuming a $4.00 per share conversion price, were convertible into 5,825,000
shares of our Common Stock and, assuming such conversion, warrants to purchase
an aggregate of 1,165,000 additional shares of our Common Stock would become
issuable upon such conversion.
PENALTY PROVISION. The terms of the Series B Preferred financing agreement
also includes certain penalty provisions that are triggered if we fail to
satisfy certain obligations. For instance, we must keep a registration statement
effective for the resale of shares of our Common Stock issued or issuable upon
conversion of the Series B Preferred shares and upon exercise of the warrants.
WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY RIGHTS WHICH OFFER ONLY LIMITED
PROTECTION AGAINST POTENTIAL INFRINGERS; IF WE CANNOT PROTECT OUR INTELLECTUAL
PROPERTY RIGHTS, THIS COULD ADVERSELY AFFECT OUR BUSINESS
Our success will continue to be heavily dependent upon proprietary
technology. We rely primarily on a combination of patent, copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect our proprietary rights. These means of protecting our
proprietary rights may not be adequate and our inability to protect our
intellectual property rights may adversely affect our business and financial
condition. We currently hold seven United States patents and several pending
applications. There can be no assurance that any other patents covering our
inventions will issue or that any patent, if issued, will provide sufficiently
broad protection or will prove enforceable in actions against alleged
infringers.
42
Our products are generally licensed to end-users on a "right-to-use" basis
under a license that restricts the use of the products for the customer's
internal business purposes. We also rely on "shrink-wrap" and "click-wrap"
licenses, which include a notice informing the end-user that, by opening the
product packaging or in the case of a click-wrap license by clicking on an
acceptance icon and downloading the product, the end-user agrees to be bound by
our license agreement. Despite such precautions, it may be possible for
unauthorized third parties to copy aspects of our current or future products or
to obtain and use information that we regard as proprietary. In addition, we
have licensed the source code of our products to certain customers under certain
circumstances and for restricted uses. We have also entered into source code
escrow agreements with a number of our customers that generally require release
of source code to the customer in the event we enter bankruptcy or liquidation
proceedings or otherwise ceasing to conduct business.
We may also be unable to protect our technology because:
- Our competitors may independently develop similar or superior technology
- Policing unauthorized use of our software is difficult
- The laws of some foreign countries do not protect our proprietary rights
to the same extent as do the laws of the United States
- "Shrink-wrap" and/or "click-wrap" licenses may be wholly or partially
unenforceable under the laws of certain jurisdictions
- Litigation to enforce our intellectual property rights, to protect our
trade secrets or to determine the validity and scope of the proprietary
rights of others could result in substantial costs and diversion of
resources and could materially adversely affect our business, future
operating results and financial condition
THIRD PARTIES IN THE FUTURE COULD ASSERT THAT OUR PRODUCTS INFRINGE THEIR
INTELLECTUAL PROPERTY RIGHTS, WHICH COULD ADVERSELY AFFECT OUR BUSINESS
Third parties may claim that our current or future products infringe their
proprietary rights. Any claim of this type could affect our relationships with
existing customers and prevent future customers from licensing our products. Any
such claim, with or without merit, could be time consuming, result in costly
litigation, cause product shipment delays or require us to enter into royalty or
licensing agreements. Royalty or license agreements may not be available on
acceptable terms or at all. We expect that software product developers will
increasingly be subject to infringement claims as the number of products and
competitors in the software industry segment grows and the functionality of
products in different industry segments overlaps. As a result of these factors,
infringement claims could materially adversely affect our business.
POTENTIAL YEAR 2000 PROBLEMS WITH OUR SOFTWARE OR OUR INTERNAL OPERATING SYSTEMS
COULD ADVERSELY AFFECT OUR BUSINESS
THIRD PARTY EQUIPMENT AND SOFTWARE. We may incur large costs and the
disruption of our business if any key systems fail as a result of Year 2000
problems. We use third party equipment and software that may not be Year 2000
compliant. If this third party equipment or software does not operate properly
with regard to the Year 2000, we may incur unexpected expenses to remedy any
problems. These costs may materially adversely affect our business. In addition,
if our key systems, or a significant number of our systems, failed as a result
of Year 2000 problems we could incur substantial costs and disruption of our
business. To the extent we are relying on the products of other vendors to
resolve Year 2000 issues, we may experience delays in implementing the products.
The failure to correct a significant Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations which
43
could harm our business. In addition, we may not have enough available personnel
to implement and complete in a timely manner our Year 2000 project.
CUSTOMER BUYING PATTERNS. Purchasing patterns of our customers and
potential customers may be affected by Year 2000 issues. Many companies are
spending significant resources to correct their current software systems for
Year 2000 compliance. Customers with limited IT budgets who face material Year
2000 issues may increasingly spend their limited resources remediating these
Year 2000 problems instead of investing in more general IT management products
such as our products. We expect this customer focus on remediating Year 2000
issues to increase as January 1, 2000 approaches.
OUR PRODUCTS. If any of our licensees experience Year 2000 problems as a
result of their use of our software products, those licensees could assert
claims for damages which, if successful, could materially adversely affect our
business, future operating results and financial condition. In the ordinary
course of our business, we test and evaluate our software products. We believe
that our software products are generally Year 2000 compliant, meaning that the
use or occurrence of dates on or after January 1, 2000 will not adversely affect
the performance of our products with respect to four-digit year dates or the
ability of our products to correctly create, store, process and output
information related to such date data, including Leap Year calculations.
However, we may learn that certain of our software products do not contain all
necessary software routines and codes necessary for the accurate calculation,
display, storage and manipulation of such date data. In addition, in certain
cases, we have warranted that the use or occurrence of dates on or after January
1, 2000 will not adversely affect the performance of our products with respect
to four digit date dependent data or the ability to create, store, process and
output information related to such data.
For a more detailed description of our Year 2000 preparedness assessment,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."
ANY ACQUISITION OR INVESTMENT THAT WE MAY MAKE WILL BE SUBJECT TO A NUMBER OF
FACTORS WHICH COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS; ANY INVESTMENT
OR ACQUISITION MAY DILUTE EXISTING STOCKHOLDERS
In the future we may acquire, or invest in, businesses that offer products,
services and technologies that we believe would help us expand or enhance our
products and services or help us expand our distribution channels. If we were to
make such an acquisition or investment, the risks described below could
materially adversely affect our business and future operating results. Any
future acquisition or investment would present risks commonly encountered in
acquisitions of or investments in businesses. The following are examples of such
risks:
- Difficulty in combining the technology, operations or work force of the
acquired business
- Disruption of our on-going businesses
- Difficulty in realizing the potential financial or strategic benefits of
the transaction
- Difficulty in maintaining uniform standards, controls, procedures and
policies
- Possible impairment of relationships with employees and customers as a
result of any integration of new businesses and management personnel
The consideration for any future acquisition could be paid in cash, shares
of our Common Stock, or a combination of cash and our Common Stock. If the
consideration is paid in Common Stock, this would further dilute existing
stockholders. Any amortization of goodwill or other assets resulting from such
acquisition transaction could materially adversely affect our operating results
and financial condition.
44
COSTS ASSOCIATED WITH EURO CONVERSION ISSUES MAY ADVERSELY AFFECT OUR BUSINESS
Costs associated with conversion to the Euro could materially adversely
affect our operating results and financial condition. On January 1, 1999, a new
currency, the Euro, became the legal currency for eleven of the fifteen member
countries of the European Economic Community. Between January 1, 1999 and
January 1, 2002, governments, companies and individuals may conduct business in
these countries in both the Euro and the existing national currencies. On
January 1, 2002, the Euro will become the sole currency in these countries. We
have reviewed the effect of the conversion to the Euro on the prices of our
products in the affected countries. As a result, we have made some adjustments
to our prices to attempt to eliminate differentials that were identified. We
have not completed our review of the impact of conversion to the Euro on our
business, but it is possible that costs associated with ensuring that our
products and internal operating systems are able to effectively work with the
Euro conversion, or price adjustments resulting from the Euro conversion, could
be material to our business.
In particular, we are reviewing:
- Whether our internal software systems can process transactions denominated
either in current national currencies or the Euro, including converting
currencies using computation methods specified by the European Economic
Community
- Our costs of modifying or replacing any of our internal operating systems
- Whether we will have to change the terms of any financial instruments in
connection with our hedging activities
OUR UNDESIGNATED PREFERRED STOCK MAY INHIBIT POTENTIAL ACQUISITION BIDS; THIS
MAY ADVERSELY AFFECT THE MARKET PRICE FOR OUR COMMON STOCK AND THE VOTING
RIGHTS OF THE HOLDERS OF COMMON STOCK
Our Board of Directors is authorized to issue up to 5,000,000 shares of
undesignated Preferred Stock in one or more series. Of the 5,000,000 shares of
Preferred Stock, 440,000 shares have been designated Series A Preferred, none of
which is outstanding; 440,000 shares have been designated Series A-1 Preferred,
none of which shares is outstanding; 50,000 shares have been designated Series B
Preferred, of which 23,300 shares remained outstanding as of December 31, 1998.
Subject to the prior consent of the holders of the Series B Preferred, the Board
of Directors can fix the price, rights, preferences, privileges and restrictions
of such Preferred Stock without any further vote or action by our stockholders.
However, the issuance of shares of Preferred Stock may delay or prevent a change
in control transaction without further action by our stockholders. As a result,
the market price of our Common Stock and the voting and other rights of the
holders of our Common Stock may be adversely affected. The issuance of Preferred
Stock with voting and conversion rights may adversely affect the voting power of
the holders of our Common Stock, including the loss of voting control to others.
CERTAIN PROVISIONS IN OUR CHARTER DOCUMENTS MAY INHIBIT POTENTIAL ACQUISITION
BIDS; THIS MAY ADVERSELY AFFECT THE MARKET PRICE FOR OUR COMMON STOCK AND
PREVENT CHANGES IN OUR MANAGEMENT
Certain provisions of our charter documents are designed to reduce our
vulnerability to an unsolicited acquisition proposal. These include:
- Elimination of the right of stockholders to act without holding a meeting
- Certain procedures for nominating directors and submitting proposals for
consideration at stockholder meetings
- A board of directors divided into three classes, with each class standing
for election once every three years
These 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 involving an actual or threatened change of control. These
provisions are designed to reduce our vulnerability to an unsolicited
acquisition proposal and, accordingly, could
45
discourage potential acquisition proposals and could delay or prevent a change
in control. 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 shares of our Common Stock and,
consequently, may also inhibit fluctuations in the market price of our Common
Stock that could result from actual or rumored takeover attempts. These
provisions may also have the effect of preventing changes in our management. In
addition, we have adopted a rights agreement, commonly referred to as a "poison
pill," that grants holders of our Common Stock preferential rights in the event
of an unsolicited takeover attempt. These rights are denied to any stockholder
involved in the takeover attempt and this has the effect of requiring
cooperation with our Board of Directors. This may also prevent an increase in
the market price of our Common Stock resulting from actual or rumored takeover
attempts. The rights agreement could also discourage potential acquirors from
making unsolicited acquisition bids.
DELAWARE LAW MAY INHIBIT POTENTIAL ACQUISITION BIDS; THIS MAY ADVERSELY AFFECT
THE MARKET PRICE FOR INFORMIX COMMON STOCK AND PREVENT CHANGES IN OUR
MANAGEMENT
We are incorporated in Delaware and are subject to the antitakeover
provisions of the Delaware General Corporation Law, which regulates corporate
acquisitions. Delaware law prevents certain Delaware corporations, including
those corporations, such as us, 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 the stockholder became an interested stockholder. For
purposes of Delaware law, a "business combination" would include, among other
things, a merger or consolidation involving us and an interested stockholder and
the sale of more than 10% of our assets. In general, Delaware law defines an
"interested stockholder" as any entity or person beneficially owning 15% or more
of the outstanding voting stock of a corporation and any entity or person
affiliated with or controlling or controlled by such entity or person. Under
Delaware law, a Delaware corporation may "opt out" of the antitakeover
provisions. We do not intend to "opt out" of these antitakeover provisions of
Delaware Law.
OUR COMMON STOCK LIKELY WILL BE SUBJECT TO SUBSTANTIAL PRICE AND VOLUME
FLUCTUATIONS DUE TO A NUMBER OF FACTORS, CERTAIN OF WHICH ARE BEYOND OUR
CONTROL
Stock prices and trading volumes for many software companies fluctuate
widely for a number of reasons, including some reasons which may be unrelated to
their businesses or results of operations. This market volatility, as well as
general domestic or international economic, market and political conditions,
could materially adversely affect the market price of our Common Stock without
regard to our operating performance. In addition, our operating results may be
below the expectations of public market analysts and investors. If this were to
occur, the market price of our Common Stock would likely decrease significantly.
The market price of our Common Stock has fluctuated significantly in the past
and may continue to fluctuate significantly because of:
- Market uncertainty about our financial condition or business prospects or
the prospects for the RDBMS market in general
- Revenues or results of operations that do not match analysts' expectations
- The introduction of new products or product enhancements by us or our
competitors
- General business conditions in the software industry
- Changes in the mix of revenues attributable to domestic and international
sales
- Seasonal trends in technology purchases and other general economic
conditions
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is set forth in the section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations Captioned "Disclosures about Market Rate Risk."
46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in our 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.
On May 20, 1998, we filed a current report on Form 8-K (the "Form 8-K")
regarding our dismissal of Ernst & Young LLP as our independent accountants and
the engagement of KPMG LLP as our independent accountants. The contents of that
report are as follows:
FORM 8-K FILED ON MAY 20, 1998
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
On May 12, 1998, the Company's Board of Directors approved a resolution (i)
to dismiss Ernst & Young LLP ("E&Y") as the Company's independent accountants,
effective upon management's notification of E&Y of the dismissal; and (ii)
concurrent with such notification, to engage KPMG LLP ("KPMG") as Informix's
independent accountants upon such terms as may be negotiated by management.
On May 13, 1998, the Company's management notified E&Y of the dismissal. On
May 19, 1998, the Company engaged KPMG as the Company's independent accountants.
E&Y's reports with respect to the Company's financial statements for the
fiscal years ended December 31, 1996 and 1997 did not contain an adverse opinion
or a disclaimer of opinion and were not qualified as to uncertainty, audit scope
or accounting principles.
In connection with the audits of the Company's financial statements for each
of the two fiscal years ended December 31, 1996 and 1997 and in the subsequent
interim period, except as described in the next paragraph, there were no
disagreements with E&Y on any matter of accounting principles or practices,
financial statement disclosure or auditing scope and procedures which, if not
resolved to the satisfaction of E&Y would have caused E&Y to make reference to
the matter in their report.
E&Y advised the Company that it disagreed with the Company's recognition of
revenue resulting from software license transactions with industrial
manufacturers which occurred during the first quarter ended March 31, 1998. The
disagreement was resolved to the satisfaction of E&Y with the result that
approximately $6.2 million in revenue has been deferred and will be recognized
over a period which Informix expects to be approximately two years. The Company
immediately filed an amendment to its quarterly report on Form 10-Q for the
quarter ended March 31, 1998 to restate its financial results for the period.
The Audit Committee has discussed the accounting for these transactions with
management and E&Y.
The Company authorized E&Y to respond fully to the inquiries of KPMG as the
successor independent accountants of the Company. Prior to accepting its
engagement as the Company's successor independent accountants, KPMG had the
opportunity to discuss with E&Y the subject matter of the disagreement described
above and other matters relevant to Informix. KPMG did not offer any report or
advice to Informix concerning such disagreement that was important to the
Company's decision in reaching a resolution.
RESPONSE OF ERNST & YOUNG LLP
On May 29, 1998 Ernst & Young furnished us with the following response
letter concerning the information contained in the Form 8-K which response
letter we filed with the Commission on Form 8-K/A on June 2, 1998 (the "Form
8-K/A").
47
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read Item 4 of Form 8-K dated May 20, 1998, of Informix Corporation
and believe it is not complete as to reportable events as described in Item
304(a)(1)(v) of Regulation S-K. We believe the ninth paragraph of Item 4
included on page 3 therein should be replaced by the following two sentences. On
April 29, 1998, E&Y informed the Audit Committee of the Board that, in
connection with the audit of Informix's fiscal 1997 consolidated financial
statements, the lack of appropriate resources, analyses, and process structure
in the accounting and financial reporting departments of Informix resulted in
delays in closing the books, numerous and material amounts of post-closing
entries and audit adjustments required to be recorded by Informix, and
difficulty in accumulating accurate information necessary for financial
statement disclosure in a timely manner. E&Y considers this condition to be a
material weakness.
We are in agreement with the statements contained in the first sentence of
the second paragraph, the third paragraph, the fourth paragraph, the first
sentence of the fifth paragraph, the first part of the second sentence of the
fifth paragraph through and including the words "has been deferred", the fourth
sentence of the fifth paragraph as it relates to our Firm, the first sentence of
the sixth paragraph, the seventh paragraph, the first and second sentence of the
eighth paragraph, and the first sentence of the tenth paragraph on pages 2 and 3
therein. In addition, we have no basis to agree or disagree with other
statements of the registrant contained therein.
Regarding the registrant's statements concerning the lack of internal
controls to prepare financial statements, included in the eighth and ninth
paragraphs of Item 4 on page 2 and 3 therein, we had considered such matters in
determining the nature, timing and extent of procedures performed in our audit
of the registrant's consolidated financial statements for the years ended
December 31, 1997, 1996, 1995, and 1994.
/s/ Ernst & Young LLP
48
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors required by Item 10 is incorporated by
reference from our definitive proxy statement for our annual stockholders'
meeting to be held on May 6, 1999.
The information regarding executive officers required by Item 10 is provided
in Item 1--Business.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from our
definitive proxy statement for our annual stockholders' meeting to be held on
May 6, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from our
definitive proxy statement for our annual stockholders' meeting to be held on
May 6, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from our
definitive proxy statement for our annual stockholders' meeting to be held on
May 6, 1999.
49
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--KPMG LLP................................................................... F-2
Report of Independent Auditors--Ernst & Young LLP.......................................................... F-3
Consolidated Balance Sheets................................................................................ F-4
Consolidated Statements of Operations...................................................................... F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Consolidated Statements of Stockholders' Equity............................................................ F-7
Notes to Consolidated Financial Statements................................................................. F-8
(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(a)(3) Bylaws of the Registrant, as amended
3.2(b) 25) Amendment to Bylaws, dated April 24, 1998
3.2(c)(2) Amendment to Bylaws, dated June 19, 1998
3.2(d)(2) Amendment to Bylaws, dated July 15, 1998
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(25) 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.
50
EXHIBIT NO. EXHIBIT TITLE
- ------------ -------------------------------------------------------------------------------------------------
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
10.23(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
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
51
EXHIBIT NO. EXHIBIT TITLE
- ------------ -------------------------------------------------------------------------------------------------
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* Offer of Employment Letter, dated December 16, 1998, from the Registrant to Howard A. Bain, III
10.55* Offer of Employment Letter, dated July 14, 1998, from the Registrant to Richard Snook
10.55(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.
10.56(1) Office Lease, dated April 10, 1995, between the Registrant and 3905 Bohannon Partners for office
space at 3905 Bohannon Drive, including addenda thereto.
10.57(24) 1998 Non-Statutory Stock Option Plan
21.1* Subsidiaries of the Registrant
23.1* Report on Schedule and Consent of KPMG LLP, Independent Auditors
23.2* Report on Schedule and Consent of Ernst & Young LLP, Independent Auditors
24.1(2) Power of Attorney (set forth on signature page)
27.1* Financial Data Schedule
- ------------------------
* Filed herewith
(1) Previously filed
52
(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
(24) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (File no. 333-61843) filed with the
Commission on August 19, 1998.
(25) Incorporated by reference to exhibits filed with the Registrant's annual
report on Form 10-K for the fiscal year ended December 31, 1997.
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 November 25, 1998 in connection with the
issuance of 80,000 shares of its Series A-1 Convertible Preferred Stock.
53
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 30th day of March, 1999.
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 HOWARD A. BAIN III AND STEPHANIE SCHWARTZ
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 30, 1999
(Robert J. Finocchio, Jr.) Officer) and Director
Executive Vice President
/s/ HOWARD A. BAIN III and Chief Financial
- ------------------------------ Officer (Principal March 30, 1999
(Howard A. Bain III) Financial Officer)
/s/ STEPHANIE P. SCHWARTZ Vice President, Corporate
- ------------------------------ Controller (Principal March 30, 1999
(Stephanie P. Schwartz) Accounting Officer)
Executive Vice President,
/s/ JEAN-YVES F. DEXMIER Field Operations (Chief
- ------------------------------ Financial Officer from March 30, 1999
(Jean-Yves F. Dexmier) October 1997 to January
1999)
/s/ LESLIE G. DENEND
- ------------------------------ Director March 30, 1999
(Leslie G. Denend)
/s/ ALBERT F. KNORP, JR.
- ------------------------------ Director March 30, 1999
(Albert F. Knorp, Jr.)
/s/ JAMES L. KOCH
- ------------------------------ Director March 30, 1999
(James L. Koch)
/s/ THOMAS A. MCDONNELL
- ------------------------------ Director March 30, 1999
(Thomas A. McDonnell)
/s/ GEORGE REYES
- ------------------------------ Director March 30, 1999
(George Reyes)
/s/ CYRIL J. YANSOUNI
- ------------------------------ Director March 30, 1999
(Cyril J. Yansouni)
54
INFORMIX CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Auditors--KPMG LLP................................................................... F-2
Report of Independent Auditors--Ernst & Young LLP.......................................................... F-3
Consolidated Balance Sheets................................................................................ F-4
Consolidated Statements of Operations...................................................................... F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Consolidated Statements of Stockholders' Equity............................................................ F-7
Notes to Consolidated Financial Statements................................................................. F-8
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders--
Informix Corporation
We have audited the accompanying consolidated balance sheet of Informix
Corporation and subsidiaries as of December 31, 1998 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. Our audit also included the financial statement schedule as
listed in the Index at Item 14(a) as of and for the year ended December 31,
1998. The consolidated financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the consolidated financial statements and financial statement
schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Informix
Corporation and subsidiaries at December 31, 1998 and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule as of and for the year ended December 31, 1998,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
[/S/ KPMG LLP]
Mountain View, California
January 27, 1999
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders--
Informix Corporation
We have audited the accompanying consolidated balance sheet of Informix
Corporation as of December 31, 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the two 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 the consolidated results of its operations
and its cash flows for each of the two 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.
[LOGO]
San Jose, California
March 2, 1998
F-3
INFORMIX CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
------------------------
1998 1997
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................................. $ 183,975 $ 139,396
Short-term investments................................................................ 37,116 16,069
Accounts receivable, less allowance for doubtful accounts of $15,034 in 1998 and
$27,104 in 1997..................................................................... 187,240 142,048
Recoverable income taxes.............................................................. 3,255 --
Deferred taxes........................................................................ -- 12,249
Other current assets.................................................................. 20,308 26,243
----------- -----------
Total current assets.................................................................... 431,894 336,005
----------- -----------
PROPERTY AND EQUIPMENT, net............................................................. 74,937 96,012
SOFTWARE COSTS, less accumulated amortization of $32,219 in 1998 and $22,786 in 1997.... 38,006 40,854
DEFERRED TAXES, including income tax refunds............................................ -- 56,345
LONG-TERM INVESTMENTS................................................................... 22,191 12,458
INTANGIBLE ASSETS, net.................................................................. 41,482 8,277
OTHER ASSETS............................................................................ 6,795 13,293
----------- -----------
Total Assets............................................................................ $ 615,305 $ 563,244
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable...................................................................... $ 29,742 $ 36,155
Accrued expenses...................................................................... 59,234 64,538
Accrued employee compensation......................................................... 50,424 49,154
Income taxes payable.................................................................. -- 3,031
Deferred revenue...................................................................... 131,423 100,828
Advances from customers and financial institutions.................................... 121,077 180,048
Accrued restructuring costs........................................................... 5,813 26,597
Other current liabilities............................................................. 6,552 15,802
----------- -----------
Total current liabilities............................................................... 404,265 476,153
----------- -----------
OTHER NON-CURRENT LIABILITIES........................................................... 3,313 6,311
DEFERRED TAXES.......................................................................... -- 21,716
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share--5,000,000 shares authorized
Series A-1 convertible preferred stock, 300,000 shares issued; none and 160,000
outstanding in 1998 and 1997, respectively........................................ -- 2
Series B convertible preferred stock, 50,000 shares issued; 23,300 and 50,000
outstanding in 1998 and 1997, respectively; aggregate liquidation preference of
$25,927........................................................................... -- 1
Common stock, par value $.01 per share--500,000,000 shares authorized; 188,158,000 and
152,587,000 shares issued and outstanding in 1998 and 1997, respectively............ 1,882 1,526
Additional paid-in capital............................................................ 429,621 347,582
Accumulated deficit................................................................... (220,426) (278,144)
Accumulated other comprehensive loss.................................................. (3,350) (11,903)
----------- -----------
Total stockholders' equity.............................................................. 207,727 59,064
----------- -----------
Total Liabilities and Stockholders' Equity.............................................. $ 615,305 $ 563,244
----------- -----------
----------- -----------
See Notes to Consolidated Financial Statements.
F-4
INFORMIX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
---------- ----------- ----------
NET REVENUES
Licenses.................................................................. $ 383,533 $ 378,164 $ 502,730
Services.................................................................. 351,450 285,728 231,810
---------- ----------- ----------
734,983 663,892 734,540
COSTS AND EXPENSES
Cost of software distribution............................................. 35,444 63,027 46,786
Cost of services.......................................................... 155,250 166,916 144,850
Sales and marketing....................................................... 268,537 417,162 413,689
Research and development.................................................. 146,291 139,310 120,211
General and administrative................................................ 76,062 87,498 64,416
Write-off of goodwill and other long-term assets.......................... -- 30,473 --
Write-off of acquired research and development............................ 2,600 7,000 --
Restructuring charges..................................................... (10,255) 108,248 --
Expenses related to Illustra merger....................................... -- -- 5,914
---------- ----------- ----------
673,929 1,019,634 795,866
---------- ----------- ----------
Operating income (loss)..................................................... 61,054 (355,742) (61,326)
OTHER INCOME (EXPENSE)
Interest income........................................................... 11,419 5,623 9,868
Interest expense.......................................................... (5,774) (9,405) (12,475)
Other, net................................................................ (4,581) 10,474 2,899
---------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES........................................... 62,118 (349,050) (61,034)
Income taxes.............................................................. 4,400 7,817 12,531
---------- ----------- ----------
NET INCOME (LOSS)........................................................... 57,718 (356,867) (73,565)
Preferred stock dividend.................................................... (3,478) (301) --
Value assigned to warrants.................................................. (1,982) (1,601) --
---------- ----------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS......................... $ 52,258 $ (358,769) $ (73,565)
---------- ----------- ----------
---------- ----------- ----------
NET INCOME (LOSS) PER COMMON SHARE
Basic..................................................................... $ 0.31 $ (2.36) $ (0.49)
---------- ----------- ----------
---------- ----------- ----------
Diluted................................................................... $ 0.30 $ (2.36) $ (0.49)
---------- ----------- ----------
---------- ----------- ----------
SHARES USED IN PER SHARE CALCULATIONS
Basic..................................................................... 168,277 151,907 149,310
---------- ----------- ----------
---------- ----------- ----------
Diluted................................................................... 173,228 151,907 149,310
---------- ----------- ----------
---------- ----------- ----------
See Notes to Consolidated Financial Statements.
F-5
INFORMIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................................ $ 57,718 $(356,867) $ (73,565)
Adjustments to reconcile net income (loss) to cash and cash equivalents provided
by (used in) operating activities:
License fees received in advance............................................... (66,069) (64,797) (58,206)
Depreciation and amortization.................................................. 46,560 65,639 47,207
Amortization of capitalized software........................................... 20,699 21,437 14,626
Write-off of capitalized software.............................................. 771 14,749 --
Write-off of long term assets.................................................. -- 6,799 --
Write-off of intangibles....................................................... -- 20,033 --
Write-off of acquired research and development................................. 2,600 7,000 --
Foreign currency transaction losses (gains).................................... 2,641 3,243 (5,349)
(Gain) loss on sales of strategic investments.................................. 500 (5,007) (3,856)
Loss on disposal of property and equipment..................................... 1,921 10,815 2,393
Deferred tax expense........................................................... -- (328) (3,965)
Provisions for losses on accounts receivable................................... (4,793) 19,929 14,983
Restructuring charges.......................................................... (10,255) 77,196 --
Stock-based employee compensation.............................................. 842 7,501 --
Changes in operating assets and liabilities:
Accounts receivable.......................................................... (38,305) 42,596 (45,426)
Other current assets......................................................... 52,843 40,530 89
Accounts payable and accrued expenses........................................ (62,603) (58,867) 52,077
Deferred maintenance revenue................................................. 22,681 3,618 29,590
--------- --------- ---------
Net cash and cash equivalents provided by (used in) operating activities......... 27,751 (144,781) (29,402)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments of excess cash:
Purchases of available-for-sale securities..................................... (49,077) (35,255) (152,179)
Maturities of available-for-sale securities.................................... 9,725 14,468 126,137
Sales of available-for-sale securities......................................... 24,300 45,957 83,696
Purchases of strategic investments............................................... (7,009) (3,250) (12,737)
Proceeds from sales of strategic investments..................................... 1,500 10,454 7,299
Purchases of land, property and equipment........................................ (20,063) (93,786) (148,270)
Proceeds from disposal of land, property and equipment........................... 864 62,371 1,929
Additions to software costs...................................................... (18,620) (20,776) (32,381)
Business combinations, net of cash acquired...................................... 1,834 (9,749) (4,340)
Other............................................................................ 1,162 (33,500) (14,434)
--------- --------- ---------
Net cash and cash equivalents used in investing activities....................... (55,384) (63,066) (145,280)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from customers and financial institutions............................... 11,402 21,787 207,218
Proceeds from issuance of common stock, net...................................... 16,219 9,239 24,357
Proceeds from issuance of preferred stock, net................................... 32,900 87,600 --
Principal payments on capital leases............................................. (4,409) (3,388) (1,025)
Acquisition of common stock...................................................... -- -- (2,388)
Reissuance of treasury stock..................................................... -- -- 578
--------- --------- ---------
Net cash and cash equivalents provided by financing activities................... 56,112 115,238 228,740
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS..................... 16,100 5,497 8,145
--------- --------- ---------
Increase (decrease) in cash and cash equivalents................................. 44,579 (87,112) 62,203
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................... 139,396 226,508 164,305
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR......................................... $ 183,975 $ 139,396 $ 226,508
--------- --------- ---------
--------- --------- ---------
See Notes to Consolidated Financial Statements.
F-6
INFORMIX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK
--------------------------
SERIES A-1 SERIES B
-------------------------- -----------
SHARES AMOUNT SHARES
----------- ------------- -----------
(IN THOUSANDS)
Balances at December 31, 1995................................................. -- $ -- --
Comprehensive loss
Net loss....................................................................
Other comprehensive loss....................................................
Unrealized gain on available-for-sale securities, net of reclassification
adjustments(1)..........................................................
Foreign currency translation adjustments..................................
Other comprehensive loss....................................................
Comprehensive loss............................................................
Exercise of stock options.....................................................
Sale of stock to employees under employee stock purchase plan.................
Acquisition of treasury stock.................................................
Reissuance of treasury stock..................................................
Tax benefits related to stock options.........................................
----- --- ---
Balances at December 31, 1996................................................. -- -- --
----- --- ---
Comprehensive loss
Net loss....................................................................
Other comprehensive loss....................................................
Unrealized loss on available-for-sale securities, net of reclassification
adjustments(1)..........................................................
Foreign currency translation adjustments..................................
Other comprehensive loss....................................................
Comprehensive loss............................................................
Exercise of stock options.....................................................
Sale of stock to employees under employee stock purchase plan.................
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
Common stock issued for services rendered in connection with the Series B
convertible preferred stock offering........................................
Accrual of 5% cumulative preferred dividends on Series B convertible preferred
stock.......................................................................
----- --- ---
Balance at December 31, 1997.................................................. 160 2 50
----- --- ---
Comprehensive income
Net income..................................................................
Other comprehensive income..................................................
Unrealized loss on available-for-sale securities, net of reclassification
adjustments(1)..........................................................
Foreign currency translation adjustments..................................
Other comprehensive income..................................................
Comprehensive income..........................................................
Exercise of stock options.....................................................
Sale of stock to employees under employee stock purchase plan.................
Stock-based compensation expense resulting from stock options.................
Exercise of Series A-1 convertible preferred stock warrants, net.............. 140 1
Conversion of Series A-1 to common stock...................................... (300) (3)
Conversion of Series B to common stock........................................ (27)
Accrual of 5% cumulative preferred dividends on Series B convertible preferred
stock.......................................................................
Additional Series B dividend..................................................
Acquisition of Red Brick......................................................
----- --- ---
Balance at December 31, 1998.................................................. -- $ -- 23
----- --- ---
----- --- ---
- ----------------------------------------
(1) Disclosure of reclassification amount for the years ended:
COMMON STOCK ADDITIONAL
-------------------- PAID-IN
AMOUNT SHARES AMOUNT CAPITAL
------------- --------- --------- -----------
Balances at December 31, 1995................................................. $ -- 147,984 $ 1,480 $ 204,448
Comprehensive loss
Net loss....................................................................
Other comprehensive loss....................................................
Unrealized gain on available-for-sale securities, net of reclassification
adjustments(1)..........................................................
Foreign currency translation adjustments..................................
Other comprehensive loss....................................................
Comprehensive loss............................................................
Exercise of stock options..................................................... 2,182 22 13,343
Sale of stock to employees under employee stock purchase plan................. 616 6 10,986
Acquisition of treasury stock.................................................
Reissuance of treasury stock..................................................
Tax benefits related to stock options......................................... 14,787
--- --------- --------- -----------
Balances at December 31, 1996................................................. -- 150,782 1,508 243,564
--- --------- --------- -----------
Comprehensive loss
Net loss....................................................................
Other comprehensive loss....................................................
Unrealized loss on available-for-sale securities, net of reclassification
adjustments(1)..........................................................
Foreign currency translation adjustments..................................
Other comprehensive loss....................................................
Comprehensive loss............................................................
Exercise of stock options..................................................... 1,132 11 3,563
Sale of stock to employees under employee stock purchase plan................. 573 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............ 1 49,196
Common stock issued for services rendered in connection with the Series B
convertible preferred stock offering........................................ 100 1 802
Accrual of 5% cumulative preferred dividends on Series B convertible preferred
stock....................................................................... (301)
--- --------- --------- -----------
Balance at December 31, 1997.................................................. 1 152,587 1,526 347,582
--- --------- --------- -----------
Comprehensive income
Net income..................................................................
Other comprehensive income..................................................
Unrealized loss on available-for-sale securities, net of reclassification
adjustments(1)..........................................................
Foreign currency translation adjustments..................................
Other comprehensive income..................................................
Comprehensive income..........................................................
Exercise of stock options..................................................... 2,483 25 8,422
Sale of stock to employees under employee stock purchase plan................. 1,613 16 7,754
Stock-based compensation expense resulting from stock options................. 840
Exercise of Series A-1 convertible preferred stock warrants, net.............. 32,899
Conversion of Series A-1 to common stock...................................... 17,413 174 (171)
Conversion of Series B to common stock........................................ (1) 6,471 65 (65)
Accrual of 5% cumulative preferred dividends on Series B convertible preferred
stock....................................................................... (2,178)
Additional Series B dividend.................................................. (1,300)
Acquisition of Red Brick...................................................... 7,591 76 35,838
--- --------- --------- -----------
Balance at December 31, 1998.................................................. $ -- 188,158 $ 1,882 $ 429,621
--- --------- --------- -----------
--- --------- --------- -----------
- ----------------------------------------
(1) Disclosure of reclassification amount for the years ended:
RETAINED
TREASURY STOCK EARNINGS
----------------------- (ACCUMULATED
SHARES AMOUNT DEFICIT)
----------- ---------- --------------
Balances at December 31, 1995................................................. -- $ -- $ 154,098
Comprehensive loss
Net loss.................................................................... (73,565)
Other comprehensive loss....................................................
Unrealized gain on available-for-sale securities, net of reclassification
adjustments(1)..........................................................
Foreign currency translation adjustments..................................
Other comprehensive loss....................................................
Comprehensive loss............................................................
Exercise of stock options.....................................................
Sale of stock to employees under employee stock purchase plan.................
Acquisition of treasury stock................................................. (100) (2,388)
Reissuance of treasury stock.................................................. 100 2,388 (1,810)
Tax benefits related to stock options.........................................
----- ---------- --------------
Balances at December 31, 1996................................................. -- -- 78,723
----- ---------- --------------
Comprehensive loss
Net loss.................................................................... (356,867)
Other comprehensive loss....................................................
Unrealized loss on available-for-sale securities, net of reclassification
adjustments(1)..........................................................
Foreign currency translation adjustments..................................
Other comprehensive loss....................................................
Comprehensive loss............................................................
Exercise of stock options.....................................................
Sale of stock to employees under employee stock purchase plan.................
Stock-based compensation expense resulting from stock options.................
Issuance of Series A-1 convertible preferred stock and warrants, net..........
Issuance of Series B convertible preferred stock and warrants, net............
Common stock issued for services rendered in connection with the Series B
convertible preferred stock offering........................................
Accrual of 5% cumulative preferred dividends on Series B convertible preferred
stock.......................................................................
----- ---------- --------------
Balance at December 31, 1997.................................................. -- -- (278,144)
----- ---------- --------------
Comprehensive income
Net income.................................................................. 57,718
Other comprehensive income..................................................
Unrealized loss on available-for-sale securities, net of reclassification
adjustments(1)..........................................................
Foreign currency translation adjustments..................................
Other comprehensive income..................................................
Comprehensive income..........................................................
Exercise of stock options.....................................................
Sale of stock to employees under employee stock purchase plan.................
Stock-based compensation expense resulting from stock options.................
Exercise of Series A-1 convertible preferred stock warrants, net..............
Conversion of Series A-1 to common stock......................................
Conversion of Series B to common stock........................................
Accrual of 5% cumulative preferred dividends on Series B convertible preferred
stock.......................................................................
Additional Series B dividend..................................................
Acquisition of Red Brick......................................................
----- ---------- --------------
Balance at December 31, 1998.................................................. -- $ -- $ (220,426)
----- ---------- --------------
----- ---------- --------------
- ----------------------------------------
(1) Disclosure of reclassification amount for the years ended:
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME (LOSS) INCOME (LOSS) TOTALS
--------------- --------------- ---------
Balances at December 31, 1995................................................. $ (2,279) $ 357,747
Comprehensive loss
Net loss.................................................................... $ (73,565) (73,565)
Other comprehensive loss....................................................
Unrealized gain on available-for-sale securities, net of reclassification
adjustments(1).......................................................... 7,626 7,626
Foreign currency translation adjustments.................................. (3,838) (3,838)
---------------
Other comprehensive loss.................................................... 3,788 3,788
---------------
Comprehensive loss............................................................ $ (69,777)
---------------
---------------
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
--------------- ---------
Balances at December 31, 1996................................................. 1,509 325,304
--------------- ---------
Comprehensive loss
Net loss.................................................................... $ (356,867) (356,867)
Other comprehensive loss....................................................
Unrealized loss on available-for-sale securities, net of reclassification
adjustments(1).......................................................... (12,457) (12,457)
Foreign currency translation adjustments.................................. (955) (955)
---------------
Other comprehensive loss.................................................... (13,412) (13,412)
---------------
Comprehensive loss............................................................ $ (370,279)
---------------
---------------
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
Accrual of 5% cumulative preferred dividends on Series B convertible preferred
stock....................................................................... (301)
--------------- ---------
Balance at December 31, 1997.................................................. (11,903) 59,064
--------------- ---------
Comprehensive income
Net income.................................................................. $ 57,718 57,718
Other comprehensive income..................................................
Unrealized loss on available-for-sale securities, net of reclassification
adjustments(1).......................................................... 5,202 5,202
Foreign currency translation adjustments.................................. 3,351 3,351
---------------
Other comprehensive income.................................................. 8,553 8,553
---------------
Comprehensive income.......................................................... $ 66,272
---------------
---------------
Exercise of stock options..................................................... 8,447
Sale of stock to employees under employee stock purchase plan................. 7,770
Stock-based compensation expense resulting from stock options................. 840
Exercise of Series A-1 convertible preferred stock warrants, net.............. 32,900
Conversion of Series A-1 to common stock...................................... --
Conversion of Series B to common stock........................................ (1)
Accrual of 5% cumulative preferred dividends on Series B convertible preferred
stock....................................................................... (2,178)
Additional Series B dividend.................................................. (1,300)
Acquisition of Red Brick...................................................... 35,914
--------------- ---------
Balance at December 31, 1998.................................................. $ (3,350) $ 207,727
--------------- ---------
--------------- ---------
- ----------------------------------------
(1) Disclosure of reclassification amount for the years ended:
1998 1997 1996
--------- --------- ---------
Net unrealized gain (loss) on available-for-sale securities arising during period....... $ 5,202 $ (3,599) $ 9,006
Less: reclassification adjustment for net gains included in net income (loss)........... -- (8,858) (1,380)
--------- --------- ---------
Net unrealized gain (loss) on available-for-sale securities............................. $ 5,202 $ (12,457) $ 7,626
--------- --------- ---------
--------- --------- ---------
Net unrealized gain (loss) on available-for-sale securities arising during period.......
Less: reclassification adjustment for net gains included in net income (loss)...........
Net unrealized gain (loss) on available-for-sale securities.............................
See Notes to Consolidated Financial Statements.
F-7
INFORMIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS. The Company is a leading multinational
supplier of information management software and solutions to governments and
enterprises worldwide. The Company designs, develops, manufactures, markets and
supports relational database management systems, connectivity interfaces and
gateways and graphical and character-based application development tools for
building database applications that allow customers to access, retrieve and
manipulate business data. The Company also offers complete solutions, which
include its database management software, its own and third party software and
consulting services to help customers design and rapidly deploy data warehousing
(decision support), web-based enterprise repository and electronic commerce
applications.
The principal geographic markets for the Company's products are North
America, Europe, Asia/ Pacific, and Latin America. 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.
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 such foreign entity financial statements are included as a
component of other comprehensive income (loss).
For foreign operations with the U.S. dollar as the functional currency,
monetary assets and liabilities are remeasured at the year-end exchange rates as
appropriate and non-monetary assets and liabilities are remeasured at historical
exchange rates. Statements of operations are remeasured at the average exchange
rates during the year. Foreign currency transaction gains and losses are
included in other income (expense), net. The Company recorded net foreign
currency transaction gains (losses) of $(4.8) million, $8.0 million and $0.3
million for the years ended December 31, 1998, 1997 and 1996, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS. The Company enters into foreign currency
forward exchange contracts to reduce its exposure to foreign currency risk due
to fluctuations in exchange rates underlying the value of intercompany accounts
receivable and payable denominated in foreign currencies (primarily European and
Asian currencies) until such receivables are collected and payables are
disbursed. A foreign currency forward exchange contract obligates the Company to
exchange predetermined amounts of specified foreign currencies at specified
exchange rates on specified dates or to make an equivalent U.S. dollar payment
equal to the value of such exchange. These foreign currency forward exchange
contracts, to qualify as hedges of existing assets or liabilities, are
denominated in the same currency in which the underlying foreign currency
receivables or payables are denominated and bear a contract value and maturity
date which approximate the value and expected settlement date of the underlying
transactions. For contracts that are designated and effective as hedges,
discounts or premiums (the difference between the spot exchange rate and the
forward exchange rate at inception of the contract) are accreted or amortized to
other expenses over the contract lives using the straight-line method while
unrealized gains and losses on open contracts at the end of each accounting
period resulting from changes in the spot exchange rate are recognized in
earnings in the same period as gains and losses on the underlying foreign
F-8
denominated receivables or payables are recognized and generally offset.
Contract amounts in excess of the carrying value of the Company's foreign
currency denominated accounts receivable or payable balances are marked to
market, with changes in market value recorded in earnings as foreign exchange
gains or losses. 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.
Most of our international revenue and expenses are denominated in local
currencies. Due to the substantial volatility of currency exchange rates, among
other factors, we cannot predict the effect of exchange rate fluctuations on our
future operating results. Although we take into account changes in exchange
rates over time in our pricing strategy, we do 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 our products is relatively long, depending on a number of
factors including the level of competition and the size of the transaction. We
attempt to reduce this exposure by entering into foreign currency forward
exchange contracts to hedge up to 80% of the forecasted net income of our
foreign subsidiaries of up to one year in the future. These foreign currency
forward exchange contracts do not qualify as hedges and, therefore are marked to
market, accounting for a significant portion of our net foreign currency losses
of $4.8 million in 1998. These losses are primarily offset by gains realized in
cost of software distribution resulting from these foreign currency movements.
Notwithstanding the Company's efforts to manage foreign exchange risk, there can
be no assurances that the Company's hedging activities will adequately protect
the Company against the risks associated with foreign currency fluctuations.
REVENUE RECOGNITION POLICY. In October 1997, the American Institute of
Certified Public Accountants issued Statement of Position 97-2 (SOP 97-2),
"Software Revenue Recognition" which superseded SOP 91-1 and provides guidance
on generally accepted accounting principles for recognizing revenue on software
transactions. SOP 97-2 requires that revenue recognized from software
arrangements be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, upgrades,
enhancements, post contract customer support, installation, or training. Under
SOP 97-2, the determination of fair value is based on objective evidence which
is specific to the vendor. If such evidence of fair value for each element of
the arrangement does not exist, all revenue from the arrangement is deferred
until such time that evidence of fair value does exist or until all elements of
the arrangement are delivered. SOP 97-2 was amended in February 1998 by
Statement of Position 98-4 (SOP 98-4) "Deferral of the Effective Date of a
Provision of SOP 97-2" and was amended again in December 1998 by Statement of
Position 98-9 (SOP 98-9) "Modification of SOP 97-2, Software Revenue Recognition
with Respect to Certain Transactions." Those amendments deferred and then
clarified, respectively, the specification of what was considered vendor
specific objective evidence of fair value for the various elements in a multiple
element arrangement. The Company adopted the provisions of SOP 97-2 and SOP 98-4
as of January 1, 1998 and as a result, changed certain business practices. The
adoption has, in certain circumstances, resulted in the deferral of software
license revenues that would have been recognized upon delivery of the related
software under prior accounting standards.
SOP 98-9 is effective for all transactions entered into by the Company in
fiscal year 2000. The adoption of this statement is not expected to have a
material impact on the Company's operating results, financial position or cash
flows.
The Company's revenue recognition policy as of January 1, 1998 is as
follows:
LICENSE REVENUE. The Company recognizes revenue from sales of software
licenses to end users upon persuasive evidence of an arrangement, delivery of
the software to a customer and determination that collection of a fixed or
determinable license fee is considered probable. Revenue for transactions with
application vendors, OEMs and distributors is currently recognized as earned
when the licenses are resold or utilized by the reseller and all related
obligations of the Company have been satisfied. The Company provides for sales
allowances on an estimated basis. The Company accrues royalty revenue through
the end of the reporting period based on reseller royalty reports or other forms
of customer-specific historical information. In the absence of customer-specific
historical information, royalty revenue is recognized when
F-9
the customer-specific objective information becomes available. Any subsequent
changes to previously recognized royalty revenues are reflected in the period
when the updated information is received from the reseller.
SERVICE REVENUE. Maintenance contracts generally call for the Company to
provide technical support and software updates and upgrades to customers.
Maintenance revenue is recognized ratably over the term of the maintenance
contract, generally on a straight-line basis. Other service revenue, primarily
training and consulting, is generally recognized at the time the service is
performed and it is determined that the Company has fulfilled its obligations
resulting from the services contract, or on a contract accounting basis. When
the fee for maintenance and service is bundled with the license fee, it is
unbundled from the license fee using the Company's objective evidence of the
fair value of the maintenance and/or services represented by the Company's
customary pricing for such maintenance and/or services.
ADVANCES FROM CUSTOMERS AND FINANCIAL INSTITUTIONS. Amounts received in
advance of revenue being recognized are recorded as a liability on the
accompanying financial statements. These amounts may be received either from the
customer or from a financing entity to whom the customer payment streams are
sold.
The Company's license arrangements with some of its 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 certain contractual terms of a
specific license agreement, the Company could be required to refund the
amount(s) received to the customer or the financial institution in the event of
an assignment of receivables.
Prior to fiscal 1998, the Company's arrangements for financing of license
contracts with customers frequently took the form of a non-recourse sale of the
future payment streams. When such customer contracts were sold to a third-party
financing entity, they were typically sold at a discount which represented the
financing cost. Such discounts offset revenues in cases where the license was
recorded as a sale. For transactions where the financing was received prior to
the recognition of revenue, the financing discount has been charged ratably to
interest expense over the financing period, which approximates the "interest
method."
SALES OF RECEIVABLES. Prior to January 1, 1998, the Company financed
amounts due from customers with financial institutions on a non-recourse basis.
The Company accounted for these transactions in accordance with Statement of
Financial Accounting Standards No. 77 (SFAS 77), "Reporting by Transferors for
Transfers of Receivables with Recourse". Effective January 1, 1998 any such
transactions would be accounted for by the Company in accordance with Statement
of Financial Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities". If at the
time of the transfer the amounts due from the customer have been recognized as
revenue and a receivable, the transfer is accounted for as the sale of a
receivable and the receivable is removed from the books and the financing fees
are charged to operations immediately as interest expense. The Company did not
enter into any such transactions during fiscal 1998.
SALES OF FUTURE REVENUE STREAMS. If at the time of transfer the amounts due
from the customers have not been recognized as revenue or a receivable, the
transfer is accounted for as the sale of a future revenue stream in accordance
with EITF 88-18. Accordingly, the receipt of cash is treated as a borrowing and
recorded as "advances from customers and financial institutions" and the
financing fees are amortized to interest expense over the term of the financing
arrangement. The Company has not financed, and does not expect to finance,
amounts due from customers subsequent to December 31, 1997.
CONCURRENT TRANSACTIONS. In fiscal 1996 and 1997, the Company entered into
software license agreements with certain computer and service vendors where the
Company concurrently committed to acquire goods and services. 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
F-10
approximately $170 million and committments by the Company to acquire goods and
services in the aggregate of approximately $130 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. The Company did not enter into any significant
concurrent transactions in fiscal 1998.
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 accounts for its software development expenses
in accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed." This statement requires that, once technological feasibility of a
developing product has been established, all subsequent costs incurred in
developing that product to a commercially acceptable level be capitalized and
amortized ratably over the revenue life of the product. The Company uses a
detail program design approach in determining technological feasibility.
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 over the
remaining estimated economic life of the product, which is generally estimated
to be three years. The Company recorded amortization of $20.7 million, $21.4
million, and $14.6 million of software costs in 1998, 1997 and 1996,
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. The Company reviews property and equipment for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Recoverability of
property and equipment to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Property and equipment to be disposed of
are reported at the lower of the carrying amount or fair value less costs to
sell.
BUSINESSES ACQUIRED. The purchase price of businesses acquired, accounted
for as purchase business combinations, is allocated to the tangible and
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
range from five to seven years. As of December 31, 1998, 1997 and 1996, the
Company had $48.3 million, $19.2 million and $50.6 million of intangible assets,
with accumulated amortization of $6.8 million, $10.9 million and $15.9 million,
respectively, as a result of these acquisitions. The carrying value of goodwill
is reviewed if the facts and circumstances suggest that it may be impaired. If
this review indicates that the goodwill 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. The carrying values of specified intangible assets are reviewed in a
manner consistent with the policy for reviewing impairment of property and
equipment, as described above. 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 1998 or 1996.
STOCK-BASED COMPENSATION. As permitted under Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," the Company has elected to follow Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees" in
accounting for stock-based awards to employees (see Note 7).
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-11
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 net
revenues of the Company in 1998, 1997 or 1996.
CASH, CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, AND LONG-TERM
INVESTMENTS. The Company considers liquid investments purchased with a
remaining 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 a remaining 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.
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, and other specific money market
instruments of similar liquidity and credit quality. The Company has not
experienced any significant losses related to these investments.
The Company invests in equity instruments of privately-held, information
technology companies for business and strategic purposes. These investments are
included in long-term investments and are accounted for under the cost method
when ownership is less than 20%. For these non-quoted investments, the Company's
policy is to regularly review the assumptions underlying the operating
performance and cash flow forecasts in assessing the carrying values. When the
Company determines that a decline in fair value below the cost basis is other
than temporary, the related investment is written down to fair value.
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 as a component of other comprehensive income (loss). 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 income (expense), net. The cost of securities sold is based on the
specific identification method. Interest on securities classified as
available-for-sale is 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 significant in 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS. Fair values of cash, cash equivalents,
short and long term investments and foreign 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-12
NOTE 2--BALANCE SHEET COMPONENTS
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Property and equipment, net:
Computer equipment...................................................................... $ 181,710 $ 189,985
Furniture and fixtures.................................................................. 35,506 36,087
Leasehold improvements.................................................................. 33,206 34,706
Buildings and other..................................................................... 2,511 2,291
---------- ----------
252,933 263,069
Less: accumulated amortization.......................................................... (177,996) (167,057)
---------- ----------
$ 74,937 $ 96,012
---------- ----------
---------- ----------
Long-term investments:
Marketable equity securities (Note 3)................................................... $ 10,308 $ 3,083
Investments in privately-held companies................................................. 5,874 9,375
Corporate bonds......................................................................... 6,009 --
---------- ----------
$ 22,191 $ 12,458
---------- ----------
---------- ----------
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, 1998 COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------- ---------- ----------- ----------- ----------
(IN THOUSANDS)
U.S. treasury securities......................................... $ 8,363 $ -- $ -- $ 8,363
Commercial paper, corporate bonds and medium-term notes.......... 95,577 179 (28) 95,728
Municipal bonds.................................................. 28,866 23 (1) 28,888
International bonds.............................................. 3,004 -- -- 3,004
---------- ----------- ----------- ----------
Total debt securities.......................................... 135,810 202 (29) 135,983
U.S. equity securities........................................... 6,046 4,717 (455) 10,308
---------- ----------- ----------- ----------
$ 141,856 $ 4,919 $ (484) $ 146,291
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Amounts included in cash and cash equivalents.................... $ 92,690 $ 168 $ -- $ 92,858
Amounts included in short-term investments....................... 37,087 31 (2) 37,116
Amounts included in long-term investments........................ 12,079 4,720 (482) 16,317
---------- ----------- ----------- ----------
$ 141,856 $ 4,919 $ (484) $ 146,291
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
DECEMBER 31, 1997
- -----------------------------------------------------------------
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........................................... 3,866 -- (783) 3,083
---------- ----------- ----------- ----------
$ 92,396 $ 19 $ (786) $ 91,629
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
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 long-term investments........................ 3,866 -- (783) 3,083
---------- ----------- ----------- ----------
$ 92,396 $ 19 $ (786) $ 91,629
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
F-13
Maturities of debt securities at market value at December 31, 1998 are as
follows (in thousands):
Mature in one year or less........................................ $ 129,974
Mature after one year through five years.......................... 6,009
Mature after five years........................................... --
---------
$ 135,983
---------
---------
NOTE 4--DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into foreign currency forward exchange contracts
primarily to hedge the value of intercompany accounts receivable or accounts
payable denominated in foreign currencies against fluctuations in exchange rates
until such receivables are collected or payables are disbursed. Subsequent to
fiscal year end 1997, Informix began entering into foreign currency forward
exchange contracts to hedge no more than 80% of anticipated net income of
foreign subsidiaries of up to a maximum of one year in the future. From an
accounting perspective, these hedges are considered to be speculative. The
Company's outstanding foreign currency forward exchange contracts used to hedge
anticipated net income are marked to market with unrealized gains and losses
recognized as incurred in results of operations. 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. There are no significant unrealized gains or losses on
these contracts at December 31, 1998 and 1997. At December 31, 1998 and 1997,
the Company had approximately $93.9 million and $102.7 million of foreign
currency forward exchange contracts outstanding, respectively.
The table below summarizes by currency the contractual amounts of the
Company's foreign currency forward exchange contracts at December 31, 1998 and
December 31, 1997. The information is provided in U.S. dollar equivalents and
presents the notional amount (contract amount), the unrealized gain (loss) and
fair value. Fair value represents the difference in value of the contracts at
the spot rate at December 31, 1998 and the forward rate, plus the unamortized
premium or discount. All contracts mature within twelve months.
F-14
FORWARD CONTRACTS
UNREALIZED
AT DECEMBER 31, 1998 CONTRACT AMOUNT GAIN/(LOSS) FAIR VALUE
- ----------------------------------------------------------------------- ---------------- ------------- -----------
(IN THOUSANDS)
Forward currency to be sold under contract:
Japanese Yen......................................................... $ 11,719 $ 13 $ (262)
Deutsche Mark........................................................ 8,092 (1) 39
Korean Won........................................................... 5,250 5 (119)
Singapore Dollar..................................................... 4,264 17 45
British Pound........................................................ 3,322 -- (30)
Australian Dollar.................................................... 2,756 (4) (2)
Netherland Guilder................................................... 2,087 (3) 7
Swiss Franc.......................................................... 2,010 3 21
Brazilian Real....................................................... 1,382 -- (273)
Other (individually less than $1 million)............................ 2,926 (6) (36)
-------- ----- -----
Total.................................................................. $ 43,808 $ 24 $ (610)
-------- ----- -----
-------- ----- -----
Forward currency to be purchased under contract:
British Pound........................................................ $ 42,576 $ (8) $ 81
French Franc......................................................... 3,046 (1) (17)
Swedish Krona........................................................ 1,493 (16) (23)
Danish Krone......................................................... 1,316 1 (3)
Other (individually less than $1 million)............................ 1,692 9 24
-------- ----- -----
Total.................................................................. $ 50,123 $ (15) $ 62
-------- ----- -----
-------- ----- -----
Grand Total............................................................ $ 93,931 $ 9 $ (548)
-------- ----- -----
-------- ----- -----
UNREALIZED
AT DECEMBER 31, 1997 CONTRACT VALUE GAIN/(LOSS) FAIR VALUE
- ------------------------------------------------------------------------- -------------- ------------- -----------
(IN THOUSANDS)
Forward currency to be sold under contract:
British Pound.......................................................... $ 55,740 $ 28 $ 241
Deutsche Mark.......................................................... 17,050 13 (75)
French Franc........................................................... 14,139 9 (66)
Italian Lira........................................................... 3,901 4 4
Spanish Peseta......................................................... 3,166 1 (7)
Swedish Krona.......................................................... 1,682 2 (3)
Other (individually less than $1 million).............................. 2,090 41 47
-------------- ----- -----
Total.................................................................... $ 97,768 $ 98 $ 141
-------------- ----- -----
-------------- ----- -----
Forward currency to be purchased under contract:
Swiss Franc............................................................ $ 1,636 $ (1) $ 16
Dutch Guilder.......................................................... 1,096 -- 5
Other (individually less than $1 million).............................. 2,208 15 12
-------------- ----- -----
Total.................................................................... $ 4,940 $ 14 $ 33
-------------- ----- -----
-------------- ----- -----
Grand Total.............................................................. $ 102,708 $ 112 $ 174
-------------- ----- -----
-------------- ----- -----
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
F-15
any, by which the counterparties' obligations exceed the obligations of the
Company as these contracts can be settled on a net basis at the option of the
Company. The Company controls credit risk through credit approvals, limits and
monitoring procedures.
As of December 31, 1998, other than foreign currency forward exchange
contracts discussed immediately above, the Company does not currently invest in
or hold any other derivative financial instruments.
NOTE 5--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 "Series A-1 Preferred") issued to the same investor, with
a corresponding change to the warrant shares. The mandatory redemption
provisions of the new Series A-1 Preferred differ from the Series A Convertible
Preferred Stock. The redemption provisions in the Series 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 Series A-1 Preferred under stockholder's equity.
The Series 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 30 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 Series 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 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 Series A-1 Convertible Preferred Stock 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.
On February 13, 1998, the holders of the Series A-1 Preferred Stock
exercised warrants to purchase 60,000 additional shares of Series A-1 Preferred
at $250 per share resulting in net proceeds to the Company of $14.1 million. In
addition, pursuant to the Series A-1 Subscription Agreement, the Series A-1
Preferred stockholders converted 220,000 shares of Series A-1 Preferred into
12,769,908 shares of the Company's Common Stock.
On November 25, 1998, the holders of the Series A-1 Preferred Stock
exercised their remaining warrants to purchase 80,000 additional shares of
Series A-1 Preferred at $250 per share resulting in net proceeds to the Company
of $18.8 million. In addition, pursuant to the Series A-1 Subscription
Agreement, the Series A-1 Preferred stockholders converted the remaining 80,000
shares of Series A-1 Preferred into 4,642,525 shares of the Company's Common
Stock. As a result of these conversions, no Series A-1 Preferred Stock or Series
A-1 Preferred warrants were outstanding at December 31, 1998.
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
F-16
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 Series A-1 Preferred in respect to the right
to receive dividend payments and liquidation preferences.
On June 10, 1998, a holder of the Series B Preferred Stock converted 500
shares of Series B Preferred into 80,008 shares of the Company's Common Stock.
In connection with such conversion, the Company also issued such Series B
Preferred Stockholder a warrant to purchase up to 66,000 shares of Common Stock
at a purchase price of $7.84 per share. Also, during the quarter ended June 30,
1998, the Company issued a warrant pursuant to the provisions of the Series B
Preferred to purchase up to an additional 50,000 shares of Common Stock at a
purchase price of $7.84 per share to a financial advisor of the Company because,
as of May 15, 1998, the closing sales price of the Company's Common Stock was
less than $12.50. Such warrant was issued in connection with services provided
by such financial advisor related to the sale of shares of the Series B
Preferred in November 1997.
During the third and fourth quarters of fiscal 1998, holders of the Series B
Preferred Stock converted a total of 26,200 shares of Series B Preferred into
6,391,639 shares of the Company's Common Stock. In connection with such
conversions, the Company also issued such Series B Preferred Stockholders
warrants to purchase up to 1,428,319 shares of Common Stock at a purchase price
of $7.84 per share and paid cash dividends in the amount of $1,170,068 to such
stockholders. The Company 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 Series 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 preferred
stockholders. The discounts were recognized as a return to the preferred
stockholders (similar to a dividend) over the minimum period during which the
preferred stockholders could realize this return, immediate for the Series A-1
Preferred and six months for the Series B Preferred. The discount has been
accreted to additional paid in capital (accumulated deficit) in the Company's
balance sheet and has been disclosed as a decrease in the amount available to
common stockholders on the face of the Company's statements 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. The appraisal was completed utilizing the
Black-Scholes valuation model. This model requires assumptions related to the
remaining life of the warrant, the risk free
F-17
interest rate at the time of issuance, stock volatility, and an illiquidity
factor associated with the security. These assumptions and the values assigned
to the Series A-1 and Series B warrants were as follows:
SERIES A-1 SERIES B
------------- -------------
Volatility..................................................... 0.4 0.6
Expected life.................................................. 18 months 24 months
Risk free interest rate........................................ 5.6% 5.6%
Dividend yield................................................. 0% 0%
Illiquidity discount........................................... 33% 33%
Exercise price................................................. $7.59 $9.73
Assigned value................................................. $0.9 million $2.7 million
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.
On June 9, 1998, the Company filed a Post-Effective Amendment to its
Registration Statement on Form S-1 pertaining to the Company's sale of its
Series B Preferred. The Securities and Exchange Commission ("SEC") reviewed the
Post-Effective Amendment and declared it effective on August 13, 1998. The
Series B Preferred stockholders claimed that during August 1998 they were
prevented from selling shares of Series B Preferred stock until the SEC
completed its review of the Post-Effective Amendment and, as a result, the
Company had failed to comply with certain terms of a Registration Rights
Agreement between the Series B Preferred stockholders and the Company. As a
result, the Company recorded a $1.3 million dividend as of December 31, 1998,
which is payable in cash to the Series B Preferred stockholders in the first
quarter of 1999.
F-18
NOTE 6--NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per common share:
1998 1997 1996
--------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Numerator:
Net income (loss)........................................................... $ 57,718 $ (356,867) $ (73,565)
Preferred stock dividends................................................... (3,478) (301) --
Value assigned to warrants.................................................. (1,982) (1,601) --
--------- ----------- ----------
Numerator for basic and diluted net income (loss) per common share.......... $ 52,258 $ (358,769) $ (73,565)
--------- ----------- ----------
--------- ----------- ----------
Denominator:
Denominator for basic net income (loss) per common share-- weighted-average
shares.................................................................... 168,277 151,907 149,310
Effect of dilutive securities:
Employee stock options.................................................... 2,203 -- --
Series A-1 convertible preferred stock.................................... 2,748 -- --
--------- ----------- ----------
Denominator for diluted net income (loss) per common share-- adjusted
weighted-average shares and assumed conversions........................... 173,228 151,907 149,310
--------- ----------- ----------
--------- ----------- ----------
Basic net income (loss) per common share...................................... $ 0.31 $ (2.36) $ (0.49)
--------- ----------- ----------
--------- ----------- ----------
Diluted net income (loss) per common share.................................... $ 0.30 $ (2.36) $ (0.49)
--------- ----------- ----------
--------- ----------- ----------
The Company excluded potentially dilutive securities for each period
presented from its diluted EPS computation because either the exercise price of
the securities exceeded the average fair value of the Company's common stock or
the Company had net losses, and, therefore, these securities were anti-dilutive.
A summary of the excluded potentially dilutive securities and the related
exercise/conversion features follows:
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
Potentially dilutive securities:
Stock options.......................................................................... 10,018 4,776 6,263
Stock warrants
Common Stock (Series B Warrants)..................................................... 1,750
Series A-1 Warrants.................................................................. -- 140 --
Series A-1 Convertible Preferred Stock
Preferred Shares..................................................................... -- 160 --
Equivalent common shares upon assumed conversion..................................... -- 4,955 --
Series B Convertible Preferred Stock
Preferred Shares..................................................................... 23 50 --
Equivalent common shares upon assumed conversion..................................... 7,901 3,387 --
The stock options have per share exercise prices ranging from $6.75 to
$42.09, $10.78 to $34.25, and $25.63 to $34.75 at December 31, 1998, 1997 and
1996, respectively.
F-19
The warrants to purchase shares of Common Stock of the Company (the "Series
B Warrants") were issued in connection with the conversion of certain shares of
the Company's Series B Preferred into shares of Common Stock of the Company.
Upon conversion of the Series B Preferred, the holders are eligible to receive
Series B Warrants to purchase that number of shares of the Company's Common
Stock equal to 20% of the shares of the Company's Common Stock into which the
Series B Preferred is convertible, but not less than an aggregate of 1,750,000,
of which approximately 1,494,000 have been issued as of December 31, 1998, at a
per share exercise price of $7.84. The Series B Warrants are exercisable through
November 2002.
Warrants to purchase shares of the Company's Series A-1 Preferred (the
"Series A-1 Warrants") were exercised into shares of Series A-1 Preferred at a
per share price of $250 and converted into 8,125,000 shares of Common Stock
during 1998. No Series A-1 Warrants were outstanding as of December 31, 1998.
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, 1998, 600,000 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, 1998, 4,116,930 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 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
F-20
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.
In December 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 January 9, 1998 (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 and Directors of the Company
were not eligible to have their shares repriced. The exercise price for repriced
options was $5.0938, the closing sales price of the Company's Common Stock on
the Repricing Effective Date.
In July 1998, the Company adopted the 1998 Non-Statutory Stock Option Plan;
5,500,000 shares were authorized for grant under this Plan. Options can be
granted to employees on terms substantially equivalent to those described above.
At December 31, 1998, 2,341,451 shares were available for grant under this Plan.
As a result of its acquisition of Red Brick Systems, Inc. ("Red Brick") in
December 1998, the Company assumed all outstanding Red Brick stock options which
had been issued under Red Brick's 1995 Stock Option Plan (including options
granted under the predecessor 1991 Stock Option Plan) and Supplemental Stock
Option Plan. Each Red Brick stock option so assumed is subject to the same terms
and conditions as the original grant, except that each option was adjusted at a
ratio of 0.6 shares of Informix common stock for each one share of Red Brick
common stock, and the exercise price was adjusted by multiplying the exercise
price by 0.6.
F-21
Following is a summary of activity for all stock option plans for the three
years ended December 31, 1998:
NUMBER OF OPTIONS
SHARES PRICE PER SHARE
------------- -----------------
Outstanding at December 31, 1995................................................ 15,753,082 $0.06 to $34.00
WEIGHTED AVERAGE
EXERCISE 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
Options granted.................................................................. 9,992,847 5.5788
Options assumed.................................................................. 2,466,727 5.4012
Options exercised................................................................ (2,439,615) 3.4299
Options canceled................................................................. (8,859,919) 9.1123
------------- --------
Outstanding at December 31, 1998................................................. 20,270,991 $ 6.5234
------------- --------
------------- --------
The following table summarizes information about options outstanding at
December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -------------------------------
NUMBER WEIGHTED NUMBER WEIGHTED
OUTSTANDING AS WEIGHTED AVERAGE AVERAGE EXERCISABLE AS AVERAGE
OF DECEMBER 31, REMAINING EXERCISE OF DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1998 CONTRACTUAL LIFE PRICE 1998 PRICE
- ---------------------------- ---------------- ------------------- ------------- ---------------- -------------
$0.2000-$5.0938............. 7,396,599 7.29 $ 4.0420 2,461,345 $ 2.5647
$5.1563-$6.7500............. 4,608,573 9.45 5.5609 158,526 6.6740
$6.7813-$9.0313............. 5,831,557 8.13 8.2713 1,927,676 8.1340
$9.0625-$13.3400............ 2,245,793 8.18 $ 10.8698 960,198 $ 10.9714
$13.5500-$33.2500........... 179,469 7.37 $ 20.5408 149,514 $ 19.8744
$42.0900.................... 9,000 7.80 42.0900 4,500 42.0900
---------------- ----------------
$0.2000-$42.0900............ 20,270,991 8.12 6.5234 5,661,759 6.4902
---------------- ----------------
---------------- ----------------
In connection with all stock option plans, 28,749,921 shares of Common Stock
were reserved for issuance as of December 31, 1998, and 5,661,759 options were
exercisable. At December 31, 1997, 23,765,427 shares of Common Stock were
reserved for issuance, and 7,287,577 options were exercisable.
EMPLOYEE STOCK PURCHASE PLAN
The Company had a qualified Employee Stock Purchase Plan (ESPP) under which
7,600,000 shares of common stock, in the aggregate, were authorized for
issuance. Under the terms of the Plan, employees could contribute, through
payroll deductions, up to 10 percent of their base pay and purchase up to 20,000
shares per quarter (with the limitation of purchases of $25,000 annually in fair
market value of the shares). Employees could elect to withdraw from the Plan
during any quarter and have their contributions for the period returned to them.
Also, employees could elect to reduce the rate of contribution one time in each
quarter. The price at which employees could purchase shares was 85 percent of
the lower of the fair market value of the stock at the beginning or end of the
quarter. The Plan was qualified under Section 423 of the
F-22
Internal Revenue Code of 1986, as amended. During 1997 and 1996, the Company
issued 573,343 shares and 616,128 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. During
fiscal 1998, the Company issued approximately 1,613,000 shares of Common Stock
under the 1997 ESPP. No shares of Common Stock were issued under this plan
during fiscal 1997.
STOCK-BASED COMPENSATION
As permitted under Statement of Financial Accounting Standards No. 123 (SFAS
123), "Accounting for Stock-Based Compensation," the Company has elected to
continue to follow Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees" 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 SFAS 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 SFAS 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
------------------------------------- -------------------------------------------------
1998 1997 1996 1998 1997 1996
--------- --------- --------------- --------------- --------------- ---------------
Expected life (years)... 4.5 4.5 4.5 0.25 .25 .25
Expected volatility..... 72.57% 79.00% 58.22-63.27% 55.98-94.99% 50.66-89.54% 57.65-96.62%
Risk-free interest
rate.................. 4.66% 5.71% 5.20-6.09% 4.69-5.3% 5.23-5.40% 5.01-5.85%
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:
1998 1997 1996
--------- ----------- ----------
(IN THOUSANDS EXCEPT FOR PER SHARE
INFORMATION)
Net income (loss) applicable to common stockholders............. As reported $ 52,258 $ (358,769) $ (73,565)
Pro forma $ 17,279 (387,594) (94,196)
Net income (loss) per common share:
Basic......................................................... As reported $ 0.31 $ (2.36) $ (0.49)
Pro forma $ 0.10 (2.55) (0.63)
Diluted....................................................... As reported $ 0.30 $ (2.36) $ (0.49)
Pro forma $ 0.10 (2.55) (0.63)
Calculated under SFAS 123, the weighted-average fair value of the options
granted during fiscal 1998, 1997 and 1996 was $3.58, $5.26 and $13.04 per share,
respectively. The weighted average fair value of
F-23
employee stock purchase rights granted under the ESPP during fiscal 1998, 1997
and 1996 were $1.91, $3.83 and $7.47, respectively.
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 1998, 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 1998, 1997 and 1996 were $3.5 million,
$4.2 million and $3.8 million, respectively.
NOTE 8--COMMITMENTS AND CONTINGENCIES
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,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
Computer equipment................................................................................ $ 9,193 $ 6,939
Office equipment.................................................................................. 389 349
--------- ---------
9,582 7,288
Less: accumulated amortization.................................................................... 5,076 1,489
--------- ---------
$ 4,506 $ 5,799
--------- ---------
--------- ---------
During fiscal 1998, 1997 and 1996, the Company financed approximately $1.4
million, $10.5 million and $1.8 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 $30.4 million, $34.7
million and $42.4 million in 1998, 1997 and 1996, 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-24
Future minimum payments, by year and in the aggregate, under the capital and
non-cancelable operating leases as of December 31, 1998, are as follows:
NON-CANCELABLE
YEAR ENDING DECEMBER 31 CAPITAL LEASES OPERATING LEASES
- ----------------------------------------------------------------------------------- --------------- ----------------
(IN THOUSANDS)
1999............................................................................... $ 4,852 $ 30,010
2000............................................................................... 2,433 26,165
2001............................................................................... 61 19,474
2002............................................................................... -- 14,780
2003............................................................................... -- 5,805
Thereafter......................................................................... -- 2,552
-------
Total payments..................................................................... 7,346 $ 98,786
-------
-------
Less: amount representing interest................................................. 502
------
Present value of minimum lease payments............................................ 6,844
Less current portion............................................................... 4,579
------
$ 2,265
------
------
As of December 31, 1998, the Company was contractually obligated to purchase
approximately $2.1 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 $12.4 million, $10.2 million, $7.3
million and $2.7 million in fiscal 1999, 2000, 2001 and 2002, respectively.
NOTE 9--BUSINESS SEGMENTS
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which was
adopted by the Company in 1998. SFAS No. 131 requires companies to report
financial and descriptive information about its reportable operating segments,
including segment profit or loss, certain specific revenue and expense items and
segment assets, as well as information about the revenues derived from the
Company's products and services, the countries in which the Company earns
revenues and holds assets, and major customers.
The Company has four reportable operating segments, North America, Europe,
Asia/Pacific and Latin America, which are organized, managed and analyzed
geographically and operate in one industry segment: the development and
marketing of information management software and related services. The Company
evaluates operating segment performance based primarily on net revenues and
certain operating expenses. The Company's products are marketed internationally
through the Company's subsidiaries and through application resellers, OEMs and
distributors.
F-25
Financial information for the Company's North America, Europe, Asia/Pacific
and Latin America operating segments is summarized below by year:
NORTH LATIN
AMERICA EUROPE ASIA/PACIFIC AMERICA OTHER(3) TOTAL
---------- --------- ----------- --------- ---------- ----------
(IN THOUSANDS)
1998:
Net revenues from unaffiliated customers......... $ 366,850 $ 240,964 $ 77,191 $ 49,978 $ -- $ 734,983
Transfers between segments(1).................... (11,256) (52) 4,093 7,215 -- --
Total net revenues............................... 355,594 240,912 81,284 57,193 -- 734,983
Operating income (loss)(2)....................... 6,487 59,306 1,733 (7,173) 701 61,054
Interest income.................................. 9,512 873 192 842 -- 11,419
Interest expense................................. 3,349 2,315 35 75 -- 5,774
Identifiable assets at December 31............... 687,892 138,470 76,918 40,328 (328,303) 615,305
Depreciation and amortization expense............ 31,586 9,771 3,718 1,485 -- 46,560
Capital expenditures............................. 14,317 4,099 853 794 -- 20,063
Income tax expense (credit)...................... (1,387) 3,375 488 3,372 (1,448) 4,400
Net income (loss)................................ $ 11,898 $ 53,042 $ 1,386 $ (10,733) $ 2,125 $ 57,718
NORTH LATIN
AMERICA EUROPE ASIA/PACIFIC AMERICA OTHER(3) TOTAL
---------- --------- ----------- --------- ---------- ----------
(IN THOUSANDS)
1997:
Net revenues from unaffiliated customers......... $ 307,870 $ 224,829 $ 81,130 $ 50,063 $ -- $ 663,892
Transfers between segments(1).................... (7,147) 3,242 333 3,572 -- --
Total net revenues............................... 300,723 228,071 81,463 53,635 -- 663,892
Operating income (loss)(2)....................... (227,831) (77,871) (48,814) 4,210 (5,436) (355,742)
Interest income.................................. 4,565 612 144 302 -- 5,623
Interest expense................................. 3,430 4,976 209 790 -- 9,405
Identifiable assets at December 31............... 555,476 130,174 61,875 38,948 (223,229) 563,244
Depreciation and amortization expense............ 34,270 23,238 7,023 1,108 -- 65,639
Capital expenditures............................. 70,662 15,102 6,534 1,489 -- 93,786
Income tax expense (credit)...................... 11,776 (4,763) 285 756 (237) 7,817
Net income (loss)................................ $ (238,847) $ (64,750) $ (49,855) $ 1,833 $ (5,248) $ (356,867)
NORTH LATIN
AMERICA EUROPE ASIA/PACIFIC AMERICA OTHER(3) TOTAL
---------- --------- ----------- --------- ---------- ----------
(IN THOUSANDS)
1996:
Net revenues from unaffiliated customers......... $ 356,863 $ 233,224 $ 93,622 $ 50,831 $ -- $ 734,540
Transfers between segments(1).................... (15,348) 2,646 6,156 6,546 -- --
Total net revenues............................... 341,515 235,870 99,778 57,377 -- 734,540
Operating income (loss)(2)....................... (35,276) (20,520) (11,576) 4,693 1,353 (61,326)
Interest income.................................. 8,428 835 60 545 -- 9,868
Interest expense................................. 7,879 4,363 233 -- 12,475
Identifiable assets at December 31............... 734,852 218,196 101,203 44,803 (217,056) 881,998
Depreciation and amortization expense............ 24,868 11,692 9,475 1,172 -- 47,207
Capital expenditures............................. 101,760 30,030 14,505 1,975 -- 148,270
Income tax expense (credit)...................... (924) 10,933 1,114 1,109 299 12,531
Net income (loss)................................ $ (7,232) $ (57,520) $ (13,052) $ 3,468 $ 771 $ (73,565)
- --------------------------
(1) The Company makes allocations of revenue to operating segments depending on
the location of the country where the order is placed, the location of the
country where the license is installed or service is delivered, the type of
revenue (license or service) and whether the sale was through a reseller or
to an end user.
The accounting policies of the segments are the same as those described in
Note 1--Summary of Significant Accounting Policies.
(2) Operating income/(loss) excludes the effect of transfers between segments.
(3) Represents consolidating adjustments such as elimination of intercompany
balances.
F-26
The Company's revenues are derived from licensing our database servers and
related tools and connectivity/gateway software, and performing services, which
include maintenance and consulting/training. Information as to the Company's
revenues from external customers for all reportable segments is as follows:
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
License revenues................................................. $ 383.5 $ 378.2 $ 502.7
--------- --------- ---------
Service revenues
Maintenance.................................................... 253.6 188.0 159.0
Consulting and training........................................ 97.9 97.7 72.8
--------- --------- ---------
351.5 285.7 $ 231.8
--------- --------- ---------
$ 735.0 $ 663.9 $ 734.5
--------- --------- ---------
--------- --------- ---------
Information as to the Company's operations in different geographical areas
is as follows:
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
Revenues, net of transfers between segments:
United States.................................................. $ 355.6 $ 300.7 $ 341.5
--------- --------- ---------
Total North America............................................ 355.6 300.7 341.5
--------- --------- ---------
United Kingdom................................................. 63.8 61.0 56.3
Germany........................................................ 69.2 63.8 92.6
France......................................................... 19.5 26.2 23.9
Italy.......................................................... 10.9 18.0 11.7
Spain.......................................................... 10.8 7.0 7.5
Other countries................................................ 66.7 52.1 43.9
--------- --------- ---------
Total Europe................................................... 240.9 228.1 235.9
--------- --------- ---------
Japan.......................................................... 26.2 18.7 31.5
Hong Kong...................................................... 10.8 16.1 19.5
China.......................................................... 9.7 3.4 0.5
Korea.......................................................... 5.6 12.4 16.7
Other countries................................................ 29.0 30.9 31.6
--------- --------- ---------
Total Asia/Pacific............................................. 81.3 81.5 99.8
--------- --------- ---------
Mexico......................................................... 21.6 18.8 25.4
Brazil......................................................... 11.3 9.2 6.6
Argentina...................................................... 7.5 7.9 7.8
Other countries................................................ 16.8 17.7 17.6
--------- --------- ---------
Total Latin America............................................ 57.2 53.6 57.4
--------- --------- ---------
$ 735.0 $ 663.9 $ 734.5
--------- --------- ---------
--------- --------- ---------
F-27
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
Property and equipment, net
United States.................................................... $ 56.9 $ 71.7 $ 128.2
Other............................................................ 0.2 0.2 0.2
--------- --------- ---------
Total North America.............................................. 57.1 71.9 128.4
--------- --------- ---------
United Kingdom................................................... 2.0 3.5 13.3
Germany.......................................................... 3.9 3.9 11.7
France........................................................... 1.3 1.9 4.6
Ireland.......................................................... 1.1 1.6 2.5
Other countries.................................................. 3.6 5.9 8.5
--------- --------- ---------
Total Europe..................................................... 11.9 16.8 40.6
--------- --------- ---------
Asia/Pacific..................................................... 3.0 4.0 14.6
Latin America.................................................... 2.9 3.3 3.1
--------- --------- ---------
Total Asia/Pacific and Latin America............................. 5.9 7.3 17.7
--------- --------- ---------
$ 74.9 $ 96.0 $ 186.7
--------- --------- ---------
--------- --------- ---------
No single customer accounted for 10% or more of the consolidated revenues of the
Company in fiscal 1998, 1997 or 1996.
NOTE 10--INCOME TAXES
The provision for income taxes applicable to income (loss) before income
taxes consists of the following:
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
Currently payable:
Federal......................................................................... $ 2,690 $ (2,264) $ 1,540
State........................................................................... 90 -- 565
Foreign......................................................................... (1,357) 10,415 6,216
--------- --------- ---------
1,423 8,151 8,321
Deferred:
Federal......................................................................... (4,071) (3,857) (1,748)
State........................................................................... (1,462) (189) (2,983)
Foreign......................................................................... 8,509 3,712 8,941
--------- --------- ---------
2,977 (334) 4,210
--------- --------- ---------
$ 4,400 $ 7,817 $ 12,531
--------- --------- ---------
--------- --------- ---------
F-28
In 1998, 1997 and 1996, the Company recognized tax benefits related to stock
option plans of $0 million, $0 million and $14.8 million, respectively. Such
benefits were recorded as an increase to additional paid-in capital.
Income (loss) before income taxes consists of the following:
1998 1997 1996
--------- ----------- ----------
(IN THOUSANDS)
Domestic...................................................................... $ 10,238 $ (227,266) $ (26,510)
Foreign....................................................................... 51,880 (121,784) (34,524)
--------- ----------- ----------
$ 62,118 $ (349,050) $ (61,034)
--------- ----------- ----------
--------- ----------- ----------
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:
1998 1997 1996
----------------------- ---------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ----------- ----------- --------- ---------- ---------
(IN THOUSANDS)
Computed tax at federal statutory rate.... $ 21,741 35.0% $ (122,167) (35.0)% $ (21,362) (35.0)%
Valuation allowance....................... (13,831) (22.3)% 116,978 33.5% 41,192 67.5%
Research and development credits.......... -- 0.0% -- 0.0% (1,457) (2.4)%
State income taxes, net of federal tax
benefit................................. (1,372) (2.2)% -- 0.0% (1,572) (2.6)%
Foreign withholding taxes not currently
creditable.............................. 2,690 4.3% -- 0.0% -- 0.0%
Foreign taxes, net........................ (4,395) (7.0)% 10,415 3.0%
Other, net................................ (433) (0.7)% 2,591 0.7% (4,270) (7.0)%
---------- ----- ----------- --------- ---------- ---------
$ 4,400 7.1% $ 7,817 2.2% $ 12,531 20.5%
---------- ----- ----------- --------- ---------- ---------
---------- ----- ----------- --------- ---------- ---------
F-29
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial statement
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1998 and
1997 are as follows:
1998 1997
---------- ----------
(IN THOUSANDS)
Deferred Tax Assets:
Reserves and accrued expenses............................................................. $ 7,981 $ 13,457
Deferred revenue.......................................................................... 3,381 3,626
Foreign net operating loss carryforwards.................................................. 43,490 74,243
Domestic net operating loss carryforwards................................................. 78,356 79,924
Domestic net operating loss carryback..................................................... -- 34,000
Foreign taxes credit...................................................................... 7,247 4,555
R&D credit carryforwards.................................................................. 22,218 15,559
Valuation of investment portfolio FAS 115................................................. -- 307
Other..................................................................................... 11,146 2,345
---------- ----------
Total deferred tax assets................................................................. 173,819 228,016
Valuation allowance for deferred tax assets............................................... (157,711) (178,353)
---------- ----------
Deferred tax assets, net of valuation allowance........................................... 16,108 49,663
Deferred Tax Liabilities:
Capitalized software...................................................................... 14,130 14,051
Revenue recognition....................................................................... -- 1,612
Valuation of investment portfolio FAS 115................................................. 1,978 --
---------- ----------
Total deferred tax liabilities............................................................ 16,108 15,663
---------- ----------
Net deferred tax assets................................................................... $ -- $ 34,000
---------- ----------
---------- ----------
At December 31, 1998, the Company had approximately $122.6 million, $164.2
million and $164.2 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 $4.7 million, $11.3 million and $22.7 million in 1998,
1997 and 1996, respectively. The valuation allowance for deferred tax assets
decreased by $20.6 million in 1998 and increased by $132.0 million and $41.2
million in 1997 and 1996, respectively.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets at December 31, 1998 will be as follows:
Income tax benefit from continuing operations..................................... $ 143,584
Goodwill and other noncurrent intangible assets................................... 14,127
----------
Total............................................................................. $ 157,711
----------
----------
NOTE 11--BUSINESS COMBINATIONS
On December 31, 1998, the Company acquired Red Brick Systems, Inc. ("Red
Brick"), a provider of scalable decision support solutions for data warehousing,
data marts, OLAP and data mining. Under terms of the acquisition, the Company
issued approximately 7.6 million shares of its Common Stock in exchange for all
outstanding shares of Red Brick Common Stock. In addition, the Company issued
options to purchase approximately 2.5 million shares of the Company's Common
Stock in exchange for outstanding unvested options to purchase Red Brick common
stock. The acquisition was accounted for using the
F-30
purchase method of accounting, and a summary of the purchase price for the
acquisition is as follows (in thousands):
Stock and stock options, net of issuance costs..................... $ 35,914
Direct acquisition costs........................................... 1,042
Other liabilities assumed.......................................... 5,892
Accrued merger and integration costs............................... 7,850
Deferred revenue................................................... 5,149
---------
Total.............................................................. $ 55,847
---------
---------
The purchase price was allocated as follows:
Cash and short-term investments acquired........................... $ 7,763
Other tangible assets acquired..................................... 10,281
Intangible assets
Capitalized software.................................... 7,400
Workforce............................................... 4,700
Goodwill................................................ 23,103
---------
35,203
In-process research and development................................ 2,600
---------
Total.............................................................. $ 55,847
---------
---------
In-process research and development represents the fair value of
technologies acquired for use in the Company's own development efforts. The
Company determined the amount of the purchase price to be allocated to
in-process research and development based on an independent appraisal of certain
intangible assets which indicated that approximately $2.6 million of the
acquired intangible assets consisted of in-process research and development that
had not yet reached technological feasibility and had no alternative future
uses. Accordingly, the Company recorded a charge to operations of $2.6 million
in the fourth quarter of fiscal 1998. The remaining intangible assets acquired,
with an assigned value of approximately $35.2 million, were included in
"Intangible Assets" in the accompanying consolidated balance sheets, and are
being amortized over three to five years.
Accrued merger and integration costs included approximately $1.6 million for
severance and related costs, $4.7 million for costs associated with the shutdown
and consolidation of the Red Brick facilities and $1.6 million for costs
associated with settling acquired royalty commitments for abandoned technology.
As of December 31, 1998, no accrued merger and integration costs had been paid.
The Company expects to complete its termination of employees and consolidation
of facilities by the end of fiscal 1999.
The following unaudited pro forma finanacial information presents the
combined results of operations of Informix and Red Brick as if the acquisition
had occurred as of the beginning of 1998 and 1997, after giving effect to
certain adjustments, including amortization of goodwill and excluding the
write-off of acquired in-process research and development in 1998. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the two companies constituted a single entity
during such periods.
YEAR ENDED
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS, EXCEPT
FOR PER SHARE DATA)
Net revenues.............................................................................. $ 769,466 $ 707,207
Net income (loss)......................................................................... 29,420 (381,931)
Net income (loss) per share............................................................... 0.13 (2.42)
F-31
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 first quarter of fiscal
1997, the period the acquisition was consummated. The remaining identifiable
intangible assets are being amortized over three to five years. CenterView's
results of operations for fiscal 1996 were not material.
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 the Company's common stock were issued to
acquire all outstanding shares of Illustra common stock. An additional 2.3
million shares of the Company's common stock were reserved for issuance in
connection with the assumption of Illustra's outstanding stock options and
warrants. The transaction has been accounted for as a pooling of interests, and
accordingly, 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.
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 former 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 former
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
for any claims asserted against it. The Company has not set aside any financial
reserves relating to any of the above-referenced actions.
F-32
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.
From time to time, in the ordinary course of business, the Company is
involved in various legal proceedings and claims. The Company does not believe
that any of these proceedings and claims will have a material adverse effect on
the Company's business or financial condition.
NOTE 13--NONRECURRING CHARGES
In accordance with Statement of Financial Accounting Standards No. 121 (SFAS
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 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 1997 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 expense charge and adjustments to restructuring expense
included in the Company's consolidated statements of operations for the years
ended December 31, 1998 and 1997 as well as the significant components of the
restructuring reserve at December 31, 1998:
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------- -----------------------------------------
ACCRUAL
BALANCE AT
RESTRUCTURING NON-CASH CASH DEC. 31, NON-CASH CASH
EXPENSE COSTS PAYMENTS 1997 COSTS PAYMENTS ADJUSTMENTS
------------- ----------- ----------- ----------- ------------- ----------- -------------
(IN MILLIONS)
Severance and benefits....... $ 21.9 $ -- $ 19.5 $ 2.4 $ -- $ 0.1 $ 2.2
Write-off of assets.......... 48.2 48.2 -- -- -- -- --
Facility charges............. 34.7 7.7 3.8 23.2 1.1 8.8 8.1
Other........................ 3.4 2.2 0.2 1.0 -- 0.5 --
------ ----- ----- ----- --- --- -----
$ 108.2 $ 58.1 $ 23.5 $ 26.6 $ 1.1 $ 9.4 $ 10.3
------ ----- ----- ----- --- --- -----
------ ----- ----- ----- --- --- -----
ACCRUAL
BALANCE AT
DEC. 31,
1998
-------------
Severance and benefits....... $ 0.1
Write-off of assets.......... --
Facility charges............. 5.2
Other........................ 0.5
---
$ 5.8
---
---
F-33
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
consisted primarily of computer servers, workstations, and personal computers
that are no longer utilized in the Company's operations. Facility charges
include early termination costs associated with the closing of certain domestic
and international sales offices.
In fiscal 1998, the Company recorded restructuring-related adjustments to
decrease restructuring expense by $10.3 million primarily due to adjusting the
estimated severance and facility charges to actual costs incurred. The Company
has substantially completed actions associated with its restructuring except for
subleasing or settling its remaining long-term operating leases related to
vacated properties. The terms of such operating leases expire at various dates
through 2003.
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,
1998, no borrowings were outstanding under the Credit Facility, the Company's
net accounts receivable totaled $187 million and its borrowing base under the
Credit Facility was $61 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 accounts receivable to the
difference of current liabilities less deferred and unearned revenues, (b)
maintain quarterly revenues of $154 million, (c) maintain quarterly operating
profit of at least $14.5 million for the quarter ended December 31, 1998 and a
quarterly operating profit of at least $3 million for the quarter ending March
31, 1999 and a quarterly operating profit of at least $15 million for the
quarter ending June 30, 1999 and thereafter, (d) maintain a positive quarterly
cash flow consisting of operating income which does not include any restated
revenue resulting from the Company's November 1997 restatement of its financial
statements, capitalized software costs, capital expenditures or cash outlays in
respect of accrued expenses arising from restructuring charges (but which income
figure does take into account depreciation and amortization expenses), (e)
maintain an interest coverage ratio of 1.25 to 1.00 in respect of quarterly
operating cash flow to interest expense plus scheduled amortization of debt, (f)
refrain from making additional investments in fixed or capital assets, in any
fiscal year, in excess of $30 million, plus any carry forward amount which carry
forward amount cannot exceed $5.0 million, and (g) obtain permission from the
lenders before entering into any merger, consolidation, reorganization or other
transaction resulting in a fundamental change.
For the quarter ended December 31, 1998, the Company exceeded its investment
in capital assets allowed by the loan agreement and its subsequent amendments.
However, the banks waived the compliance of the capital expenditures covenant
for the quarter in an amendment to the loan agreement made prior to December 31,
1998. There is no assurance that the Company will be able to meet its
obligations under the amended loan agreement.
NOTE 15--COMPREHENSIVE INCOME (LOSS)
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income" which establishes
standards for displaying comprehensive income and its components.
F-34
The components of accumulated other comprehensive income (loss) consist of
the following items:
ACCUMULATED
UNREALIZED OTHER
FOREIGN GAINS/(LOSSES) COMPREHENSIVE
CURRENCY ON SECURITIES INCOME/(LOSS)
---------- ------------- --------------
(IN THOUSANDS)
December 31, 1995..................................................... $ (6,343) $ 4,064 $ (2,279)
Current-period change................................................. (3,838) 7,626 3,788
---------- ------------- --------------
December 31, 1996..................................................... (10,181) 11,690 1,509
Current-period change................................................. (955) (12,457) (13,412)
---------- ------------- --------------
December 31, 1997..................................................... (11,136) (767) (11,903)
Current-period change................................................. 3,351 5,202 8,553
---------- ------------- --------------
December 31, 1998..................................................... $ (7,785) $ 4,435 $ (3,350)
---------- ------------- --------------
---------- ------------- --------------
The tax effect on components of comprehensive income (loss) is not
significant.
NOTE 16--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which establishes guidelines
for the accounting for the costs of all computer software developed or obtained
for internal use. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. The Company is currently evaluating the impact of SOP 98-1 on
its financial statements and related disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities,"
which establishes standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS 133 is effective for fiscal years beginning after June 15,
1999. Earlier application of SFAS 133 is encouraged but should not be applied
retroactively to financial statements of prior periods. The Company is currently
evaluating the requirements and impact of SFAS 133.
In December 1998, the AICPA issued Statement of Position 98-9 (SOP 98-9),
"Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions." This amendment clarified the specification of what was considered
vendor specific objective evidence of fair value for the various elements in a
multiple element arrangement. SOP 98-9 is effective for all transactions entered
into by the Company in fiscal year 2000. The adoption of this statement is not
expected to have a material impact on the Company's operating results, financial
position or cash flows.
F-35
INFORMIX CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
---------------------------
CHARGED TO
BALANCE AT CHARGED TO REVENUES
BEGINNING COSTS AND -------------- BALANCE AT
OF PERIOD EXPENSES DEDUCTIONS(1) OTHER(2) END OF YEAR
----------- ----------- (IN THOUSANDS) ------------- ----------- -----------
Allowance for Doubtful Accounts
Year ended December 31, 1998.............. $ 27,104 $ (264) $ (4,529) $ 8,754 $ 1,477 $ 15,034
Year ended December 31, 1997.............. 21,429 13,226 -- 7,551 -- 27,104
Year ended December 31, 1996.............. 12,854 15,329 (346) 6,408 -- 21,429
- ------------------------
(1) Uncollectible accounts written off, net of recoveries
(2) Allowance for doubtful accounts acquired from Red Brick Systems, Inc. (Note
11)
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT TITLE
- ------------ --------------------------------------------------------------------------------------------------
3.1(3) Certificate of Incorporation of the Registrant, as amended
3.2(a)(3) Bylaws of the Registrant, as amended
3.2(b) 25) Amendment to Bylaws, dated April 24, 1998
3.2(c)(2) Amendment to Bylaws, dated June 19, 1998
3.2(d)(2) Amendment to Bylaws, dated July 15, 1998
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(25) 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
10.23(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
EXHIBIT NO. EXHIBIT TITLE
- ------------ --------------------------------------------------------------------------------------------------
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
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.
EXHIBIT NO. EXHIBIT TITLE
- ------------ --------------------------------------------------------------------------------------------------
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* Offer of Employment Letter, dated December 16, 1998, from the Registrant to Howard A. Bain, III
10.55* Offer of Employment Letter, dated July 14, 1998, from the Registrant to Richard Snook
10.55(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.
10.56(1) Office Lease, dated April 10, 1995, between the Registrant and 3905 Bohannon Partners for office
space at 3905 Bohannon Drive, including addenda thereto.
10.57(24) 1998 Non-Statutory Stock Option Plan
21.1* Subsidiaries of the Registrant
23.1* Report on Schedule and Consent of KPMG LLP, Independent Auditors
23.2* Report on Schedule and Consent of Ernst & Young LLP, Independent Auditors
24.1(2) Power of Attorney (set forth on signature page)
27.1* Financial Data Schedule
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* Filed herewith
(1) Previously filed
(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
(24) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (File no. 333-61843) filed with the
Commission on August 19, 1998.
(25) Incorporated by reference to exhibits filed with the Registrant's annual
report on Form 10-K for the fiscal year ended December 31, 1997.