-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BpZ9DB0iCqvpw3HaFteqHz7N5QrlrtF20g8ZcU9DSlS/QoXeQHQYrNVpOYY7So5K jUBkITLyQXWnMINSkSgq5w== 0001047469-97-005359.txt : 19971119 0001047469-97-005359.hdr.sgml : 19971119 ACCESSION NUMBER: 0001047469-97-005359 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19971118 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INFORMIX CORP CENTRAL INDEX KEY: 0000799089 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943011736 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-15325 FILM NUMBER: 97723730 BUSINESS ADDRESS: STREET 1: 4100 BOHANNON DR CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 4159266300 MAIL ADDRESS: STREET 1: 4100 BOHANNON DRIVE CITY: MENLOW PARK STATE: CA ZIP: 94025 10-K/A 1 10-K/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-15325 ------------------------ INFORMIX CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-3011736 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification organization) 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 (Title of each class) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of the 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K/A. /X/ The aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 28, 1997 was approximately $2,616,000,000. Shares of Common Stock held by each officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 28, 1997, Registrant had outstanding 151,163,317 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE (to be deemed filed only to the extent specifically incorporated herein by reference and not otherwise excluded by law): PART III: Parts of the Proxy Statement to be used in conjunction with Registrant's Annual Stockholders Meeting to be held May 22, 1997. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMIX CORPORATION 1996 ANNUAL REPORT ON FORM 10-K/A TABLE OF CONTENTS
PART I PAGE --------- Item 1. Business............................................................ 4 Item 2. Properties.......................................................... 12 Item 3. Legal Proceedings................................................... 12 Item 4. Submission of Matters to a Vote of Security Holders................. 13 PART II 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............................................... 15 Item 8. Financial Statements and Supplementary Data......................... 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................ 52 PART III Item 10. Directors and Executive Officers of Registrant...................... 53 Item 11. Executive Compensation.............................................. 53 Item 12. Security Ownership of Certain Beneficial Owners and Management...... 53 Item 13. Certain Relationships and Related Transactions...................... 53 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 54 SIGNATURES............................................................................ 56
2 FORWARD LOOKING STATEMENTS This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements as a result of certain factors described herein and in other documents. Readers should pay particular attention to the risk factors described in the section of this Report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." Readers should also carefully review the risk factors described in the other documents the Company files from time to time with the Securities and Exchange Commission, specifically the Quarterly Reports on Form 10-Q to be filed by the Company in 1997 and any Current Reports on Form 8-K filed by the Company. AMENDED FILING OF FORM 10-K FOR 1996 RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION On August 7, 1997 and again on September 22, 1997, the Company announced that as a result of errors and irregularities discovered in the recording of income in 1996 and 1995 the Company anticipated restating its financial statements. The procedures undertaken by the Company to determine the extent of the restatement (described in those announcements) have resulted in the restatement of its financial statements for 1996, 1995 and 1994 (see Note 1 to the Consolidated Financial Statements). General information in the originally filed Form 10-K was presented as of the March 29, 1997 filing date or earlier, as indicated. Unless otherwise stated, such information has not been updated in this amended filing. Financial statement and related disclosures contained in this amended filing reflect, where appropriate, changes to conform to the restatement. 3 PART I ITEM 1. BUSINESS BACKGROUND The Company is a multinational supplier of high-performance, parallel processing database technology for open systems. The Company's products also include applications development tools for creating client/server production applications, decision-support systems, ad-hoc query interfaces, and software that allows information to be shared from personal computers to mainframes within the corporate computing environment. In addition to software products, the Company offers training, consulting, and post-contract support to its customers. The principal geographic markets for the Company's products are in North America, Europe, Asia/Pacific, Japan, and Latin America. Customers include large-, medium- and small-sized corporations in the manufacturing, financial services, telecommunications, retail/wholesale, hospitality and government services sectors. The Company was initially incorporated in California in 1980 and was reincorporated in Delaware in August 1986. Unless the context requires otherwise, the terms "Company" and "Informix" refer to Informix Corporation and its subsidiaries. The Company maintains its executive offices at 4100 Bohannon Drive, Menlo Park, California 94025. Its telephone number is (650) 926-6300. All of the Company's database products developed since 1983 support Structured Query Language ("SQL"), an industry standard created by IBM. The Company's core database management software runs on the UNIX-Registered Trademark-, Windows-TM- and Windows/NT-TM- operating systems, and certain networks composed of computers running these operating systems. The Company's customers consist primarily of end-users, application vendors, original computer equipment manufacturers ("OEMs") and distributors. The Company markets its products directly to end-users through its sales force and indirectly to end-users through application vendors, OEMs and distributors. The Company markets its products worldwide and has operating subsidiaries in 37 foreign countries. In February 1996, the Company acquired Illustra Information Technologies, Inc. ("Illustra"), a United States based provider of object-relational database systems and tools for managing complex data, such as audio, video, text and images. Approximately 12,700,000 shares of the Company's common stock were issued to acquire all of the outstanding shares of Illustra stock. An additional 2,300,000 shares were reserved by the Company for future issuance in connection with the assumption of Illustra's outstanding stock options and warrants. The transaction was accounted for as a pooling of interests. In December 1996, the Company announced the availability of a new product based on the Illustra technology named INFORMIX-Registered Trademark--Universal Server. INFORMIX-Universal Server combines the object relational technology developed by Illustra with the core database technology based on Informix's Dynamic Scalable Architecture-TM- giving customers the ability to manage all kinds of data throughout their enterprises. PRODUCTS DATABASE SERVERS AND CONNECTIVITY PRODUCTS DATABASE SERVERS The Company offers a full line of relational database servers. The Company's principal servers include: INFORMIX-Universal Server, a new, enterprise capable, fully-extensible object relational database server based on Informix's Dynamic Scalable Architecture. This product became available in December 1996. INFORMIX-Universal Server allows customers to intelligently manage traditional datatypes alongside new kinds of data, such as audio, video, text and images. This extensibility is obtained through the use of DataBlade-Registered Trademark- modules--reusable, plug-in object 4 extensions--which expand the general purpose capabilities of INFORMIX-Universal Server to provide data storage and management functionality for non-traditional datatypes. Customers can select prebuilt DataBlade modules (available from the Company and many other companies) or design their own DataBlade modules with the INFORMIX-DataBlade Developer's Kit to accommodate their unique data management requirements. DataBlade modules available from the Company include: INFORMIX-Spatial, INFORMIX-TimeSeries, INFORMIX-Video Foundation and INFORMIX-Web. INFORMIX-OnLine Dynamic Server-TM- , a high performance, enterprise capable online transaction processing database server. This product is based on the Company's Dynamic Scalable Architecture and features parallel data processing capability, replication and connectivity options built into its core. INFORMIX-OnLine Workgroup Server, a database management system designed specifically for workgroups. This product is based on the Company's Dynamic Scalable Architecture and comes bundled with Netscape FastTrack Server. This product became available in the third quarter of 1996. INFORMIX-OnLine Extended Parallel Server, a high-performance, scalable database server which extends the Company's Dynamic Scalable Architecture to loosely coupled, "shared nothing" computing architectures, including clusters of symmetric multiprocessing systems and massively parallel processing systems. CONNECTIVITY PRODUCTS The Company's principal connectivity products include: INFORMIX-Enterprise Gateway-TM- Manager, a connectivity tool allowing applications running on UNIX, Microsoft Windows or Windows 95 to access data sources via loadable gateway drivers. The Company offers gateway drivers for Oracle and Sybase databases. Drivers for additional data sources are available from various third parties. INFORMIX-Enterprise Gateway with DRDA, a UNIX-based connectivity tool allowing interoperability to IBM databases such as DB2, DB2/VM and DB2/400 from Windows and UNIX clients. INFORMIX-Gateway with DRDA allows applications built with Informix application development tools to access and modify information in Distributed Relational Database Architecture-TM- -compliant database management systems. INFORMIX-ESQL for C and COBOL, embedded SQL products which permit developers to take advantage of SQL technology while building applications in C or COBOL. INFORMIX-CLI, a library of low level functions that provide high performance direct access to Informix databases from applications built in C or other third generation languages. INFORMIX-CLI is compliant with Microsoft's ODBC specifications. INFORMIX-Universal Web Connect-TM-, a tool that provides high performance connectivity between Web servers and databases. INFORMIX-Universal Web Connect enables Web developers to create "intelligent" web applications that dynamically deliver multimedia rich, tailored Web pages to users. 5 DATABASE TOOLS The Company offers a variety of database application development tools designed to allow users to build applications. The Company's principal database tools include: INFORMIX-NewEra-TM-, a graphical, object-oriented development environment designed for creating enterprise-wide multi-tier client/server database applications. INFORMIX-NewEra features a fourth-generation object-oriented programming language, reusable class libraries, application partitioning, and flexible application deployment, and supports open connectivity to Informix and non-Informix databases. INFORMIX-NewEra is currently available for Microsoft-Registered Trademark- Windows-TM- and OSF Motif-TM-. INFORMIX-4GL, a character-based development environment, which includes a fourth-generation programming language with full screen-building, report entry and SQL database input/ output capabilities. The INFORMIX-4GL product family is comprised of three core products: INFORMIX-4GL Compiled, INFORMIX-4GL Rapid Development System and INFORMIX-4GL Interactive Debugger. INFORMIX-SQL, a package of five interactive tools for creating character-based applications. INFORMIX-SQL consists of a forms package, a report writer, an interactive SQL editor, a menu builder and an interactive schema editor. INFORMIX-MetaCube-TM-, a high-performance on-line analytical processing engine that automatically preconsolidates data and provides a multidimensional view of data without the constraints of a two dimensional (row and table) data model. The INFORMIX-MetaCube product family also includes MetaCube Explorer, an adhoc decision support tool for end users, MetaCube Warehouse Manager, a graphical tool for administering the "metadata" describing a database in a logical, user-friendly view, MetaCube Scheduler for batch processing, MetaCube Queryback for running queries in the background, MetaCube Aggregator for creating and maintaining aggregates in a data warehouse, MetaCube for Excel which enables data warehouse analysis in an Excel spreadsheet environment, and MetaCube for the Web which brings MetaCube analysis capabilities to intranets. MAINTENANCE, CONSULTING AND SERVICES The Company maintains field-based and centralized corporate technical staffs to provide a comprehensive range of assistance to its customers. These services include pre- and post-sales technical assistance, consulting, product and sales training and technical support services. Consultants and trainers provide services to customers to assist them in the use of the Company's products and the design and development of applications that utilize the Company's products. The Company provides post-sales support to its customers on an optional basis for annual fees which generally range from 10% to 18% of the license fees paid by the customer. These support services usually include product updates. During 1996 and the first half of 1997, Informix launched a series of Information SuperStores worldwide which demonstrated and offered the most recent Informix technology advances. Along with the core Informix product line, these locations carried tools from leading third-party tools and application vendors installed on a wide variety of hardware platforms, such as Data General, Hewlett Packard, IBM, NCR, Pyramid, Sequent, Silicon Graphics, and Sun. The Company has scaled back its original plans for the SuperStores and repositioned the remaining sites as solution labs managed by the Company's consulting practice. The Company's decision in 1997 to scale back resulted in charges to operations in 1997. 6 MARKETING AND CUSTOMERS The Company distributes its products through the channels of direct end-user licensing, OEMs, application vendors addressing specific markets and distributors. The Company has chosen a multiple channel distribution strategy to maintain broad market coverage and product availability. The Company, therefore, has generally avoided exclusive relationships with its licensees and other resellers of its products. Discount policies and reseller licensing programs are intended to support each distribution channel with a minimum of channel conflict. The Company also provides a financing option to customers in connection with the license of software. At December 31, 1996, the Company's sales, marketing and support staff totaled 1,427 regular employees in the North America region; 122 regular employees in the Latin America region, 947 regular employees in the Europe, Middle East and Africa regions, 344 regular employees in the Asia/Pacific region and 99 regular employees in Japan. LICENSING END-USER LICENSING The Company licenses its products to large companies and government entities through its direct sales force, and to certain of these companies, as well as smaller end-users, through its telemarketing sales force. The Company believes that the common core technology of its database management system products, based on standard operating systems and the SQL database language, helps it sell into major corporations and government agencies that wish to standardize their diverse computing environments. As a result, certain of these end-user organizations have entered into general purchasing agreements with the Company which offer volume discounts. APPLICATION VENDOR LICENSING Since its inception, the Company has licensed application vendors to distribute its products. A typical application vendor develops an application product (e.g., an insurance agency management system) using one of the Company's products and then licenses the resultant application software to its customers in the target market. The application vendor customer purchases a license for use of the Company's product to develop an applications program. Depending on the application program developed, it may include a run-only license, a full version license or even multiple product licenses. Application vendors develop applications using a wide array of application development tools, including products from the Company, such as INFORMIX-NewEra, INFORMIX-4GL and INFORMIX-SQL, as well as products offered by third parties. Applications developed using the Company's products are generally portable across various brands of computers and different operating systems. The Company has specialized programs to support the application vendor distribution channel. Under these programs, the Company provides to selected application vendors a combination of marketing development services, consulting and technical marketing support and discounts. OEM LICENSING The Company's products are also marketed with the assistance of the sales forces of its OEM customers who have concluded that "solution selling" of a combination of software and hardware to their respective customers enhances the sales of their computer equipment. The Company believes that the compatibility and range of applications for its products are significant to this distribution channel. 7 DISTRIBUTOR LICENSING The Company has established a network of full service international distributors who provide local service and support, as well as the Company's products, to their respective national markets. Distributors are used to supplement the Company's direct sales force and enable the Company to sell its products and services in countries where the Company has not established a direct sales force. PRODUCT DEVELOPMENT The computer software industry is highly competitive and rapidly changing. Consequently, the Company dedicates considerable resources to research and development efforts to enhance its existing product lines and to develop new products to meet new market opportunities. Most of the Company's current software products and accompanying documentation have been developed internally; however, the Company has acquired certain software products from others and plans to do so again in the future. Major product releases resulting from research and development projects in 1996 included the release of INFORMIX-Universal Server, the release of INFORMIX-OnLine WorkGroup Server and new releases of INFORMIX-OnLine Dynamic Server and INFORMIX-OnLine Extended Parallel Server. Current product development is focused toward: Improvement and enhancement of current products and new products, with particular emphasis on parallel computer architecture, user-defined database extensions, Web technology integration, graphical desk top and system administration. Improvements to the Company's products to provide greater speed and support for larger numbers of concurrent users. Adaptation of new products to the broad range of computer brands and operating systems the Company currently supports and adaptation of current products to new brands of computers and operating systems which represent attractive market opportunities for the Company's products. There can be no assurance that the Company's product development efforts will be successful or that any new products will achieve significant market acceptance. As of December 31, 1996, the Company had 967 regular employees engaged in research and development. During 1994, 1995 and 1996, the Company expensed $64.3 million, $85.6 million and $120.2 million, respectively, on research and development, representing approximately 14%, 14% and 16% of revenues for such periods. Also during fiscal 1994, 1995 and 1996, the Company capitalized costs in accordance with Statement of Financial Accounting Standards No. 86 of $13.6 million, $17.5 million and $28.4 million, respectively. See Item 7 of this Annual Report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations--Research and Development Expenses." COMPETITION The Company faces intense competition in the market for relational database management system software products. Companies in this market compete primarily on the basis of price/performance characteristics, name recognition, and technical support, training and consulting services. With respect to product performance, the Company believes that the principal competitive factors include: Application development productivity (the speed with which applications can be built). Database performance (the speed at which database storage and retrieval functions are executed). 8 The ability to support large warehouses of information. Reliability, availability and serviceability. The distribution of software applications and data across networks of computers from multiple suppliers. Increasingly, the ability to manage complex data and solve more complex business problems based on such data. The Company believes that the technical advantages of its products, its approach to sales and marketing, its relations with application vendors, OEMs and distributors and its customer service and support contribute to its ability to compete in this market. The chief competition faced by the Company is currently provided by Oracle Corporation, Sybase, Inc., IBM Corporation and Microsoft Corporation. Several of the Company's current competitors have greater financial, technical and marketing resources than the Company. To the extent that market acceptance for personal computer oriented technologies increases at the expense of UNIX or other non-PC platforms, this could result in greater price pressure on certain of the Company's database products and services. The availability and market acceptance of Microsoft Corporation's Windows NT operating system may increase the competition faced by the principal operating system platforms on which the Company's products operate and may result in greater price pressure on certain of the Company's database products and services. Also, new or enhanced products introduced by existing or future competitors could have an adverse effect on the Company's business. Existing and future competition or changes in the Company's product or service pricing structure or product or service offerings could result in an immediate reduction in the prices of the Company's products or services. If this were to result in significant price declines, the effects of which were not offset by any resulting increases in sales volume of the Company's products or services, the Company's business, results of operations and financial condition would be adversely affected. PRODUCT PROTECTION The Company relies on a combination of trade secret, copyright and trademark laws, license agreements and technical measures to protect its rights in its software products. Like many software companies, the Company has no patents to date, although it has several applications pending. The Company maintains trademark and service mark registrations in the United States and numerous other foreign jurisdictions. The Company's products are generally licensed to end-users on a "right-to-use" basis pursuant to a license that restricts the use of the products for the customer's internal business purposes. The Company also relies on "shrink-wrap" licenses. The Company's "shrink-wrap" license includes a prominently displayed notice informing the end-user that, by opening the product packaging, the end-user agrees to be bound by the Company's license agreement printed on the package. Copyright and trade secret protection for source and object code version of software products may be unavailable in certain foreign countries. In addition, "shrink-wrap" licenses may be wholly or partially unenforceable under the laws of certain jurisdictions. The Company protects the human readable, source code version of its products as a trade secret and an unpublished copyrighted work. The Company has licensed the source code of its products to certain customers under certain circumstances, and for restricted uses. In addition, the Company has entered into source code escrow agreements with a number of its customers that generally require release of source code to the customer in the event there is a bankruptcy or similar proceeding by or against the Company, the Company ceases to do business or the Company ceases to support the product. In the event of a release of the source code to a customer, the customer is required to maintain its confidentiality and, in general, to 9 use the source code solely for internal business purposes or for the purpose of providing maintenance and support to its customers, and, in certain circumstances, to embedding it in customer products. The Company believes that, because of the rapid pace of technological change in the computer software industry, patent, trade secret and copyright protection are less significant than factors such as the knowledge, ability and experience of the Company's personnel, new product introduction, frequent product enhancement, name recognition and ongoing product maintenance. EMPLOYEES As of December 31, 1996, the Company and its subsidiaries had 4,491 regular employees worldwide, including 2,939 in sales, marketing and support; 967 in research and development; 89 in operations and 496 in administration and finance. Competition in recruiting personnel in the database software industry is intense. The Company believes that its future success will depend on its continued ability to attract and retain highly skilled sales, consulting, technical, marketing and management personnel. None of the Company's U.S. employees are represented by a labor union. A small number of employees located outside of the United States are represented by labor unions. The degree of this representation varies from country to country. The Company has experienced no work stoppages. EXECUTIVE OFFICERS Set forth below in alphabetical order are biographical summaries of the executive officers of the Company as of March 1997. Ronald M. Alvarez, 47, joined the Company in December 1991 as Director of Latin America Operations. He was promoted to Executive Director, Latin America Operations in March 1993, and to Vice President, Latin America in May 1995. He was appointed to his current position of Vice President, Americas Sales in January 1996. Karen Blasing, 40, joined the Company in November 1992 as Director of Financial Planning and Analysis and became Controller in June 1996. From January 1989 to October 1992, Ms. Blasing was a Senior Financial Manager at Oracle Corporation, a provider of information management software and services. Margaret R. Brauns, 42, became Vice President and Treasurer of the Company in November 1992. Ms. Brauns joined the Company as Treasurer in May 1990. D. Kenneth Coulter, 52, joined the Company in February 1988 as Managing Director, UK. From January 1990 to April 1992, Mr. Coulter was Vice President, Europe. He became Senior Vice President, Europe, Middle East and Africa, in April 1992 and was named Senior Vice President, International in January 1996. Mr. Coulter became Executive Vice President, Worldwide Field Operations in November 1996. Ira H. Dorf, 56, joined the Company as Vice President, Human Resources in October 1989. Bruce Golden, 37, joined the Company in February 1996 as Vice President of Business Units and became General Manager, Data Warehouse Business Development Unit in September 1996. From June 1993 to February 1996, he was Vice President of Marketing of Illustra Information Technologies, Inc., a supplier of object-relational database management systems. Prior to Illustra, Mr. Golden was employed by Sun Microsystems, Inc., a computer hardware and software company, for eight years in a variety of positions, his last being Director of Commercial Market Development. James F. Hendrickson, Jr., 57, joined the Company as Vice President, Customer Services in July 1992. In February 1995, Mr. Hendrickson assumed the additional responsibility of Lenexa Site Manager. From 10 1991 until the time he joined the Company, Mr. Hendrickson was Senior Vice President of Marketing at Image Business Systems. Alan S. Henricks, 46, joined the Company as Executive Vice President and Chief Financial Officer in January 1997. From May 1994 to December 1996, Mr. Henricks was Vice President, Finance and Operations, and Chief Financial Officer of Documentum, Inc., a provider of document management software and services, where he was responsible for all financial functions, as well as MIS, legal and operations. From February 1988 to April 1994, Mr. Henricks was Senior Vice President, Finance and Operations, and Chief Financial Officer, of Borland International, a provider of software development tools. Stephen E. Hill, 38, joined the Company in December 1985, and has served the Company in a variety of strategic planning, development and marketing positions. Mr. Hill currently serves as Vice President, Advanced Technology. Jeffrey V. Hudson, 44, joined the Company in June 1995 as Vice President, Business Development and became Vice President, Business Development and Product Marketing in May 1996. From December 1993 to January 1995, Mr. Hudson was President and Chief Executive Officer of Visioneer Communications, Inc. From June 1989 to December 1993, he was Vice President, Sales, Marketing and Service for Netframe Systems, Inc. Mike Saranga, 59, joined the Company as Senior Vice President, Product Management and Development in May 1993. Prior to joining the Company, Mr. Saranga was employed by IBM for 30 years, most recently as Assistant General Manager of Programming Systems, where Mr. Saranga developed IBM's technical and business strategies for key technologies including client/server, distributed systems and multimedia. David H. Stanley, 50, joined the Company as Vice President, Legal, General Counsel and Assistant Secretary in July 1988. In August 1990, Mr. Stanley was elected to the additional office of Secretary. In March 1995, Mr. Stanley assumed the additional responsibility for corporate services and became Vice President, Legal and Corporate Services, General Counsel and Secretary. Michael R. Stonebraker, 53, joined the Company as Vice President and Chief Technology Officer in February 1996. Dr. Stonebraker cofounded Illustra Information Technologies, Inc., a supplier of object-relational database management systems, in July 1992, and served in a consulting capacity with Illustra as Chief Technology Officer until February 1996. Dr. Stonebraker is professor emeritus of Electrical Engineering and Computer Sciences at the University of California, Berkeley, where he joined the faculty in 1971. Phillip E. White, 54, has been the Company's Chief Executive Officer and a director since January 1989. He has held the additional office of President since August 1990 and of Chairman since December 1992. Mr. White also serves as a director of Adaptec, Inc., a computer input/output technology company, and of Legato Systems, a manufacturer and developer of network storage management software products. Edwin C. Winder, 47, joined the Company in February 1990. Since joining the Company, Mr. Winder has held a variety of executive positions in sales, marketing and customer service. He is currently the Company's Senior Vice President, Japan Operations. - ------------------------ Distributed Relational Database Architecture, Microsoft, Motif, UNIX, Windows and Windows/NT are trademarks of their respective owners. All other names indicated by -Registered Trademark- or -TM- are trademarks of the Company. 11 ITEM 2. PROPERTIES The Company's headquarters and its marketing, finance, Americas sales, administration, customer service and research and development operations are located in five modern buildings in a seven building office park in Menlo Park, California, approximately 30 miles south of San Francisco. The Company leases approximately 214,000 square feet of space in these buildings. The leases for spaces in three of the buildings expire in March 1998. The Company has options to renew each lease for up to two additional five year terms at 95% of the then fair rental value. The leases for space in the other two buildings expire in September 2001. In 1996, the Company planned on relocating its corporate headquarters to Santa Clara, California, approximately 15 miles to the south of the Company's current headquarters. To facilitate the move, in January 1997, the Company entered into a two-year lease for 27 acres of undeveloped commercial real estate. In order to secure performance of its obligation under the lease, the Company was required to pledge certain cash collateral to the lessor throughout the full term of the lease. Accordingly, in January 1997, the Company deposited $61.5 million in cash into a non-interest bearing collateral account controlled by an affiliate of the lessor. In April 1997, the Company exercised its option to purchase the land for $61.5 million, with the intent to arrange for the sale of the parcels to an unrelated third party. In October 1997, the Company entered into agreements to sell the Santa Clara land in two separate transactions. Both sales are expected to be consummated in the fourth quarter of 1997. See Note 13 to the Consolidated Financial Statements. Some of the research and development for the Company's tools products, a portion of the Company's customer service organization, the Company's principal domestic manufacturing facility and the Company's telemarketing organization are located in two modern buildings aggregating approximately 135,000 square feet in Lenexa, Kansas, a suburb of Kansas City. The buildings are owned by a partnership, of which the Company is a 50% partner, and leased by the partnership to the Company under a lease with an initial ten-year term that expires in March 1998. There are two five-year renewal options. Rental under this lease remains fixed through 1998, and then adjusts to prevailing rates for the renewal terms. The Company also leases office space in approximately 56 facilities in the United States and Canada and approximately 60 facilities internationally. The Company believes that its facilities are adequate for its current needs and that suitable additional or substitute space will be available as needed to accommodate the expansion of the Company's operations. ITEM 3. LEGAL PROCEEDINGS Commencing in April 1997, a series of class action lawsuits and a separate but related stockholder action were filed in federal court purportedly by or on behalf of stockholders. These actions name as defendants the Company, certain of its present and former officers and directors and its independent auditors. The complaints allege various violations of the federal securities laws and seek unspecified but potentially significant damages. Similar actions were also filed in state court. Stockholder derivative actions, purportedly on behalf of the Company and naming virtually the same individual defendants, were also filed in state court. Any monetary judgments in the derivative actions would accrue to the benefit of the Company. 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. 12 The Company is not involved in any other legal proceedings, other than ordinary routine litigation incidental to the business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matters to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1996. 13 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION The Company's common stock has been traded on the over-the-counter market under the Nasdaq symbol IFMX since the Company's initial public offering on September 24, 1986. The following table sets forth the range of high and low closing prices as reported on the Nasdaq National Market for the periods indicated.
HIGH LOW --------- --------- Fiscal 1995* First Quarter........................................................... $ 19.63 $ 14.63 Second Quarter.......................................................... 25.94 17.06 Third Quarter........................................................... 34.00 25.25 Fourth Quarter.......................................................... 33.00 24.13 Fiscal 1996 First Quarter........................................................... 35.88 26.38 Second Quarter.......................................................... 26.88 18.38 Third Quarter........................................................... 30.25 20.31 Fourth Quarter.......................................................... 28.63 17.63
- ------------------------ * The prices shown reflect a two-for-one stock split effected in the form of a stock dividend in June 1995. COMMON STOCKHOLDERS OF RECORD AND DIVIDENDS At December 31, 1996, there were approximately 3,400 stockholders of record of the Company's common stock, as shown in the records of the Company's transfer agent. The Company has never paid dividends on its common stock and its present policy is to retain its earnings to finance anticipated future growth. ITEM 6. SELECTED FINANCIAL DATA FINANCIAL OVERVIEW Five-Year Summary (1) (2)
1996 1995 1994 1993 1992(3) ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues......................................... $ 727,849 $ 632,770 $ 451,969 $ 353,115 $ 283,594 Net income (loss).................................... (73,565) 38,600 48,293 54,989 47,782 Net income (loss) per share (4)...................... (0.49) 0.26 0.34 0.40 0.38 Retained earnings.................................... 78,723 154,098 115,668 86,484 34,980 Total assets......................................... 881,998 682,445 447,769 328,001 231,459 Long-Term obligations................................ 2,359 2,846 892 451 1,797
The Company has not paid and does not anticipate paying cash dividends on its common stock. 14 (1) See Note 1 to Consolidated Financial Statements for information concerning the Company's restatement of its financial statements. All financial data in the table above as of and for the years ended December 31, 1996, 1995 and 1994 presented reflect such restatement. (2) The above information has also been restated to reflect the Company's business combination with Illustra Information Technologies, Inc. from its inception date of July 31, 1992 through the merger date of February 16, 1996, as a pooling of interests. (3) In 1991, the Company was selected to provide the database component of a decision-support system for the Army National Guard and Army Reserves. In 1992, the Company received $26.8 million for license fees and support as part of this Reserve Component Automation System (RCAS) contract and recorded $21.8 million as license revenue and incurred $3.2 million in operating expenses in 1992. The remaining $5.0 million of service revenue was recognized over the support period. (4) Per-share information applicable to prior periods has been restated to reflect a two-for-one stock split (effected in the form of a stock dividend) which was effective June 1995. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Management's Discussion and Analysis of Financial Condition and Results of Operation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements as a result of certain factors described herein and in other documents. Readers should carefully review the risk factors described in the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Quarterly Reports on Form 10-Q to be filed by the Company in 1997 and any Current Reports on Form 8-K filed by the Company. As a result of the restatement of the Company's financial statements for 1996, 1995 and 1994, certain information contained in this item has been changed from that which appeared in the Company's originally filed Form 10-K for 1996. Readers should carefully review the "Liquidity and Capital Resources" and "Business Risks" sections which have been substantially rewritten to reflect current events. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. All information is based on the Company's fiscal calendar. 15 Selected elements of Informix's restated financial statements are shown below for the last three years as a percentage of net revenues and as a percentage change from year to year.
PERCENT OF NET REVENUE % INCREASE (DECREASE) YEARS ENDED DECEMBER 31, -------------------------- 1996 ------------------------------------- COMPARED TO 1995 COMPARED 1996 1995 1994 1995 TO 1994 ----- ----- ----- ----------- ------------- Licenses......................................... 68 72 77 8 32 Services......................................... 32 28 23 33 65 -- --- --- --- ----------- Net revenues..................................... 100 100 100 15 40 Cost and Expenses: Cost of software distribution.................. 6 6 6 24 53 Cost of services............................... 20 14 10 58 96 Sales and marketing............................ 57 48 45 37 48 Research and development....................... 16 14 14 40 33 General and administrative..................... 9 8 8 26 45 Merger expenses................................ 1 -- -- N.M. -- -- --- --- --- ----------- Total costs and expenses..................... 109 90 83 41 51 -- --- --- --- ----------- Operating income (loss).......................... (9) 10 17 N.M. (16) -- --- --- --- ----------- Net income (loss)................................ (10) 6 11 N.M. (20)
OPERATING RESULTS Informix's operating results were affected negatively in 1996 as a result of operating expenses growing more rapidly than revenues. Informix continued to invest heavily in personnel in the areas of sales, marketing and customer service, and research and development and incurred integration expenses and fees associated with the acquisition of Illustra Information Technologies, Inc. (Illustra). This acquisition was accounted for as a pooling-of-interests in February 1996. In December 1996, Informix began shipping the INFORMIX-Universal Server, based on Informix's proven Dynamic Scaleable Architecture(tm) (DSA) and providing extensibility to handle the broad range of datatypes not managed effectively by traditional relational databases. This product merges the technology of Illustra and Informix. Informix incurred significant marketing expenses in connection with the initial announcement and launch of the Universal Server in 1996. The Company expects selling and marketing expenses in 1997 to be at a level comparable to 1996 both in support of INFORMIX-Universal Server and as Informix continues developing specific market channels and specific products for such channels. These development, integration and marketing expenses and the relatively low operating margins of Illustra have adversely affected Informix's operating margins in 1996. In the near term, these development and marketing efforts will continue to negatively affect the Company's operating margins. REVENUES The Company derives revenues principally from licensing its software and from providing technical product services to customers. License revenues may involve the shipment of product by the Company or the granting of a license to a customer to manufacture products. Service revenue consists of customer telephone or direct support, update rights for new product versions, consulting, and training fees. The Company's products are sold directly to end-user customers or through resellers, including original equipment manufacturers (OEMs), distributors, and value added resellers (VARs) including application vendors. In 1995 and in 1996, the Company increased the focus on its reseller channels, particularly OEMs and VARs, to obtain access to their installed bases in certain industries and to benefit 16 from their consulting and systems integration organizations. This increased focus on reseller channels resulted in a significant build-up of licenses that had not been resold or utilized by such resellers. These unsold licenses have not been recognized as earned revenue as of December 31, 1996. Principally during 1996, the Company entered into software license agreements with certain computer and service vendors where the Company concurrently committed to acquire goods and services in the aggregate of approximately $130 million. If the agreement is with a reseller, revenue is recognized as earned on these transactions as the licenses are resold by the customer. If the agreement is with an end user, revenue is generally recognized as earned upon delivery of software. The computer equipment and services are recorded at their fair value. These concurrent transactions for 1996 included license agreements of approximately $170 million, of which $31 million was recognized as earned revenue by the Company in 1996. The Company disclosed in its 1996 annual report that $55 million of revenue was recognized from concurrent transactions in that year. This disclosure represented revenue (before the restatement) arising from specific license agreements where the Company acquired goods and services in approximately the same dollar amount and is included in the $170 million of 1996 concurrent transactions. See Notes 1 and 3 to Consolidated Financial Statements. The Company's license sales transactions can be relatively large in size and difficult to forecast both in timing and dollar value. As a result, these transactions have caused fluctuations in net revenues and net income because of the relatively high gross margin on such revenues. As is common in the industry, a disproportional amount of the Company's license revenue is derived from transactions that close in the last few weeks of a quarter. The timing of closing large license agreements also increases the risk of quarter-to-quarter fluctuations. The Company expects that these types of transactions and the resulting fluctuations will continue. The overall revenue growth in 1996 compared to 1995 primarily reflects continued acceptance of the Company's server products. The relational database management systems industry has benefited from trends to downsize from large proprietary computer systems and market acceptance of UNIX(R), Windows(TM), Windows NT(TM) and other open operating environments. Informix's current server product line debuted in the fall of 1994 with INFORMIX-OnLine Dynamic Server for Sequent (DSA) and was expanded to a wide array of Unix-based multi-processor systems in December 1994. This product accounts for a majority of the Company's server sales and is now available on Windows/NT operating systems. In the spring of 1996, the Company introduced a workgroup version of this product named INFORMIX-OnLine Workgroup Server. In fall 1996, the Company released INFORMIX-Online Extended Parallel Server 8.1, designed for very high end use in "loosely-coupled" computer architectures. In late 1996, the first version of INFORMIX-Universal Server was released which was the combination of the INFORMIX-OnLine Dynamic Server product with the Illustra server product. The license revenue growth in 1996 compared to 1995 reflects increases in the Company's server products, particularly the Company's flagship database server, INFORMIX-OnLine Dynamic Server. The Company believes that the license revenues derived from its database tool products declined from 1995 to 1996 primarily as a result of competitive product offerings from other companies. The increase in service revenue was primarily attributable to the continued growth of the Company's installed customer base, and resulting renewal of maintenance contracts and increased consulting revenue. The Company continues to emphasize support services as a source of revenue. As the Company's products become more complex, more support services will be required. The Company intends to satisfy this requirement through internal support, third-party services and OEM support. The contribution margin on service revenue decreased from 48% in 1995 to 38% in 1996. The decrease resulted from increased costs incurred to expand the support function due to sales increases and the continuing complexity of the products. 17 Approximately 54%, 55% and 43% of Informix's net revenues were derived from sales to foreign customers in 1996, 1995, and 1994, respectively. Informix expects that foreign revenues will continue to provide a significant portion of total revenues. However, changes in foreign currency exchange rates, the strength of local economies, and the general volatility of software markets may result in a higher or lower proportion of foreign revenues in the future. In Europe, Asia/Pacific, and Japan, most revenues and expenses are now denominated in local currencies. The U.S. dollar strengthened in the fourth quarter and for the year against the major European and Asia/Pacific currencies, which resulted in lower revenue and expenses recorded when translated into U.S. dollars, compared with the prior year periods. The Company has also increased its direct presence in Latin America, although a significant percentage of this region's revenue is still denominated in U.S. dollars. Although the effect was not significant in 1996, the Company has experienced significant currency fluctuations in Mexico, and to a lesser extent, other Latin American countries, and expects such fluctuations may occur in the future. The Company's operating and pricing strategies take into account changes in exchange rates over time; however, the Company's results of operations may be significantly affected in the short term by fluctuations in foreign currency exchange rates. The Company enters into forward foreign exchange contracts primarily to hedge the impact of fluctuations in exchange rates on accounts receivable or accounts payable denominated in foreign currencies until such receivables are collected or payables are disbursed. This program involves the use of forward foreign exchange contracts in the primary European and Asian currencies. The Company operates, on a limited basis, in certain countries in Latin America, Eastern Europe, and Asia Pacific where there are limited forward currency exchange markets and thus the Company has limited unhedged transaction exposures in these currencies. The Company does not attempt to hedge the translation to U.S. dollars of foreign denominated revenues and expenses not yet earned or incurred. Informix's distribution markets are organized into three general markets: North America; Europe, which includes the Middle East and Africa; and the Intercontinental Group, consisting of Latin America, Japan, and the Asia/Pacific region. The North America, Europe, and Intercontinental Group organizations contributed 46%, 34% and 20% of Informix's net revenues respectively, in 1996, compared to 45%, 36% and 19%, respectively, in 1995, and 57%, 35% and 8%, respectively, in 1994. In November 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, "Software Revenue Recognition." The Company will be required to adopt the provisions of the SOP as of January 1, 1998. The Company is evaluating the SOP in relation to its current revenue recognition policy. Adoption of the SOP may affect the revenue recognition practices of the Company. COST OF SOFTWARE DISTRIBUTION
1996 CHANGE 1995 CHANGE 1994 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN MILLIONS) Manufactured cost of software distribution............................. $ 32.2 26% $ 25.6 54% $ 16.7 Percentage of license revenue.............. 6% 6% 5% Amortization of capitalized software....... $ 14.6 21% $ 12.0 53% $ 7.8 Percentage of license revenue.............. 3% 3% 2% Cost of software distribution.............. $ 46.8 24% $ 37.6 53% $ 24.5 Percentage of license revenue.............. 9% 8% 7%
Software distribution costs consist primarily of: (1) manufacturing and related costs such as media, documentation, product assembly and purchasing costs, freight, customs, and third-party royalties, and (2) amortization of previously capitalized software development costs and any write-offs of previously capitalized software costs that are no longer realizable. 18 Excluding amortization of previously capitalized software development costs, cost of software distribution as a percentage of license revenue was 6% for both 1996 and 1995. In the future, the cost of software distribution as a percentage of revenue may vary depending upon whether the product is reproduced by the Company or by its customers. Amortization of capitalized software increased 21% in 1996 compared to 1995 due to the release of several products in the latter half of 1995 and 1996. Amortization expense will continue to rise in absolute dollars in 1997 due to 1996 product releases including INFORMIX-Universal Server. The absolute value of amortization of capitalized software will vary from quarter to quarter as new products are released and other product development costs become fully amortized. COST OF SERVICES
1996 CHANGE 1995 CHANGE 1994 ---------- ----------- --------- ----------- --------- (DOLLARS IN MILLIONS) Cost of services......................... $ 144.9 58% $ 91.5 96% $ 46.8 Percentage of service revenue............ 62% 52% 44%
Cost of services consists primarily of maintenance, consulting and training expenses. The increase in cost of services in 1996 in absolute dollars and as a percentage of net revenues compared to the prior year is primarily due to the Company's expansion of consulting and support service capabilities as products have become more complex. The increase in cost of services as a percentage of net service revenue is due to increases in support personnel in anticipation of additional consulting revenue as more customers utilize the Company's products in more complex applications. The Company has also subcontracted certain service projects which reduces margins. SALES AND MARKETING EXPENSES
1996 CHANGE 1995 CHANGE 1994 ---------- ----------- ---------- ----------- --------- (DOLLARS IN MILLIONS) Sales and marketing..................... $ 413.7 37% $ 301.9 48% $ 203.8 Percentage of net revenue............... 57% 48% 45%
The increase in sales and marketing expenses in 1996 in absolute dollars compared to 1995 was a result of the addition of new sales offices and sales personnel worldwide as the Company expanded its worldwide direct sales organizations, the opening of new subsidiaries, higher commission expense associated with the increase in revenues, and increased marketing programs associated with new product launches. As a percentage of net revenues, sales and marketing expenses increased from 48% in 1995 to 57% in 1996. 19 RESEARCH AND DEVELOPMENT EXPENSES Informix accounts for its software development expenses in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." This statement requires that, once technological feasibility of a developing product has been established, all subsequent costs incurred in developing that product to a commercially acceptable level be capitalized and amortized ratably over the revenue life of the product. The following table summarizes research and development costs for the prior three years:
1996 CHANGE 1995 CHANGE 1994 --------- ----------- --------- ----------- --------- (DOLLARS IN MILLIONS) Incurred product development expenditures..... $ 148.6 44% $ 103.1 32% $ 77.9 Expenditures capitalized...................... 28.4 62% 17.5 29% 13.6 --------- --------- --------- Research and development expenses............. $ 120.2 40% $ 85.6 33% $ 64.3 Expenditures capitalized as percentage of incurred.................................... 19% 17% 17%
The increase in research and development expenditures in absolute dollars from year to year is attributed to an increase in staff working on new products and product extensions, including the Company's latest product INFORMIX-Universal Server. The higher capitalization in absolute dollars of product development expenditures from year to year resulted from an increase in the work involved in projects reaching technological feasibility as they neared their release dates. Significant programs currently under development include improvements and enhancements of current products, with particular emphasis on parallel computer architecture, user-defined database extensions, web technology integration, and graphic desktop and systems administration. The Company believes that research and development expenditures are essential to maintaining its competitive position in its primary markets and expects the expenditure levels to continue to constitute a significant percentage of revenues. GENERAL AND ADMINISTRATIVE EXPENSES
1996 CHANGE 1995 CHANGE 1994 --------- ----------- --------- ----------- --------- (DOLLARS IN MILLIONS) General and administrative expenses............... $ 64.4 26% $ 51.1 45% $ 35.4 Percentage of net revenue......................... 9% 8% 8%
General and administrative expenses increased in absolute dollars in 1996 compared to 1995 as a result of the continued expansion of the Company's international operations. General and administrative expenses in 1995 increased in absolute dollars compared to 1994 as a result of the continued expansion in international operations as well as the acquisition of several foreign distributors. MERGER EXPENSES In the first quarter of 1996, the Company recorded expenses of approximately $5.9 million as a result of the acquisition of Illustra, which was accounted for as a pooling of interests. These costs consisted primarily of investment banking, legal and accounting fees. 20 INTEREST INCOME
1996 CHANGE 1995 CHANGE 1994 --------- ----------- --------- ----------- --------- (DOLLARS IN MILLIONS) Interest income................................... $ 9.9 21% $ 8.1 105% $ 4.0 Percentage of net revenue......................... 1% 1% 1%
The increase in absolute dollars from 1994 to 1995 and 1995 to 1996 results from higher balances of cash and cash equivalents and short-term investments, offset by slightly lower interest rates. INTEREST EXPENSE
1996 CHANGE 1995 CHANGE 1994 --------- ----------- --------- ----------- --------- (DOLLARS IN MILLIONS) Interest expense.................................. $ 5.8 129% $ 2.5 358% $ .6 Percentage of net revenue......................... 1% -- --
Interest expense principally relates to interest charges incurred in connection with financing of customer accounts receivable and has increased from 1994 to 1995 and 1995 to 1996 as the Company has increased its customer accounts receivable financing activities. These financing costs are expensed ratably over the term of the financing arrangement. INCOME TAXES
1996 CHANGE 1995 CHANGE 1994 --------- ----------- --------- ----------- --------- (DOLLARS IN MILLIONS) Income tax provision........................... $ 12.5 (61)% $ 32.1 10% $ 29.3 Effective tax rate............................. N.M. 45% 38%
In 1996, income tax expense resulted from an increase in the valuation allowance for deferred tax assets attributable to foreign net operating loss carryforwards, foreign withholding taxes and taxable earnings in certain foreign jurisdictions. The Company has provided a valuation allowance for net deferred tax assets in excess of amounts recoverable through carryback of net operating losses. Accordingly, realization of the net deferred tax asset at December 31, 1996 of $26.9 million is not dependent on future taxable income. FOREIGN EXCHANGE LOSSES The Company enters into forward foreign exchange contracts primarily to hedge the value of accounts receivable or accounts payable denominated in foreign currencies against fluctuation in exchange rates until such receivables are collected or payables disbursed. The purpose of the Company's foreign exchange exposure management policy and practices is to attempt to minimize the impact of exchange rate fluctuation on the value of foreign currency denominated assets and liabilities being hedged. The receivables and payables being hedged are primarily intercompany transactions related to internal distribution of the Company's product under formal agreements drafted between the Company's various subsidiaries. The restatement of the 1996, 1995 and 1994 financial statements resulted in a change in the Company's foreign currency denominated intercompany accounts payable and accounts receivable balances. As a result, certain foreign currency transaction gains and losses realized due to fluctuation in the related assets and liabilities currency exchange rates were not offset by underlying gains and losses on forward foreign currency exchange contracts used to hedge these foreign currency exposures. IMPACT OF INFLATION The effect of inflation on the Company's financial position has not been significant. 21 LIQUIDITY AND CAPITAL RESOURCES
1996 1995 1994 --------- --------- --------- (DOLLARS IN MILLIONS) Cash, cash equivalents, and investments....................... $ 261.0 $ 253.2 $ 194.2 Working capital............................................... 3.1 163.6 184.9 Cash provided by (used in) operations......................... (29.4) 59.3 80.9 Cash used in investment activities, excluding investments of excess cash................................................. 145.3 157.7 40.6 Cash provided by financing activities......................... 228.7 136.8 26.6
Cash from operations did not provide sufficient resources to fund the Company's headcount growth and capital asset needs in 1996 due to a significant increase in the Company's operating expenses, in comparison to only moderate increase in its revenue. Cash generated by operations provided sufficient resources in the prior years. Net accounts receivable increased by $27.8 million in 1996 as compared to December 1995. Days sales outstanding increased from approximately 79 days in December 1995 to 83 days in December 1996. The days sales outstanding ratio is dependent on many factors, including the mix of contract-based revenue with significant OEMs and large corporate and government end-users versus revenue recognized on shipments to application vendors and distributors and the success of the Company's third-party accounts receivable financing programs. The Company's programs with third-party financing institutions provide financing for extended credit terms instead of such financing being provided by the Company. Cash received from customers and third-party financial institutions in advance of revenue being recognized is reflected in the Statement of Cash Flows under "Advances on Unearned Revenue" as a financing activity. Excluding investments of excess cash, net cash and cash equivalents used for investing activities increased in 1996 compared with 1995, the decrease in corporate acquisition activity (the Company acquired 90 percent of the database division of ASCII Corporation in the first quarter of 1995) was offset by investments in property and equipment and in software development costs. In 1996, 1995 and 1994, the Company acquired $148.3 million, $56.5 million and $25.7 million, respectively, of capital equipment consisting primarily of computer equipment, computer software and office equipment. The increase in capital equipment purchases in 1996 resulted from the Company's investments in capital equipment used in sales and product demonstration activities and an effort to improve the level of consulting and support services provided to customers, and to provide technology infrastructure for the Company's growing employee headcount. During 1996 and the first half of 1997, Informix launched a series of Information SuperStores worldwide which demonstrated and offered the most recent Informix technology advances. Along with the core Informix product line, these locations carried tools from leading third-party tools and application vendors installed on a wide variety of hardware platforms, such as Data General, Hewlett Packard, IBM, NCR, Pyramid, Sequent, Silicon Graphics, and Sun. The Company has scaled back its original plans for the SuperStores and repositioned the remaining sites as solution labs managed by the Company's consulting practice. The Company's decision to scale back resulted in charges to operations in 1997 (see Note 13 of Notes to the Consolidated Financial Statements). The Company's investments in software costs were previously discussed under "Results of Operations." In January 1995, the Company acquired a 90 percent interest in the database division of ASCII Corporation, a distributor of its products in Japan. The Company acquired the remaining 10 percent interest in January 1996. The acquisition was recorded as a purchase. The purchase price of ASCII's 22 database division was approximately $46.0 million, of which approximately $35.4 million has been allocated to intangible assets acquired. In April 1995, the Company acquired an 80 percent interest in the database division of Daou Corporation, a distributor of its products in Korea. The Company acquired the remaining 20 percent in January 1997 for approximately $1 million. The acquisition was recorded as a purchase. The initial purchase price of this business was approximately $4.6 million, and was increased by approximately $3.0 million in January 1997 due to performance incentives outlined in the agreement; a total of approximately $7.0 million has been allocated to intangible assets acquired. The operating results of these distributors subsequent to the acquisition dates have been included in the consolidated results of operations. In February 1996, the Company acquired Illustra, a U.S.-based company that provides dynamic content management database software and tools for managing complex data in the Internet, multimedia/ entertainment, financial services, earth sciences, and other markets. Approximately 12.7 million shares of Informix common stock were issued to acquire all outstanding shares of Illustra stock. An additional 2.3 million shares of Informix common stock were reserved for issuance in connection with the assumption of Illustra's outstanding stock options and warrants. The transaction has been accounted for as a pooling of interests and accordingly all of the accompanying financial statements have been restated to reflect the merger as of the beginning of the earliest period presented. Merger expenses of approximately $5.9 million were recorded in the first quarter of 1996. Net cash and cash equivalents provided by financing activities in 1996 and 1995 consisted primarily of proceeds from the sale of future payment streams and the Company's common stock to employees, partially offset by payments on capital leases, as well as extensive third-party non-recourse financing of certain customer payments. Net cash and cash equivalents used in financing activities in 1994 included payments on capital leases and repurchases of the Company's common stock, offset by proceeds from the sale of the Company's common stock to employees. In 1993 and 1994, the Board of Directors authorized the repurchase of up to 8 million shares of the Company's common stock in the open market. As of December 31, 1996, the Company had repurchased 3,580,000 shares with an aggregate cost of approximately $32.1 million on the open market. All repurchased shares were re-issued to partially satisfy requirements under Stock Option and Stock Purchase Plans. In 1996, the Company rescinded the stock repurchase authorization. RECENT DEVELOPMENTS IN LIQUIDITY AND CAPITAL RESOURCES. In 1996, the Company planned on relocating its corporate headquarters to Santa Clara, California, approximately 15 miles to the south of the Company's current headquarters. To facilitate the move, in January 1997, the Company entered into a two-year lease for 27 acres of undeveloped commercial real estate. In order to secure performance of its obligation under the lease, the Company was required to pledge certain cash collateral to the lessor throughout the full term of the lease. Accordingly, in January 1997, the Company deposited $61.5 million in cash into a non-interest bearing collateral account controlled by an affiliate of the lessor. In April 1997, the Company exercised its option to purchase the land for $61.5 million, with the intent to arrange for the sale of the parcels to an unrelated third party. In October 1997, the Company entered into agreements to sell the Santa Clara land in two separate transactions. Both sales are expected to be consummated in the fourth quarter of 1997. See Note 13 to the Consolidated Financial Statements. Such transactions should not result in further loss/write down in the carrying value of this real estate asset. In addition, in November 1996, the Company leased approximately 200,000 square feet of office space in Santa Clara adjacent to the 27 acres described above. The lease term is for 15 years and minimum lease payments amount to $96.0 million over the term. The minimum lease payments are scheduled to increase within a contractual range based on changes in the Consumer Price Index. As a result of the sale of the adjacent land, the Company does not intend to occupy this office space. The Company is actively pursuing 23 solutions to sell its leasehold interest along with related obligations under the lease to an unrelated third party. As a result of the operating losses incurred and restructurings taken by the Company in 1997 and the prior capital equipment and real estate commitments made by the Company in 1996, the Company's cash, cash equivalents and short-term investments declined in the first half of 1997 from $261.0 million to $104.4 million. In August 1997, the Company sold 160,000 shares of newly issued Series A Convertible Stock, face value $250 per share, to a private investor for aggregate net proceeds of $37.2 million (see Note 13 to the Consolidated Financial Statements). Cash, cash equivalents and short-term investments declined to $87.1 million in the third quarter of 1997. In order to continue as a going concern, the Company will need to raise additional capital to offset expected future operating losses, to fund restructuring programs, such as headcount reduction and elimination or consolidation of administrative and sales offices worldwide, and to finance necessary capital equipment additions and software development. The Company intends to achieve this goal through a combination of (a) continued cost containment measures to bring spending levels in line with planned revenue, (b) sale of non-essential assets, including the undeveloped Santa Clara land site described above, and (c) raising additional equity and debt financing (see Notes 2 and 13 to the Consolidated Financial Statements). There can be no assurance that management will be successful in accomplishing these plans and objectives. BUSINESS RISKS RESTATEMENT OF FINANCIAL STATEMENTS. As previously announced, the Company's restatement of its consolidated financial statements for 1996 and 1995 reflects significant reductions in reported earned revenue for all three years and resulted in reporting a net loss for 1996 and a significant reduction in net income for 1994 and 1995. The cumulative effect of the restatement negatively impacts the Company's December 31, 1996 financial condition, most notably evidenced by the reduction in retained earnings and working capital in the consolidated balance sheet (see Note 1 to the Consolidated Financial Statements). In October 1997, the Company's independent auditors reported to the Company's Board of Directors that as a result of the findings and other relevant information related to the restatement of the Company's 1996, 1995 and 1994 financial statements (see Note 1 to the Consolidated Financial Statements), they concluded that a material weakness in internal accounting controls exists. In conjunction with such findings, the independent auditors have also made a number of recommendations to strengthen the Company's internal accounting controls. The Company has reviewed the independent auditor's report and is in agreement with the recommendations. The Company is taking action to implement such recommendations. The Audit Committee of the Board of Directors has initiated a plan to monitor the Company's implementation of these recommendations and will consider other actions that might be undertaken by the Company to further improve the accuracy and integrity of its financial reporting process. Further, as reported, the Company's restated first quarter and second quarter 1997 revenues, operating results and net loss were not favorable when compared to the same 1996 quarters, although the restatement has a positive effect on first and second quarter 1997, as well as on anticipated third quarter 1997 revenue and operating results (see Note 13 to the Consolidated Financial Statements). The Company anticipates reduced revenues, lower operating results and a significant restructuring charge for the third quarter of 1997 when compared to the third quarter of 1996. The Company's public announcement of the pending restatement of its financial statements, the delay in reporting its second quarter results for 1997 while the restatement was being compiled and the related uncertainty regarding the Company's financial condition have adversely affected the Company's ability to sell its products. 24 The Company is unable to estimate the amount of any additional financial exposure from possible claims that might be asserted as a result of the restatement of its 1994, 1995 and 1996 financial statements. These factors and other matters described under "Business Risks" have had, and will continue to have, a material adverse effect on the Company's business, including its financial condition and results of operations. LITIGATION. Commencing in April 1997, a series of class action lawsuits and a separate but related stockholder action were filed in federal court purportedly by or on behalf of stockholders. These actions name as defendants the Company, certain of its present and former officers and directors and its independent auditors. The complaints allege various violations of the federal securities laws and seek unspecified but potentially significant damages from the Company. Similar actions were also filed in state court. While management intends to contest these actions vigorously, the disposition of this litigation could have a material adverse effect on the Company's financial condition, results of operations and cash flows. Stockholder derivative actions, purportedly on behalf of the Company and naming virtually the same individual defendants, were also filed in state court. Any monetary judgments in the derivative actions would accrue to the benefit of the Company. 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. ADVANCES ON UNEARNED LICENSE REVENUE. At December 31, 1996 and 1995, "advances on unearned license revenue" in the Company's restated consolidated balance sheet reflects amounts received from customers and third-party financial institutions in advance of revenue being recognized. The Company's license agreements with customers provide contractually for a non-refundable fee payable by the customer in a single or multiple installment(s) at the initiation or over the term of the license arrangement. If the Company fails to comply with the contractual terms of a specific license agreement, the Company could be required to refund to the customer or the financial institution the amount(s) received. CUSTOMER FINANCING. In the normal course of business, the Company often arranges for non-recourse financing through the sale of customer payment streams. Such financing arrangements are offered by a number of financial institutions. The Company has traditionally relied on a limited number of these financing institutions for most of the customer financing it arranges. Future cash flows of the Company would be negatively impacted if the Company's financing resources were to discontinue their services for any reason. NEED FOR ADDITIONAL FINANCING. In order to provide additional working capital to fund its operating activities and restructuring costs, the Company expects that it will be required to raise additional capital, which may be in the form of equity or debt. There can be no assurance that additional debt or equity financing will be available as needed or that, if available, such financing could be completed on commercially favorable terms. Failure to obtain additional capital as needed would have a material adverse effect on the Company's business and financial condition. To the extent the terms of any available financing are materially unfavorable to the Company, such a financing could impair the Company's ability to obtain additional financing in the future or to implement its business plan. VOLATILITY OF INFORMIX STOCK PRICE. The market for the Company's common stock is highly volatile. The trading price of the Company's common stock could be subject to wide fluctuations in response to quarterly variations in operating and financial results, announcements of technological innovations or new products by the Company or its competitors, changes in prices of the Company's or its competitors' products and services, changes in product mix, changes in the Company's revenue and revenue growth 25 rates for the Company as a whole or for individual geographic areas, business units, products or product categories, as well as other events or factors. Statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to the market in which the Company does business or relating to the Company specifically have resulted, and could in the future result, in an immediate and adverse effect on the market price of the Company's common stock. In addition, the stock market has from time to time experienced extreme price and volume fluctuations which have particularly affected the market price for the securities of many high technology companies and which often have been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of the Company's common stock. PERSONNEL CHANGES. The Company's future performance will depend to a significant extent on its ability to attract and retain highly skilled sales, consulting, technical, marketing and management personnel. Beginning in the first part of 1997 and continuing until the present, a number of senior management personnel and other key employees have departed the Company. The Company has been successful to date in replacing only some of the positions that have been vacated. The competition for employees in the database software industry is intense, and the Company expects that such competition will continue for the foreseeable future. From time to time the Company has experienced difficulty in locating candidates with appropriate qualifications. The Company also believes stock options are a critical component for motivating and retaining its key employees. The recent decline in the price of the Company's Common Stock has made stock options previously granted with higher exercise prices less valuable to the Company's current employees and has consequently made it more difficult for the Company to retain its key employees. The failure of the Company to attract and retain key personnel could have an adverse effect on the Company's business, results of operations, financial position and cash flows. During 1997, the Company has experienced a significant number of voluntary resignations and in addition has taken actions to selectively reduce the number of employees in certain functional areas. At December 31, 1996, the Company had 4,491 regular employees worldwide. On or about September 28, 1997, regular employees numbered approximately 3,745. COMPETITION. The market for the Company's software products and services is extremely competitive. Some of the Company's current competitors have greater financial, technical and marketing resources than the Company. The industry movement to new operating systems, like Windows NT, access through low-end desktop machines, and access to data through the Internet may cause downward pressure on prices of database and related products. If such downward pressure on prices were to occur, margins would be adversely affected. Also, new or enhanced products introduced by existing or future competitors could have an adverse effect on the Company's business, results of operations and financial condition. Existing and future competition or changes in the Company's product or service pricing structure or product or service offerings could result in an immediate reduction in the prices of the Company's products or services. If significant price reductions in the Company's products or services were to occur and not be offset by increases in sales volume, the Company's business, results of operations and financial condition would be adversely affected. There can be no assurance that the Company will continue to compete successfully with its existing competitors or will be able to compete successfully with new competitors. TECHNOLOGICAL CHANGE AND NEW PRODUCTS. In recent years, the relational database management system (RDBMS) industry has expanded at significant growth rates, due in part to the continuing development of new technologies and products responsive to customer requirements. In the event the growth rates in the RDBMS industry should decline for any reason, it is likely the markets for the Company's products would be adversely affected, which would have a negative impact on the Company's business, results of operations, financial position and cash flows. In addition, the market for the Company's products and services is characterized by rapidly changing technology and frequent new product introductions. The Company's success will depend upon its ability to enhance its existing products and to introduce new products on a timely and cost-effective basis and that meet dynamic customer requirements. There can be 26 no assurance that the Company will be successful in developing new products or enhancing its existing products or that such new or enhanced products will receive market acceptance or be delivered timely to the market. The Company has experienced product delays in the past and may experience delays in the future. Delays in the scheduled availability or a lack of market acceptance of its products or failure to accurately anticipate customer demand and meet customer performance requirements could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, products as complex as those offered by the Company may contain undetected errors or bugs when first introduced or as new versions are released. There can be no assurance that, despite testing, new products or new versions of existing products will not contain undetected errors or bugs that will delay the introduction or commercial acceptance of such products. A key factor in determining the success of the Company will continue to be the ability of the Company's products to interoperate and perform well with existing and future leading, industry-standard application software products intended to be used in connection with relational database management systems. Failure to meet existing or future interoperability and performance requirements of certain independent vendors marketing such applications in a timely manner could adversely affect the market for the Company's products. Commercial acceptance of the Company's products and services could also be adversely affected by critical or negative statements or reports by brokerage firms, industry and financial analysts and industry periodicals concerning the Company, its products, business or competitors or by the advertising or marketing efforts of competitors, or other factors that could affect consumer perception. INTERNATIONAL OPERATIONS. In 1995 and 1996, approximately 55 percent and 54 percent, respectively, of the Company's net revenues were derived from its international operations. The Company's operations and financial results could be significantly affected by factors associated with international operations such as changes in foreign currency exchange rates and uncertainties relative to regional political and economic circumstances, as well as by other factors associated with international activities. Most of the Company's international revenue and expenses are denominated in local currencies. Although the Company takes into account changes in exchange rates over time in its pricing strategy, the Company's business, results of operations and financial condition could be materially and adversely affected by fluctuations in foreign currency exchange rates. INTEGRATION OF ACQUIRED COMPANIES. The Company has completed several acquisitions during the last two years, including the database division of ASCII Corporation in Japan; distributors in Germany, Korea and Malaysia; Stanford Technology Group; and, most recently, Illustra in the United States. The Company may acquire other distributors, companies, products or technologies in the future. There can be no assurance that these acquisitions can be effectively integrated, that such acquisitions will not result in costs and liabilities that could adversely affect the Company's results of operations and financial condition, or that the Company will obtain the anticipated or desired benefits of such acquisitions. INFRINGEMENT CLAIMS. As the number of software products and software patents in the industry increases, the Company believes that software developers like the Company have and will become increasingly subject to infringement claims with respect to patents, trademarks and other proprietary rights. Such claims, with or without merit, can be time consuming and expensive to defend and could have an adverse effect on the Company's business, results of operations, financial position, and cash flows. 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS
RESTATED--SEE NOTE 1 -------------------------- DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ (IN THOUSANDS, EXCEPT SHARE AND PER-SHARE AMOUNTS) ASSETS Current Assets: Cash and cash equivalents....................................................... $ 226,508 $ 164,305 Short-term investments.......................................................... 34,512 88,904 Accounts receivable, less allowances for doubtful accounts of $21,429 in 1996 and $12,854 in 1995........................................................... 194,499 166,716 Deferred taxes.................................................................. 42,133 24,536 Other current assets............................................................ 35,662 28,155 ------------ ------------ Total current assets.............................................................. 533,314 472,616 ------------ ------------ Property and equipment, at cost Computer equipment.............................................................. 225,336 103,650 Office equipment and leasehold improvements..................................... 67,982 49,292 Less accumulated depreciation and amortization.................................. (106,591) (71,310) ------------ ------------ 186,727 81,632 Software costs, less accumulated amortization of $41,559 in 1996 and $18,980 in 1995............................................................................ 54,486 36,866 Deferred taxes.................................................................... 10,542 21,021 Long-term investments............................................................. 6,639 9,781 Intangible assets................................................................. 34,693 40,730 Other assets...................................................................... 55,597 19,799 ------------ ------------ Total Assets...................................................................... $ 881,998 $ 682,445 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................................................................ $ 65,446 $ 29,646 Accrued expenses................................................................ 59,723 35,480 Accrued employee compensation................................................... 57,626 49,911 Income tax payable.............................................................. 5,757 32,780 Deferred taxes.................................................................. 1,612 1,612 Deferred maintenance revenue.................................................... 94,981 66,792 Advances on unearned license revenue............................................ 239,506 83,553 Current portion of capital lease obligations.................................... 866 769 Other current liabilities....................................................... 4,660 8,479 ------------ ------------ Total current liabilities......................................................... 530,177 309,022 ------------ ------------ Capital lease obligations, less current portion................................... 1,462 890 Other noncurrent liabilities...................................................... 897 1,956 Deferred taxes.................................................................... 24,158 12,830 Commitments and contingencies Stockholders' Equity: Preferred stock, par value $.01 per share--5,000,000 shares authorized, none issued........................................................................ -- -- Common stock, par value $.01 per share--500,000,000 shares authorized, issued 150,782,000 and 147,984,000 in 1996 and 1995, respectively.................... 1,508 1,480 Additional paid-in capital...................................................... 243,564 204,448 Retained earnings............................................................... 78,723 154,098 Unrealized gain on available-for-sale securities, net of tax.................... 11,690 4,064 Foreign currency translation adjustment......................................... (10,181) (6,343) ------------ ------------ Total stockholders' equity........................................................ 325,304 357,747 ------------ ------------ Total Liabilities and Stockholders' Equity........................................ $ 881,998 $ 682,445 ------------ ------------ ------------ ------------
See Notes to Consolidated Financial Statements. 28 CONSOLIDATED STATEMENTS OF OPERATIONS
RESTATED--SEE NOTE 1 ---------------------------------- YEARS ENDED DECEMBER 31, 1996 1995 1994 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net Revenues Licenses................................................................... $ 496,039 $ 458,284 $ 346,518 Services................................................................... 231,810 174,486 105,451 ---------- ---------- ---------- 727,849 632,770 451,969 Costs and Expenses Cost of software distribution.............................................. 46,786 37,593 24,494 Cost of services........................................................... 144,850 91,540 46,798 Sales and marketing........................................................ 413,689 301,932 203,815 Research and development................................................... 120,211 85,643 64,264 General and administrative................................................. 64,416 51,114 35,369 Expenses related to Illustra merger........................................ 5,914 -- -- ---------- ---------- ---------- 795,866 567,822 374,740 ---------- ---------- ---------- Operating income (Loss)...................................................... (68,017) 64,948 77,229 Interest income............................................................ 9,868 8,148 3,970 Interest expense........................................................... (5,784) (2,522) (551) Other income (expense), net................................................ 2,899 120 (3,105) ---------- ---------- ---------- Income (loss) before income taxes............................................ (61,034) 70,694 77,543 Income taxes............................................................. 12,531 32,094 29,250 ---------- ---------- ---------- Net income (loss)............................................................ $ (73,565) $ 38,600 $ 48,293 ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) per common share........................................... $ (0.49) $ 0.26 $ 0.34 ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number of common and common equivalent shares outstanding:............................................................... 149,310 150,627 142,782
See Notes to Consolidated Financial Statements. 29 CONSOLIDATED STATEMENTS OF CASH FLOWS
RESTATED--SEE NOTE 1 ------------------------------------- YEARS ENDED DECEMBER 31, 1996 1995 1994 ----------- ----------- ----------- (IN THOUSANDS) Operating Activities Net income (loss).......................................................... $ (73,565) $ 38,600 $ 48,293 Adjustments to reconcile net income (loss) to cash and cash equivalents provided by (used in) operating activities: License revenue paid in advance (see contra)............................. (58,206) (34,237) (8,140) Depreciation and amortization............................................ 47,207 28,949 16,575 Amortization of capitalized software..................................... 14,626 12,041 7,848 Deferred tax expense..................................................... (3,965) (16,577) (4,103) Provisions for losses on accounts receivable............................. 14,983 8,508 3,837 Foreign currency transaction gain........................................ (5,349) (4,609) (1,323) Gain on sales of strategic investments................................... (3,856) -- -- Loss on disposal of property and equipment............................... 2,393 605 -- Changes in operating assets and liabilities: Accounts receivable.................................................... (45,426) (47,045) (23,249) Other current assets................................................... 89 (8,441) (2,025) Accounts payable and accrued expenses.................................. 52,077 64,294 31,528 Deferred maintenance revenue........................................... 29,590 17,197 11,613 ----------- ----------- ----------- Net cash and cash equivalents provided by (used in) operating activities... (29,402) (59,285) 80,854 ----------- ----------- ----------- Investing Activities Investments of excess cash: Purchases of held-to-maturity securities................................. -- (144,517) (124,102) Purchases of available-for-sale securities............................... (152,179) (4,303) (111,923) Maturities of held-to-maturity securities................................ -- 83,159 106,513 Maturities of available-for-sale securities.............................. 126,137 6,104 -- Sales of available-for-sale securities................................... 83,696 27,261 140,866 Purchases of strategic investments......................................... (12,737) (1,000) (1,623) Proceeds from sales of strategic investments............................... 7,299 -- -- Purchases of property and equipment........................................ (148,270) (56,500) (25,747) Proceeds from disposal of property and equipment........................... 1,929 288 -- Additions to software costs................................................ (32,381) (23,977) (15,048) Business combinations, net of cash acquired................................ (4,340) (38,413) (8,799) Other...................................................................... (14,434) (5,757) (721) ----------- ----------- ----------- Net cash and cash equivalents used in investing activities................. (145,280) (157,655) (40,584) ----------- ----------- ----------- Financing Activities Advances on unearned license revenue (see contra).......................... 207,218 109,338 26,380 Proceeds from issuance of common stock, net................................ 24,357 27,898 15,836 Principal payments on capital leases....................................... (1,025) (442) (1,342) Acquisition of common stock................................................ (2,388) -- (22,141) Reissuance of treasury stock............................................... 578 -- 7,915 ----------- ----------- ----------- Net cash and cash equivalents provided by financing activities............. 228,740 136,794 26,648 ----------- ----------- ----------- Effect of exchange rate changes on cash and cash equivalents............... 8,145 (6,402) 554 ----------- ----------- ----------- Increase in cash and cash equivalents...................................... 62,203 32,022 67,472 Cash and cash equivalents at beginning of year............................. 164,305 132,283 64,811 ----------- ----------- ----------- Cash and cash equivalents at end of year................................... $ 226,508 $ 164,305 $ 132,283 ----------- ----------- ----------- ----------- ----------- -----------
See Notes to Consolidated Financial Statements. 30 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (RESTATED--SEE NOTE 1)
UNREALIZED GAIN ON FOREIGN ADDITIONAL AVAILABLE- CURRENCY COMMON STOCK PAID-IN TREASURY STOCK RETAINED FOR-SALE TRANSLATION SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS SECURITIES ADJUSTMENT --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- (IN THOUSANDS) Balances at December 31, 1993........................ 133,286 $ 1,333 $ 127,176 (266) $ (2,431) $ 84,030 $ -- $ (2,527) Exercise of stock options..... 1,170 11 3,557 Sale of stock to employees under employee stock purchase plan............... 90 1 1,052 Issuance of stock, net of costs....................... 5,608 55 11,499 Tax benefits related to stock options..................... 10,062 Foreign currency translation adjustment.................. 850 Acquisition of treasury stock....................... (3) (2,723) (22,139) Reissuance of treasury stock....................... 2,989 24,570 (16,655) Unrealized Gain on available-for-sale securities, net of tax 665 Net income.................... 48,293 --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- Balances at December 31, 1994........................ 140,154 1,400 153,343 -- -- 115,668 665 (1,676) Exercise of stock options..... 4,377 44 13,712 Sale of stock to employees under employee stock purchase plan............... 349 3 6,603 Issuance of stock, net of costs....................... 2,571 28 7,508 Tax benefits related to stock options..................... 21,291 Acquisition of STG............ 533 5 1,991 (170) Foreign currency translation adjustment.................. (4,667) Unrealized Gain on available-for-sale securities, net of tax...... 3,399 Net income.................... 38,600 --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- Balances at December 31, 1995........................ 147,984 1,480 204,448 -- -- 154,098 4,064 (6,343) 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....................... (100) (2,388) Reissuance of treasury stock....................... 100 2,388 (1,810) Tax benefits related to stock options..................... 14,787 Foreign currency translation adjustment.................. (3,838) Unrealized Gain on available-for-sale securities, net of tax...... 7,626 Net loss...................... (73,565) --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- Balances at December 31, 1996........................ 150,782 $ 1,508 $ 243,564 -- $ -- $ 78,723 $ 11,690 $ (10,181) --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- TOTALS --------- Balances at December 31, 1993........................ $ 207,581 Exercise of stock options..... 3,568 Sale of stock to employees under employee stock purchase plan............... 1,053 Issuance of stock, net of costs....................... 11,554 Tax benefits related to stock options..................... 10,062 Foreign currency translation adjustment.................. 850 Acquisition of treasury stock....................... (22,142) Reissuance of treasury stock....................... 7,915 Unrealized Gain on available-for-sale securities, net of tax 665 Net income.................... 48,293 --------- Balances at December 31, 1994........................ 269,400 Exercise of stock options..... 13,756 Sale of stock to employees under employee stock purchase plan............... 6,606 Issuance of stock, net of costs....................... 7,536 Tax benefits related to stock options..................... 21,291 Acquisition of STG............ 1,826 Foreign currency translation adjustment.................. (4,667) Unrealized Gain on available-for-sale securities, net of tax...... 3,399 Net income.................... 38,600 --------- Balances at December 31, 1995........................ 357,747 Exercise of stock options..... 13,365 Sale of stock to employees under employee stock purchase plan............... 10,992 Acquisition of treasury stock....................... (2,388) Reissuance of treasury stock....................... 578 Tax benefits related to stock options..................... 14,787 Foreign currency translation adjustment.................. (3,838) Unrealized Gain on available-for-sale securities, net of tax...... 7,626 Net loss...................... (73,565) --------- Balances at December 31, 1996........................ $ 325,304 --------- ---------
See Notes to Consolidated Financial Statements. 31 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--RESTATEMENT OF FINANCIAL STATEMENTS Subsequent to the filing of its Annual Report on Form 10-K for the year ended December 31, 1996 with the Securities and Exchange Commission, the Company became aware of errors and irregularities that ultimately affected the timing and dollar amount of reported earned revenues from license transactions in 1996, 1995 and 1994. The irregularities took numerous forms and were primarily the result of lack of compliance with or circumvention of the Company's procedures and controls. The Company undertook and completed extended procedures related to license transactions recorded in each year of the three-year period. As a result of these findings and other relevant information now known or disclosed, the Company has determined that a significant number and dollar amount of license transactions were improperly reported as earned revenue in 1996, 1995 and 1994. Because of the pervasiveness of the aforementioned irregularities, the Company has concluded that the earnings process for a significant number of original license agreements with resellers (original equipment manufacturers, distributors and value added resellers) was not complete at the time of delivery of the master copy of the software to the reseller. Further, the Company has learned that informal or otherwise undisclosed arrangements with a number of resellers have resulted or could result in significant concessions or allowances that were not accounted for when the revenue was originally reported as earned. Accordingly, the Company has determined that this revenue is earned when the licenses are resold or utilized by the reseller and after any related obligations have been satisfied, i.e. when there are no longer any significant remaining uncertainties related to the earnings process. This revised application of accounting policy has been followed for all transactions with resellers, other than those licenses sold and billed on a per-copy basis, for 1996, 1995 and 1994. Accordingly, such financial statements have been restated as follows:
1996 1995 1994 ---------------------- ---------------------- ---------------------- AS AS AS REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED ---------- ---------- ---------- ---------- ---------- ---------- Net revenues Licenses.............................. $ 708,035 $ 496,039 $ 539,733 $ 458,284 $ 364,661 $ 346,518 Services.............................. 231,276 231,810 174,486 174,486 105,451 105,451 ---------- ---------- ---------- ---------- ---------- ---------- 939,311 727,849 714,219 632,770 470,112 451,969 Operating income (loss)................. 137,344 (68,017) 145,826 64,948 95,091 77,229 Income taxes............................ 50,391 12,531 55,164 32,094 34,074 29,250 Net income (loss)....................... 97,818 (73,565) 97,644 38,600 61,948 48,293 Net income (loss) per share............. $ 0.63 $ (0.49) $ 0.65 $ 0.26 $ 0.43 $ 0.34 Retained earnings....................... $ 322,805 $ 78,723 $ 226,797 $ 154,098 $ 129,323 $ 115,668 Advances on unearned license revenue.... -- 239,506 -- 83,553 -- 18,556
NOTE 2--MANAGEMENT PLANS TO ADDRESS OPERATIONAL ISSUES AND LIQUIDITY The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred losses in 1996 and anticipates that it will continue to incur losses and report reduced revenues through at least 1997. In addition, the Company anticipates that its cash and working capital requirements in the short term cannot be met entirely from funds generated internally from operations. 32 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--MANAGEMENT PLANS TO ADDRESS OPERATIONAL ISSUES AND LIQUIDITY (CONTINUED) Management's operational and financing plans to address the above issues include (1) continued cost containment measures to bring spending levels in line with planned revenue; (2) sale of non-essential assets including an undeveloped land site (see Note 13 to the Consolidated Financial Statements); (3) obtaining additional equity and debt financing; (4) modifying long-term lease arrangements for new offices; and (5) resolution of stockholder class action litigation (see Note 12 to the Consolidated Financial Statements). There can be no assurance that management will be successful in accomplishing these objectives. The 1996 consolidated financial statements do not include any adjustments that might result from the outcome of these liquidity uncertainties. NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND OPERATIONS. The Company is a multinational supplier of high-performance, parallel processing database technology for open systems. The Company's products also include application development tools for creating client/server production applications, decision-support systems, ad-hoc query interfaces, and software that allows information to be shared transparently from personal computers to mainframes within the corporate computing environment. In addition to software products, the Company offers training, consulting, and post-contract support to its customers. The principal geographic markets for the Company's products are North America, Europe, Asia/ Pacific, Japan, and Latin America. Customers include large-, medium- and small-sized corporations in the manufacturing, financial services, telecommunications, retail/wholesale, hospitality, and government services sectors. USE OF ESTIMATES. The preparation of financial statements in conformity with general accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of Informix Corporation and its wholly owned subsidiaries. All material intercompany accounts, transactions, and profits have been eliminated in consolidation. RESTATEMENT OF PRIOR YEAR DATA AS A RESULT OF A BUSINESS COMBINATION. As more fully described in Note 11, in February 1996, Illustra Information Technologies, Inc. (Illustra) merged with a wholly-owned subsidiary of the Company. The merger has been accounted for as a pooling of interests and the historical consolidated financial statements of the Company for all periods prior to the merger have been restated to include the financial position, results of operations, and cash flows of Illustra. Costs of the merger are included in the consolidated results of operations in 1996. FOREIGN CURRENCY TRANSLATION. For foreign operations with the local currency as the functional currency, assets and liabilities are translated at year-end exchange rates, and statements of operations are translated at the average exchange rates during the year. Exchange gains or losses arising from translation of foreign entity financial statements are included as a component of stockholders' equity. For foreign operations with the U.S. dollar as the functional currency, certain assets and liabilities are remeasured at the year-end or historical exchange rates as appropriate. Statements of operations are 33 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) remeasured at the average exchange rates during the year. Gains and losses resulting from the remeasurement of the entity's financial statements and other foreign currency transaction gains and losses are included in other expense, net. The Company enters into forward foreign exchange contracts primarily to hedge the value of accounts receivable or accounts payable denominated in foreign currencies (mainly European and Asian foreign currencies) against fluctuations in exchange rates until such receivables are collected or such payables are disbursed. The Company operates, on a limited basis, in certain countries in Latin America, Eastern Europe, and Asia Pacific where there are limited forward currency exchange markets and thus the Company has limited unhedged transaction exposures in these currencies. Gains and losses associated with exchange rate fluctuations on forward foreign exchange contracts are recorded currently as income or loss as they offset corresponding gains and losses recorded on the foreign currency denominated assets and liabilities being hedged. The costs of the forward foreign exchange contracts are recorded as other expense, net (see Note 5 to the Consolidated Financial Statements). REVENUE RECOGNITION LICENSE REVENUE. The Company recognizes revenue from sales of software licenses to end-users upon delivery of the software product to a customer when there are no significant post-delivery obligations and collection of the license fee is considered probable. However, as previously discussed in Note 1, because the Company is unable to estimate the amount of allowances for transactions entered into with resellers, revenue from license agreements with resellers, except for those licenses sold and billed on a per-copy basis, is recognized as earned when the licenses are resold or utilized by the reseller and all related obligations have been satisfied. The Company provides for all other sales allowances on an estimated basis. SERVICE REVENUE. Maintenance contracts generally call for the Company to provide technical support and software updates to customers. Maintenance contract revenue is recognized ratably over the term of the maintenance contract, generally on a straight-line basis. Where maintenance revenue is not separately invoiced, it is unbundled from license fees and deferred for revenue recognition purposes. Other service revenue, primarily training and consulting, is generally recognized at the time the service is performed. ADVANCES ON UNEARNED LICENSE REVENUE. At December 31, 1996 and 1995, "advances on unearned license revenue" in the Company's restated consolidated balance sheets reflect amounts received from customers and third-party financial institutions in advance of revenue being recognized. As a result of the Company's aforementioned revised application of its revenue recognition accounting policy for reseller transactions, the Company may receive cash, either from the customer, or from a financing entity to whom the customer payment streams are sold, prior to the time the license fee is recognized as earned revenue. The Company's license agreements with customers provide contractually for a non-refundable fee payable by the customer in single or multiple installment(s) at the initiation or over the term of the license arrangement. If the Company fails to comply with the contractual terms of a specific license agreement, the Company could be required to refund to the customer or the financial institution the amount(s) received. The Company's arrangements for financing of license contracts with customers frequently take the form of a non-recourse sale of the future payment streams. When such customer contracts are sold to a third-party financing entity, they are typically sold at a discount which represents the financing cost. Such discounts are charged to expense immediately in cases where the license has been recorded as a sale. For 34 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) transactions where the financing is received prior to the recognition of revenue, the financing discount has been charged to interest expense over the financing period based on the contractual terms on a straight-line basis, which approximates the "interest method." In 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, "Software Revenue Recognition." The Company will be required to adopt the provisions of the SOP as of January 1, 1998. The Company is evaluating the SOP in relation to its current revenue recognition policy. Adoption of the SOP may affect the revenue recognition practices of the Company. CONCURRENT TRANSACTIONS. Principally during 1996, the Company entered into software license agreements with certain computer and service vendors where the Company concurrently committed to acquire goods and services in the aggregate of approximately $130 million. If the agreement is with a reseller, revenue is recognized as earned on these transactions as the licenses are resold by the customer. If the agreement is with an end user, revenue is generally recognized as earned upon delivery of software. The computer equipment and services are recorded at their fair value. These concurrent transactions for 1996 included license agreements of approximately $170 million, of which $31 million was recognized as earned revenue by the Company in 1996. The Company disclosed in its 1996 annual report that $55 million of revenue was recognized from concurrent transactions in that year. This disclosure represented revenue (before the restatement) arising from specific license agreements where the Company acquired goods and services in approximately the same dollar amount and is included in the $170 million of 1996 concurrent transactions. INCOME TAXES. The Company accounts for income taxes in accordance with the provisions of the Financial Accounting Standards Board Statement No. 109 (FAS 109) "Accounting for Income Taxes." Under FAS 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and income tax bases of assets and liabilities, and are measured by applying enacted tax rates and laws to the taxable years in which such differences are expected to reverse. INVENTORIES. Inventories, which consist primarily of software product components, finished software products, and marketing and promotional materials, are carried at the lower of cost (first in, first out) or market value, and are included in other current assets. SOFTWARE COSTS. The Company capitalizes software development costs incurred in developing a product once technological feasibility of the product has been determined. Software costs also include amounts paid for purchased software and outside development on products which have reached technological feasibility. All software costs are amortized as a cost of software distribution either on a straight-line basis over the remaining estimated economic life of the product or on the basis of each product's projected revenues, whichever results in greater amortization. The Company recorded amortization of $14.6 million, $12.0 million, and $7.8 million of software costs in 1996, 1995 and 1994, respectively, in cost of software distribution. PROPERTY AND EQUIPMENT. Depreciation of property and equipment is calculated using the straight-line method over its estimated useful life, generally the shorter of the applicable lease term or three-to-seven years for financial reporting purposes. 35 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) BUSINESSES ACQUIRED. The purchase price of businesses acquired, accounted for as purchased business combinations, is allocated to the tangible and specifically identifiable intangible assets acquired based on their fair values with any amount in excess of such allocations being designated as goodwill. Intangible assets are amortized over their estimated useful lives, which to date have been five to seven years. The carrying values of goodwill and specified intangible assets are reviewed if the facts and circumstances suggest that they may be impaired. If this review indicates that the asset will not be recoverable, as determined based on the undiscounted cash flows of the acquired business over the remaining amortization period, the Company's carrying value is reduced to net realizable value. There were no writedowns of intangible assets in 1996, 1995 or 1994. As of December 31, 1996 and 1995, the Company had $50.6 million and $48.4 million of intangible assets, with accumulated amortization of $15.9 million and $7.7 million, respectively, as a result of these acquisitions. NET INCOME (LOSS) PER COMMON SHARE. Net income (loss) per common share is based on the weighted average number of common and dilutive common equivalent shares outstanding during each year. All stock options are considered common stock equivalents and are included in the weighted average computations when the effect is dilutive. CONCENTRATION OF CREDIT RISK. The Company designs, develops, manufactures, markets, and supports computer software systems to customers in diversified industries and in diversified geographic locations. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. In the normal course of business, the Company often arranges for non-recourse financing through the sale of customer accounts receivable. Such financing arrangements are offered by a number of financial institutions. The Company has traditionally relied on a limited number of these financial institutions for most of the customer financing it arranges. Future advances and cash flows of the Company would be negatively impacted if the Company's financing resources were to discontinue their services for any reason. No single customer accounted for 10% or more of the consolidated revenues of the Company in 1996, 1995 or 1994. CASH, CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, AND LONG-TERM INVESTMENTS. The Company considers liquid investments purchased with a maturity of three months or less to be cash equivalents. The Company considers investments with a maturity of more than three months but less than one year to be short-term investments. Investments with an original maturity of more than one year are considered long-term investments. Short-term and long-term investments are classified as available-for-sale and are carried at fair value. Cash equivalents are carried at amortized cost. The Company invests its excess cash in accordance with its short-term and long-term investments policy, which is approved by the Board of Directors. The policy authorizes the investment of excess cash in government securities, municipal bonds, time deposits, certificates of deposit with approved financial institutions, commercial paper rated A-1/P-1 (a small portion of the portfolio may consist of commercial paper rated A-2/P-2), and other specific money market instruments of similar liquidity and credit quality. The Company has not experienced any significant losses related to these investments. SECURITIES HELD-TO-MATURITY AND AVAILABLE-FOR-SALE. Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and the 36 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ability to hold the securities until maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, as well as any interest on the securities, is included in interest income. Marketable equity securities and debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in other expense, net. The cost of securities sold is based on the specific identification method. Interest on securities classified as available-for-sale are included in interest income. There were no material gross realized gains or losses from sales of securities during the year. FAIR VALUE OF FINANCIAL INSTRUMENTS. Fair values of cash, cash equivalents, short and long term investments, other assets, and currency forward contracts are based on quoted market prices. NOTE 4--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, 1996 COST GAINS LOSSES FAIR VALUE - ----------------------------------------------------------------- ---------- ----------- ------------- ---------- (IN THOUSANDS) U.S. treasury securities......................................... $ 61,308 $ -- $ (20) $ 61,288 Commercial paper................................................. 15,872 14 (2) 15,884 Municipal bonds.................................................. 27,317 10 (48) 27,279 Auctioned preferred stock........................................ 4,504 -- (4) 4,500 ---------- ----------- --- ---------- Total debt securities........................................ 109,001 24 (74) 108,951 U.S. equity securities........................................... 15,404 18,490 -- 33,894 ---------- ----------- --- ---------- $ 124,405 $ 18,514 $ (74) $ 142,845 ---------- ----------- --- ---------- ---------- ----------- --- ---------- Amounts included in cash and cash equivalents.................... $ 67,806 $ -- $ (6) $ 67,800 Amounts included in short-term investments....................... 34,548 19 (55) 34,512 Amounts included in long-term investments........................ 6,647 5 (13) 6,639 Amounts included in other assets................................. 15,404 18,490 -- 33,894 ---------- ----------- --- ---------- $ 124,405 $ 18,514 $ (74) $ 142,845 ---------- ----------- --- ---------- ---------- ----------- --- ----------
37 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4--FINANCIAL INSTRUMENTS (CONTINUED) The maturity dates of the financial instruments included in long-term investments vary from 1998 to 2026.
AVAILABLE-FOR-SALE SECURITIES ------------------------------------------------ GROSS GROSS UNREALIZED UNREALIZED ESTIMATED DECEMBER 31, 1995 COST GAINS LOSSES FAIR VALUE - ----------------------------------------------------------------- ---------- ----------- ----------- ---------- (IN THOUSANDS) U.S. treasury securities......................................... $ 5,608 $ -- $ -- $ 5,608 Commercial paper................................................. 51,288 146 (88) 51,346 Municipal bonds.................................................. 82,096 71 (213) 81,954 Auctioned preferred stock........................................ 2,506 -- (5) 2,501 ---------- ----------- ----------- ---------- Total debt securities........................................ 141,498 217 (306) 141,409 U.S. equity securities........................................... 6,110 7,500 (831) 12,779 ---------- ----------- ----------- ---------- $ 147,608 $ 7,717 $ (1,137) $ 154,188 ---------- ----------- ----------- ---------- ---------- ----------- ----------- ---------- Amounts included in cash and cash equivalents.................... $ 42,724 $ -- $ -- $ 42,724 Amounts included in short-term investments....................... 89,072 137 (305) 88,904 Amounts included in long-term investments........................ 9,702 80 (1) 9,781 Amounts included in other assets................................. 6,110 7,500 (831) 12,779 ---------- ----------- ----------- ---------- $ 147,608 $ 7,717 $ (1,137) $ 154,188 ---------- ----------- ----------- ---------- ---------- ----------- ----------- ----------
In the fourth quarter of 1995, the Company re-evaluated the initial designation of certain of its investments in debt securities as held-to-maturity based on the Company's current ability and intent to hold such securities to their contractual maturity. As a result, in December 1995, these securities were transferred from held-to-maturity to available-for-sale at their estimated fair value of $125.7 million. The difference between amortized cost of $125.8 million and estimated fair value of these securities at the date of transfer, $0.1 million, was charged to a separate component of stockholders' equity. NOTE 5--DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into forward foreign exchange contracts primarily to hedge the value of accounts receivable or accounts payable denominated in foreign currencies against fluctuations in exchange rates until such receivables are collected or payables are disbursed. The purpose of the Company's foreign exchange exposure management policy and practices is to attempt to minimize the impact of exchange rate fluctuations on the value of the foreign currency denominated assets and liabilities being hedged. Substantially all forward foreign exchange contracts entered into by the Company have maturities of 360 days or less. The Company's practice is to settle all foreign exchange contracts within ten calendar days of year end and thus there is no material difference between the contract value and the fair value of the contracts at December 31, 1996 and 1995. At December 31, 1996 and 1995, the Company had approximately $168.6 million and $77.2 million of forward foreign currency exchange contracts outstanding, respectively. The table below summarizes by currency the contractual amounts of the Company's forward foreign exchange contracts at December 31, 1996 and December 31, 1995. 38 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5--DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) The restatement of the 1996, 1995 and 1994 financial statements resulted in a change in the Company's foreign currency denominated intercompany accounts payable and accounts receivable balances. As a result, certain foreign currency transaction gains and losses realized due to fluctuation in the related asset and liability currency exchange rates were not offset by underlying gains and losses on forward foreign currency exchange contracts used to hedge those foreign currency exposures. FORWARD CONTRACTS
AT DECEMBER 31, 1996 FACE VALUE UNREALIZED GAIN/(LOSS) - ------------------------------------------------------------------------------- ---------- ----------------------- (IN THOUSANDS) Forward currency contracts sold: Deutsche Mark.............................................................. $ 55,815 $ (24) Japanese Yen............................................................... 41,384 (143) British Pound.............................................................. 16,051 (12) French Franc............................................................... 8,252 -- Malaysian Ringgit.......................................................... 5,914 1 Taiwanese NT............................................................... 5,609 (2) Italian Lira............................................................... 4,555 (9) Singapore Dollar........................................................... 3,600 (8) Dutch Guilder.............................................................. 3,558 1 Sweden Krona............................................................... 2,246 1 Swiss Franc................................................................ 1,622 1 Portuguese Escudo.......................................................... 1,574 -- Other (under $1 million)................................................... 2,240 (1) ---------- ----- Total.......................................................................... $ 152,420 $ (195) ---------- ----- ---------- ----- Forward currency contracts purchased: British Pound.............................................................. $ 10,501 $ (192) Deutsche Mark.............................................................. 4,198 6 Other (under $1 million)................................................... 1,472 (7) ---------- ----- Total.......................................................................... $ 16,171 $ (193) ---------- ----- ---------- ----- Grand Total.................................................................... $ 168,591 $ (388) ---------- ----- ---------- -----
39 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5--DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) FORWARD CONTRACTS
AT DECEMBER 31, 1995 FACE VALUE UNREALIZED GAIN/(LOSS) - ------------------------------------------------------------------------------- ----------- ----------------------- (IN THOUSANDS) Forward currency contracts sold: Deutsche Mark.............................................................. $ 25,356 $ (14) Japanese Yen............................................................... 21,817 (74) Spanish Peseta............................................................. 6,178 (4) French Franc............................................................... 4,807 (7) Singapore Dollars.......................................................... 4,326 6 Italian Lira............................................................... 2,403 4 British Pound.............................................................. 2,329 22 Malaysian Ringgit.......................................................... 2,287 (2) Dutch Guilder.............................................................. 1,550 1 Portuguese Escudo.......................................................... 1,369 (1) Austrian Schilling......................................................... 1,361 -- Other...................................................................... 3,369 (1) ----------- --- Total.......................................................................... $ 77,152 $ (70) ----------- --- ----------- ---
Other than the use of forward foreign exchange contracts as discussed immediately above as of December 31, 1996, the Company does not currently invest in or hold any other financial instruments defined as derivative financial instruments by FAS 119. NOTE 6--STOCK-BASED BENEFIT PLANS OPTION PLANS Under the Company's 1986 Employee Stock Option Plan, options are granted at fair market value on the date of the grant. Options are generally exercisable in cumulative annual installments over three to five years. Payment for shares purchased upon exercise of options may be by cash or, with Board approval, by full recourse promissory note or by exchange of shares of the Company's common stock at fair market value on the exercise date. Options under the 1986 Plan expired on July 29, 1996, which was 10 years after the date of grant. Additionally, 1,600,000 shares were authorized for issuance under the 1989 Outside Directors Stock Option Plan, whereby non-employee directors are automatically granted non-qualified stock options upon election or re-election to the Board of Directors. At December 31, 1996, 675,000 shares were available for grant under this Plan. In April 1994, the Company adopted the 1994 Stock Option and Award Plan; 8,000,000 shares were authorized for grant under this Plan. Options can be granted to employees on terms substantially equivalent to those described above. The 1994 Stock Option and Award Plan also allows the Company to award performance shares of the Company's common stock to be paid to recipients on the achievement of certain performance goals set with respect to each recipient. At December 31, 1996, 788,783 shares were available for grant under this Plan. 40 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6--STOCK-BASED BENEFIT PLANS In February 1996, on acquisition of Illustra, all of Illustra's outstanding options were converted into options to purchase 2.3 million shares of Informix common stock. All stock options were restated to include Illustra's options under the pooling-of-interests method. There were 172,677 shares available for grant under this Plan at December 31, 1996. Following is a summary of activity for all stock option plans for the three years ended December 31, 1996:
NUMBER OPTIONS OF SHARES PRICE PER SHARE ------------ ----------------- Outstanding at December 31, 1993............................. 15,739,957 $0.06 to $13.13 Options granted.............................................. 4,029,815 0.19 to 14.44 Options exercised............................................ (3,627,468) 0.06 to 12.75 Options canceled............................................. (1,128,532) 0.06 to 11.88 ------------ Outstanding at December 31, 1994............................. 15,013,772 0.06 to 14.44 Options granted and assumed.................................. 5,456,927 0.19 to 34.00 Options exercised............................................ (3,852,697) 0.19 to 13.88 Options canceled............................................. (864,920) 0.06 to 32.75 ------------ Outstanding at December 31, 1995............................. 15,753,082 0.06 to 34.00
WEIGHTED AVERAGE PRICE ------------ Options granted and assumed.................................. 5,850,225 $ 24.3456 Options exercised............................................ (2,927,260) 4.6069 Options canceled............................................. (1,561,800) 17.1483 ------------ Outstanding at December 31, 1996............................. 17,114,247 $ 13.4495
41 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6--STOCK-BASED BENEFIT PLANS (CONTINUED) The following table summarizes information about options outstanding at December 31, 1996:
OPTIONS EXERCISABLE OPTIONS OUTSTANDING ------------------------------ -------------------------------------------------- NUMBER NUMBER WEIGHTED WEIGHTED EXERCISABLE WEIGHTED OUTSTANDING AT AVERAGE AVERAGE AT AVERAGE RANGE OF DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE EXERCISE PRICES 1996 CONTRACTUAL LIFE PRICE 1996 PRICE - ---------------------- -------------- ------------------- ------------- ------------- --------------- $ 0.0700 - $ 0.6719 2,304,968 6.63 $ 0.3911 2,304,968 $ 0.3911 $ 0.6875 - $ 0.7500 380,100 4.38 $ 0.7447 380,100 $ 0.7447 $ 0.7656 - $ 3.5938 1,731,085 5.08 $ 3.2936 1,730,236 $ 3.2943 $ 3.7188 - $ 7.5000 1,888,065 6.88 $ 6.7008 1,087,165 $ 6.1130 $ 7.5938 - $ 8.6250 1,871,601 6.26 $ 8.6012 1,286,801 $ 8.6017 $ 8.6875 - $10.7813 420,675 6.79 $ 10.0854 184,300 $ 10.1559 $10.8750 - $18.2500 2,761,139 8.24 $ 17.8675 723,415 $ 17.6530 $18.3750 - $23.1250 2,001,650 9.74 $ 22.1668 37,750 $ 20.9894 $23.2500 - $24.1250 2,766,288 9.33 $ 24.0838 59,116 $ 23.8057 $24.2500 - $34.7500 988,676 9.08 $ 30.3152 194,325 $ 28.4078 -------------- --- ------------- ------------- --------------- $ 0.0700 - $34.7500 17,114,247 7.61 $ 13.4495 7,988,176 $ 5.8788
In connection with all stock option plans, 18,750,708 shares of common stock were reserved for issuance as of December 31, 1996. At December 31, 1995, 4,898,537 options were exercisable. EMPLOYEE STOCK PURCHASE PLAN The Company also has a qualified Employee Stock Purchase Plan (ESPP) under which 7,600,000 shares of common stock, in the aggregate, have been authorized for issuance. Under the terms of the Plan, employees may contribute, through payroll deductions, up to 10 percent of their base pay and purchase up to 500 shares per quarter (with the limitation of purchases of $25,000 annually in fair market value of the shares). Employees may elect to withdraw from the Plan during any quarter and have their contributions for the period returned to them. Also, employees may elect to reduce the rate of contribution one time in each quarter. The price at which employees may purchase shares is 85 percent of the lower of the fair market value of the stock at the beginning or end of the quarter. The Plan is qualified under Section 423 of the Internal Revenue Code of 1986, as amended. During 1996, 1995, and 1994 the Company issued 616,128 shares, 347,743 shares, and 484,756 shares, respectively, under this Plan. In connection with the Employee Stock Purchase Plan, 650,587 shares were reserved for issuance as of December 31, 1996. STOCK REPURCHASE AUTHORIZATION The Board of Directors had authorized the purchase of up to 8 million shares of the Company's common stock in the open market to satisfy requirements under Stock Option and Stock Purchase Plans under a stock repurchase plan. In 1996, the Company rescinded the stock repurchase authorization. STOCK BASED COMPENSATION As permitted under FASB Statement No.123, "Accounting for Stock-Based Compensation" (FASB 123), the Company has elected to continue to follow Accounting Principles Board Opinion No. 25, 42 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6--STOCK-BASED BENEFIT PLANS (CONTINUED) "Accounting for Stock Issued to Employees" (APB 25) in accounting for stock-based awards to employees. Under APB 25, the Company generally recognizes no compensation expense with respect to such awards. Pro forma information regarding the net income (loss) and earnings per share (loss) is required by FASB 123 for awards granted or modified after December 31, 1994 as if the Company had accounted for its stock based awards to employees under the fair value method of FASB 123. The fair value of the Company's stock-based awards to employees was estimated using a Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reasonable single measure of the fair value of its stock-based awards to employees. The fair value of the Company's stock-based awards was estimated assuming no expected dividends and the following weighted-average assumptions:
OPTIONS ESPP ------------------------------ ------------------------------ 1996 1995 1996 1995 -------------- -------------- -------------- -------------- Expected life (years)................ 4.5 year 4.5 year .25 year .25 year Expected volatility (percent)........ .5822 - .6327 .5642 - .6239 .5765 - .9662 .4170 - .7295 Risk-free interest rate (percent).... 5.20 - 6.09 5.82 - 7.72 5.01 - 5.85 5.49 - 6.07
For pro forma purposes, the estimated fair value of the Company's stock based awards is amortized over the award's vesting period (for options) and the three month purchase period (for stock purchases under the ESPP). The Company's pro forma information follows, (in thousands except for net income per share information):
1996 1995 RESTATED RESTATED ---------- --------- Net income (loss) As reported $ (73,565) $ 38,600 Pro forma (94,196) 28,652 Net income (loss) per share As reported $ (0.49) $ 0.26 Pro forma (0.63) 0.19
FASB 123 is applicable only to awards granted subsequent to December 31, 1994. Therefore, its pro forma effect will not be fully reflected until approximately 1998. Calculated under FASB 123, the weighted-average fair value of the options granted during 1996 and 1995 was $13.04 and $10.39 per share, respectively. The weighted average fair value of employee stock purchase rights granted under the ESPP during 1996 and 1995 were $7.47 and $5.27, respectively. NOTE 7--401(K) PLAN The Company has a 401(k) plan covering substantially all of its U.S. employees. Under this plan, participating employees may defer up to 15 percent of their pre-tax earnings, subject to the Internal Revenue Service annual contribution limit ($9,500 for 1996). In 1996, the Company matched 50 percent of 43 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--401(K) PLAN (CONTINUED) each employee's contribution up to a maximum of $2,000. The Company's matching contributions to this 401(k) plan for 1996, 1995 and 1994 were $3.8 million, $2.5 million and $1.4 million, respectively. NOTE 8--COMMITMENTS The Company leases certain computer and office equipment under capital leases having terms of three-to-five years. Amounts capitalized for such leases are included on the consolidated balance sheets as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- (IN THOUSANDS) Computer equipment..................................... $ 8,825 $ 7,924 Office equipment....................................... 2,474 1,636 ------ ------ 11,299 9,560 Less: accumulated amortization......................... 8,985 7,716 ------ ------ $ 2,314 $ 1,844 ------ ------ ------ ------
During 1996 and 1995, the Company financed approximately $1,800,000 and $1,677,000, respectively, of equipment purchases under capital lease arrangements. Amortization with respect to leased equipment is included in depreciation expense. The Company leases certain of its office facilities and equipment under non-cancelable operating leases and total rent expense was $42.4 million, $19.7 million and $17.3 million in 1996, 1995 and 1994, respectively (see Note 13 to the Consolidated Financial Statements). The Company planned on relocating its corporate headquarters to Santa Clara, California approximately 15 miles to the south of the Company's current headquarters. To facilitate the move, in January 1997, the Company entered into a two year lease for twenty seven acres of undeveloped commercial real estate. Upon termination of the lease term, the Company would have had the option to purchase the land, or if such purchase option was not exercised, arrange for the sale of the parcels to an unrelated third party. In the event the later option was exercised, the Company was required to pay the lessor any difference between the net sales proceeds and the lessor's investment in the parcels, approximately $61.5 million. In order to secure performance of its obligation under the lease, the Company was required to pledge certain cash collateral to the lessor throughout the full term of the lease. Accordingly, in January 1997, the Company deposited $61.5 million in cash into a collateral account controlled by an affiliate of the lessor. Interest on these deposits computed at market rates, otherwise due to the Company, have been assigned by the Company to the lessor in order to reduce the gross monthly lease payments due under the lease. The real estate lease also included certain financial performance criteria which must be met by the Company during the lease term. (See Note 13 to the Consolidated Financial Statements.) In addition, in November 1996, the Company leased approximately 200,000 square feet of office space in Santa Clara adjacent to the twenty seven acres described above. The lease term is for fifteen years and minimum lease payments amount to $96.0 million over the term. The minimum lease payments increase within a contractual range based on changes in the Consumer Price Index. As of December 31, 1996, the Company was contractually obligated to purchase approximately $45 million of various computer equipment related to its SuperStores. 44 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8--COMMITMENTS (CONTINUED) Future minimum payments, by year and in the aggregate, under the capital and non-cancelable operating leases as of December 31, 1996, are as follows:
CAPITAL NON-CANCELABLE YEAR ENDING DECEMBER 31 LEASES OPERATING LEASES - ------------------------------------------------------------------ --------- ---------------- (IN THOUSANDS) 1997.............................................................. $ 1,265 $ 45,941 1998.............................................................. 803 44,591 1999.............................................................. 386 41,244 2000.............................................................. 153 23,438 2001.............................................................. -- 16,396 Thereafter........................................................ -- 88,904 --------- -------- Total payments.................................................... 2,607 $ 260,514 -------- -------- Less: amount representing interest................................ 279 --------- Present value of minimum lease payments........................... 2,328 Less current portion 866 --------- $ 1,462 --------- ---------
NOTE 9--GEOGRAPHIC INFORMATION Net revenues, operating income, and identifiable assets for the Company's U.S., European, Asia/ Pacific and other foreign operations are summarized below by year:
UNITED STATES EUROPE INTERCONTINENTAL ELIMINATIONS TOTAL ------------ ---------- --------------- ------------ ---------- (IN THOUSANDS) 1996: Net revenues................................ $ 410,549 $ 229,588 $ 144,451 $ (56,741) $ 727,847 Operating income (loss)..................... (38,331) (24,156) (6,883) 1,353 (68,017) Identifiable assets......................... 734,852 218,196 146,006 (217,058) 881,996 1995: Net revenues................................ $ 365,647 $ 199,711 $ 120,216 $ (52,804) $ 632,770 Operating income (loss)..................... 69,245 (2,588) (960) (749) 64,948 Identifiable assets......................... 579,306 216,530 110,776 (224,699) 681,913 1994: Net revenues................................ $ 267,795 $ 131,605 $ 67,649 $ (15,079) $ 451,970 Operating income (loss)..................... 85,224 (50,527) 41,637 895 77,229 Identifiable assets......................... 419,006 110,195 37,448 (118,880) 447,769
Sales and transfers between geographic areas are accounted for at prices which the Company believes are arm's length prices, and which in general are in accordance with the rules and regulations of the respective governing tax authorities. 45 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9--GEOGRAPHIC INFORMATION (CONTINUED) Export revenues consisting of sales from the Company's U.S. operating subsidiary to non-affiliated customers were as follows:
1996 1995 1994 --------- --------- --------- (IN THOUSANDS) Canada....................................................... $ 7,521 $ 6,299 $ 5,100 Latin America................................................ 6,556 6,817 6,641 Asia/Pacific................................................. 3,391 5,887 32,820 Other........................................................ 3,437 1,301 3,015 --------- --------- --------- Total........................................................ $ 20,905 $ 20,304 $ 47,576 --------- --------- --------- --------- --------- ---------
NOTE 10--INCOME TAXES The provision for income taxes applicable to income before income taxes consists of the following:
1996 1995 1994 --------- ---------- --------- (IN THOUSANDS) Currently payable: Federal................................................... $ 1,540 $ 40,582 $ 26,754 State..................................................... 565 6,463 4,482 Foreign................................................... 6,216 9,325 5,277 --------- ---------- --------- 8,321 56,370 36,513 Deferred: Federal................................................... (1,748) (13,747) (2,736) State..................................................... (2,983) (1,204) (61) Foreign................................................... 8,941 (9,325) (4,466) --------- ---------- --------- 4,210 (24,276) (7,263) --------- ---------- --------- $ 12,531 $ 32,094 $ 29,250 --------- ---------- --------- --------- ---------- ---------
In 1996, 1995 and 1994, the Company recognized tax benefits related to stock option plans of $14.8 million, $21.3 million and $10.1 million, respectively. Such benefits were recorded as an increase to additional paid-in capital. Income before income taxes consists of the following:
1996 1995 1994 ---------- ---------- --------- (IN THOUSANDS) Domestic................................................... $ (26,510) $ 83,937 $ 81,508 Foreign.................................................... (34,524) (13,243) (3,965) ---------- ---------- --------- $ (61,034) $ 70,694 $ 77,543 ---------- ---------- ---------
46 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10--INCOME TAXES (CONTINUED) The provision for income taxes differs from the amount computed by applying the federal statutory income tax rate to income (loss) before income taxes. The sources and tax effects of the differences are as follows:
1996 1995 1994 ---------------------- ------------------------ ------------------------ AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT --------- ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS) Computed tax at federal statutory rate............... $ (21,362) (35.0)% $ 24,743 35.0% $ 27,140 35.0% Valuation allowance.................................. 41,192 67.5% 4,239 6.0% 908 1.2% Research and development credits..................... (1,457) (2.4)% (935) (1.3)% (1,241) (1.6)% State income taxes, net of federal tax benefit....... (1,572) (2.6)% 3,418 4.8% 2,874 3.7% Benefit from net earnings of foreign subsidiaries considered to be permanently reinvested in non-U.S. operations......................................... -- -- -- -- -- -- Other, net........................................... (4,270) (7.0)% 629 0.9% (431) (0.6)% --------- ----- ----------- ----- ----------- ----- $ 12,531 N.M. $ 32,094 45.4% $ 29,250 37.7%
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1996 and 1995 are as follows:
1996 1995 --------- --------- (IN THOUSANDS) DEFERRED TAX ASSETS: Reserves and accrued expenses.............................................. $ 7,703 $ 8,600 Deferred revenue........................................................... 33,875 15,290 Foreign net operating loss carryforwards................................... 38,067 11,701 Domestic net operating loss carryforwards.................................. 9,800 7,984 Foreign taxes in excess of taxes at U.S. rate.............................. 9,014 6,483 Other...................................................................... 555 646 --------- --------- Total deferred tax assets.................................................. 99,014 50,704 Valuation allowance for deferred tax assets................................ (46,339) (5,147) --------- --------- Deferred tax assets, net of valuation allowance............................ 52,675 45,557 DEFERRED TAX LIABILITIES: Capitalized software....................................................... 17,704 10,329 Revenue recognition........................................................ 1,612 1,612 Taxes on unremitted foreign earnings Valuation of investment portfolio..... 6,454 2,501 --------- --------- Total deferred tax liabilities............................................. 25,770 14,442 --------- --------- Net deferred tax assets.................................................... $ 26,905 $ 31,115 --------- --------- --------- ---------
At December 31, 1996, the Company had approximately $98.1 million, $21.0 million and $10.5 million of foreign, federal and state net operating loss carryforwards. The foreign and state net operating loss carryovers expire at various dates beginning in 1998. The federal net operating loss carryovers expire at various dates beginning in 2008. Income taxes paid amounted to $22.7 million, $18.6 million and $22.5 million in 1996, 1995 and 1994, respectively. The valuation allowance for deferred tax assets increased by $41.2 million, $4.2 million and $0.9 million in 1996, 1995 and 1994, respectively. 47 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11--BUSINESS COMBINATIONS In January 1995, the Company acquired a 90 percent interest in the database division of ASCII Corporation, a distributor of its products in Japan. The Company acquired the remaining 10 percent interest in January 1996. The acquisition was recorded as a purchase. The purchase price of ASCII's database division was approximately $46.0 million, of which approximately $35.4 million has been allocated to intangible assets acquired. In April 1995, the Company acquired an 80 percent interest in the database division of Daou Corporation, a distributor of its products in Korea. The acquisition was recorded as a purchase. The Company has acquired the remaining 20 percent in January 1997 for approximately $1 million. The initial purchase price of this business was approximately $4.6 million, and was increased by approximately $3.0 million in January 1997 due to performance incentives outlined in the agreement, of which approximately $7.0 million has been allocated to intangible assets acquired. The operating results of these businesses have not been material in relation to those of the Company and are included in the Company's consolidated results of operations from the date of acquisition. In February 1996, the Company acquired Illustra Information Technologies, Inc. (Illustra), a company that provides dynamic content management database software and tools for managing complex data in the Internet, multimedia/entertainment, financial services, earth sciences and other markets. Approximately 12.7 million shares of Informix common stock were issued to acquire all outstanding shares of Illustra common stock. An additional 2.3 million shares of Informix common stock were reserved for issuance in connection the assumption of Illustra's outstanding stock options and warrants. The transaction has been accounted for as a pooling of interests, and accordingly, the consolidated financial statements for all prior periods presented have been restated to include the accounts and operations of Illustra as if the merger was consummated at the beginning of the earliest period presented. Merger fees of approximately $5.9 million were recorded in the first quarter of 1996. The following table presents the separate operating results for Informix Corporation and Illustra for the periods prior to the acquisition date (because the operating results of Illustra for the period January 1, 1996 to the effective date of the merger were immaterial to the combined Company, for the purposes of this table an acquisition date of January 1, 1996 is assumed).
1995 1994 ---------- ---------- (IN THOUSANDS) Income Statement Net revenues Informix............................................................ $ 632,770 $ 451,969 Illustra............................................................ 5,234 1,415 ---------- ---------- Combined............................................................ $ 638,004 $ 453,384 ---------- ---------- ---------- ---------- Net income (loss) Informix............................................................ $ 38,600 $ 48,293 Illustra............................................................ (7,689) (4,248) ---------- ---------- Combined............................................................ $ 30,911 $ 44,045 ---------- ---------- ---------- ----------
48 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12--LITIGATION Commencing in April 1997, a series of class action lawsuits and a separate but related stockholder action were filed in federal court purportedly by or on behalf of stockholders. These actions name as defendants the Company, certain of its present and former officers and directors and its independent auditors. The complaints allege various violations of the federal securities laws and seek unspecified but potentially significant damages. Similar actions were also filed in state court. While management intends to contest these actions vigorously, the disposition of this litigation could have a material adverse effect on the Company's financial condition, results of operations and cash flows. Stockholder derivative actions, purportedly on behalf of the Company and naming virtually the same individual defendants, were also filed in state court. Any monetary judgments in the derivative actions would accrue to the benefit of the Company. In addition, in July 1997, the Securities and Exchange Commission issued a formal order of investigation of the Company and certain unidentified individuals associated with the Company with respect to non-specified accounting matters, public disclosures and trading activity in the Company's securities. The Company is cooperating with the investigation and is providing all information subpoenaed by the Commission. In the ordinary course of business, various other lawsuits and claims are filed from time to time against the Company. It is the Company's opinion that the resolution of such other litigation will not have a material effect on the Company's financial position, results of operations or cash flows. NOTE 13--SUBSEQUENT EVENTS (UNAUDITED) In the first nine months of 1997, the Company's license revenue decreased from the comparable period of the prior year. These lower revenues, combined with an increase in operating expenses resulted in a significant operating loss before restructuring charges. In response to the significant downturn in operating results, the Company restructured its operations to reduce operating expenses and recorded restructuring charges. BUSINESS COMBINATION. 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 plus direct costs of acquisition. 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 approximately $7 million of research and development, which has been charged to operations in the period the acquisition was consummated (the first quarter of 1997). PURCHASE AND SALE OF SANTA CLARA REAL ESTATE. In April 1997, the Company exercised its option to purchase the 27 acres of real estate in Santa Clara, California, being leased under a two-year operating lease entered into in January 1997 for $61.5 million, so that alternative financing or a third party sale could be pursued. The Company had originally intended to lease the land for purposes of arranging the construction of its new corporate headquarters. In the second quarter of 1997, the Company wrote down the carrying value of this real estate asset to its estimated fair market value (based on a current independent appraisal) less estimated selling costs, of approximately $58 million. The Company has entered into agreements to sell the land in two separate transactions. Both sales are expected to be consummated in the fourth quarter of 1997. 49 INFORMIX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED) WRITE-OFF OF LONG-TERM ASSETS. In the first quarter of 1997, the Company's Japanese subsidiary experienced a significant shortfall in business activity compared to historical levels. This fact, coupled with continuing competitive pressures in the Japanese market, resulted in the Company adjusting its forecasts of future cash flows and further led the Company to evaluate the recoverability of the subsidiary's long-lived assets, including computer and other equipment and goodwill. As a result of this evaluation, the Company determined that the carrying value of these long-lived assets had been impaired and, accordingly, recorded a charge in the first quarter of $30.5 million to write-down the assets' carrying value to their estimated fair value. Fair value was determined using estimated future discounted cash flows of the subsidiary and/or resale market quotes as appropriate. ISSUANCE OF CONVERTIBLE PREFERRED STOCK. In August 1997, the Company sold 160,000 shares of newly issued Series A Convertible Preferred Stock, face value $250 per share, to a private investor for aggregate net proceeds of $37.2 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 issued to the same investor, with a corresponding change to the warrant shares. The warrant may be exercised from August 13, 1997 through April 15, 1999. The Series A-1 Convertible 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 Convertible Preferred Stock 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. 50 INFORMIX CORPORATION SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (RESTATED) (AMOUNTS IN THOUSANDS)
ADDITIONS ------------------------ CHARGED TO BALANCE AT CHARGED TO OTHER BALANCE AT BEGINNING COSTS AND ACCOUNTS DEDUCTIONS END OF OF PERIOD EXPENSES (1) (2) PERIOD ----------- ----------- ----------- ----------- ----------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Year ended December 31, 1996........................ $ 12,854 $ 15,329 $ (346) $ 6,408 $ 21,429 Year ended December 31, 1995........................ $ 6,049 $ 8,247 $ 261 $ 1,703 $ 12,854 Year ended December 31, 1994........................ $ 3,181 $ 1,937 $ 1,900 $ 969 $ 6,049
- ------------------------ (1) Charged to net revenues (2) Uncollectible accounts written off, net of recoveries 51 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders--Informix Corporation We have audited the accompanying consolidated balance sheets of Informix Corporation as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996 (as restated). 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. Since the date of completion of our audit of the accompanying financial statements and initial issuance of our report thereon dated February 3, 1997, the Company, as discussed in Note 2, has experienced a substantial reduction in revenues and operating losses that adversely affect the Company's current results of operations and liquidity. Note 2 describes management's plans to address these issues. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Informix Corporation at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. San Jose, California February 3, 1997, except as to Notes 1, 2, 3 and 12, /s/ Ernst & Young LLP as to which the date is November 16, 1997 52 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors is incorporated herein by reference from the section entitled "Election of Directors" of the Company's proxy statement to be filed pursuant to Regulation 14A for its Annual Stockholders Meeting held May 22, 1997. For information regarding executive officers of the Company, see the information appearing under the caption "Executive Officers" in Part I, Item 1 of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated herein by reference from the section entitled "Executive Compensation" of the Company's proxy statement to be filed pursuant to Regulation 14A for its Annual Stockholders Meeting held May 22, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information regarding security ownership is incorporated herein by reference from the section entitled "Stock Ownership of Certain Beneficial Owners and Management" of the Company's proxy statement to be filed pursuant to Regulation 14A for its Annual Stockholders Meeting held May 22, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is incorporated herein by reference from the sections entitled "Stock Ownership of Certain Beneficial Owners and Management", "Executive Compensation" and "Transactions with Management" of the Company's proxy statement to be filed pursuant to Regulation 14A for its Annual Stockholders Meeting held May 22, 1997. 53 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: (a)1. Financial Statements (Restated) Report of Ernst & Young LLP, Independent Auditors Consolidated Financial Statements: Balance Sheets at December 31, 1996 and 1995 Statements of Operations for each of the three years in the period ended December 31, 1996 Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1996 Statements of Cash Flows for each of the three years in the period ended December 31, 1996 Notes to Consolidated Financial Statements (a)2. Financial Statement Schedule (Restated) Schedule as of and for the three years in the period ended December 31, 1996, as applicable: Schedule II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are omitted because they are not required under the related instructions or are not applicable. (a)3. Exhibits 3.1 (1) Restated Certificate of Incorporation, as amended. 3.2 (1) By-Laws, as amended. 4.1 (2) Amended and Restated Preferred Share Rights Agreement. 10.1 (3) Form of Indemnity Agreement. 10.2 (4) Form of Amended Indemnity Agreement. 10.3 (5) 1989 Directors Stock Option Plan. 10.4 (6) Amendment to the 1989 Directors Stock Option Plan. 10.5 (7) Purchase Agreement dated as of January 6, 1997 between the Company and BPN Leasing Corporation ("BPN"). 10.6 (7) Lease Agreement dated as of January 6, 1997 between the Company and BPN. 10.7 (7) Pledge Agreement dated as of January 6, 1997 between the Company, BPN and Banque Nationale de Paris. 11.1* Schedule re: Computation of Net Income (Loss) Per Share. 21.1 (7) Subsidiaries of the Registrant. 23.1* Consent of Ernst & Young LLP, Independent Auditors.
54 24.1* Power of Attorney (set forth on signature page). 27.1* Financial Data Schedules.
- ------------------------ * Filed herewith. (1) Incorporated by reference to exhibits to the Form 10-Q of Informix Corporation for the fiscal quarter ended July 2, 1995 (2) Incorporated by reference to exhibits to the Form 8-A/A Registration Statement filed on August 11, 1995. (3) Incorporated by reference to exhibits to the Form S-1 Registration Statement No. 33-8006. (4) Incorporated by reference to exhibits to the Form 10-K of Informix Corporation for the fiscal year ended December 31, 1988. (5) Incorporated by reference to exhibits to the Form S-8 Registration Statement No. 33-31116. (6) Incorporated by reference to exhibits to the Form S-8 Registration Statement No. 33-50608. (7) Incorporated by reference to exhibits to the Form 10-K of Informix Corporation, as originally filed March 31, 1997. (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the fourth quarter of the fiscal year ended December 31, 1996. 55 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, Informix Corporation, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 18, 1997. INFORMIX CORPORATION By: /s/ ROBERT J. FINOCCHIO, JR. -------------------------------------- Robert J. Finocchio, Jr. CHAIRMAN
POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jean-Yves Dexmier and Karen Blasing, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K/A, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- Chairman, President, Chief /s/ ROBERT J. FINOCCHIO, JR. Executive Officer and - ------------------------------ Director (Principal November 18, 1997 (Robert J. Finocchio, Jr.) Executive Officer) Executive Vice President /s/ JEAN-YVES DEXMIER and Chief Financial - ------------------------------ Officer November 18, 1997 (Jean-Yves Dexmier) (Principal Financial Officer) /s/ ALBERT F. KNORP, JR. - ------------------------------ Director November 18, 1997 (Albert F. Knorp, Jr.) /s/ JAMES L. KOCH - ------------------------------ Director November 18, 1997 (James L. Koch) /s/ THOMAS A. MCDONNELL - ------------------------------ Director November 18, 1997 (Thomas A. McDonnell) 56 SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ CYRIL J. YANSOUNI - ------------------------------ Director November 18, 1997 (Cyril J. Yansouni) Vice President and /s/ KAREN BLASING Corporate Controller - ------------------------------ (Principal Accounting November 18, 1997 (Karen Blasing) Officer) 57 EXHIBIT INDEX 3.1 (1) Restated Certificate of Incorporation, as amended. 3.2 (1) By-Laws, as amended. 4.1 (2) Amended and Restated Preferred Share Rights Agreement. 10.1 (3) Form of Indemnity Agreement. 10.2 (4) Form of Amended Indemnity Agreement. 10.3 (5) 1989 Directors Stock Option Plan. 10.4 (6) Amendment to the 1989 Directors Stock Option Plan. 10.5 (7) Purchase Agreement dated as of January 6, 1997 between the Company and BPN Leasing Corporation ("BPN"). 10.6 (7) Lease Agreement dated as of January 6, 1997 between the Company and BPN. 10.7 (7) Pledge Agreement dated as of January 6, 1997 between the Company, BPN and Banque Nationale de Paris. 11.1* Schedule re: Computation of Net Income (Loss) Per Share. 21.1 (7) Subsidiaries of the Registrant. 23.1* Consent of Ernst & Young LLP, Independent Auditors. 24.1* Power of Attorney (set forth on signature page). 27.1* Financial Data Schedules.
- ------------------------ * Filed herewith. (1) Incorporated by reference to exhibits to the Form 10-Q of Informix Corporation for the fiscal quarter ended July 2, 1995 (2) Incorporated by reference to exhibits to the Form 8-A/A Registration Statement filed on August 11, 1995. (3) Incorporated by reference to exhibits to the Form S-1 Registration Statement No. 33-8006. (4) Incorporated by reference to exhibits to the Form 10-K of Informix Corporation for the fiscal year ended December 31, 1988. (5) Incorporated by reference to exhibits to the Form S-8 Registration Statement No. 33-31116. (6) Incorporated by reference to exhibits to the Form S-8 Registration Statement No. 33-50608. (7) Incorporated by reference to exhibits to the Form 10-K of Informix Corporation, as originally filed March 31, 1997. EX-11.1 2 EXHIBIT 11.1 EXHIBIT 11.1 INFORMIX CORPORATION COMPUTATION OF NET INCOME PER SHARE (IN THOUSANDS, EXCEPT PER-SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1996 1995(1) 1994(1)(2) ---------- ---------- ---------- Net income used for net income (loss) per-share calculation.................. $ (73,565) $ 38,600 $ 48,293 Net Income Per Common Share: Weighted average outstanding shares........................................ 149,310 145,062 137,742 Net effect of outstanding options.......................................... -- 5,565 5,040 Weighted average common and common equivalent shares outstanding........... 149,310 150,627 142,782 Net income (loss) per-share.................................................. $ (.49) $ .26 $ .34 ---------- ---------- ---------- ---------- ---------- ----------
Fully diluted computation not presented since such amounts differ by less than 3 percent of the net income (loss) per share amounts shown above. Notes: (1) Amounts presented have been restated to reflect the Company's business combination with Illustra Information Technologies, Inc. as a pooling-of-interests. (2) Share and per-share information has been restated to reflect a two-for-one stock split (effected in the form of a stock dividend) which was effective June 26, 1995. EX-23.1 3 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-46715, 33-50610, 33-50608, 33-50607, 333-01409, 333-31371, and 333-31369) pertaining to the Employee Stock Purchase Plan and the Employee Stock Option Plan of Informix Corporation of our report dated February 3, 1997, except for paragraphs 1, 2, 3, and 12 (as to which date is November 16, 1997) with respect to the consolidated financial statements and schedule of Informix Corporation, as restated, included in this Annual Report (Form 10-K/A) for the year ended December 31, 1996. San Jose, California /s/ Ernst & Young LLP November 16, 1997 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 346,518 451,969 24,494 71,292 303,448 3,837 (551) 77,543 29,250 48,293 0 0 0 48,293 .34 0
EX-27.2 5 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 164,305 98,685 179,570 12,854 2,801 472,616 152,942 (71,310) 682,445 309,022 0 0 0 1,480 356,267 682,445 458,284 632,770 37,593 129,133 438,689 8,508 (2,522) 70,694 32,094 38,600 0 0 0 38,600 .26 0
EX-27.3 6 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 226,508 41,151 215,928 21,429 3,678 533,314 293,318 (106,591) 881,998 530,177 0 0 0 1,508 323,796 881,998 496,039 727,849 46,786 191,636 604,230 14,983 (5,784) (61,034) (12,531) (73,565) 0 0 0 (73,565) (.49) 0
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