-----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, Kl0HtUezyH2igf6W1rH0ba8awRQVT0aiNx2ynnyxuWUqDj/lgnOa818zdolJ1+K3 Qio7WBae71j/wG6nX0iezA== 0001047469-98-023475.txt : 19980610 0001047469-98-023475.hdr.sgml : 19980610 ACCESSION NUMBER: 0001047469-98-023475 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980609 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-Q/A SEC ACT: SEC FILE NUMBER: 000-15325 FILM NUMBER: 98644988 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-Q/A 1 10-Q/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q/A (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NUMBER 0-15325 ------------------------ INFORMIX CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-3011736 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 4100 BOHANNON DRIVE, MENLO PARK, CA 94025 (Address of principal executive office) 650-926-6300 (Registrant's telephone number, including area code) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / At March 31, 1998, 167,464,942 shares of the Registrant's Common Stock were outstanding. Total number of pages: 44. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORWARD LOOKING STATEMENTS THIS QUARTERLY REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS DESCRIBED HEREIN AND IN OTHER DOCUMENTS. READERS SHOULD PAY PARTICULAR ATTENTION TO THE SECTION OF THIS REPORT ENTITLED "BUSINESS RISKS" AND SHOULD ALSO CAREFULLY REVIEW THE RISK FACTORS DESCRIBED IN THE OTHER DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION. RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION Subsequent to the filing with the Commission of its Quarterly Report of Form 10-Q for the quarter ended March 30, 1997, the Company became aware of errors and irregularities that ultimately affected the timing and dollar amount of reported earned revenues from license transactions for all annual periods in the three years ended December 31, 1996, in particular transactions involving unauthorized or undisclosed arrangements or agreements with resellers. As a result of its investigation into these errors and irregularities, in August 1997, the Company announced that it would restate its financial results for fiscal 1996 and 1995. The financial review undertaken by the Company to determine the extent of the restatement ultimately resulted in the restatement of the Company's financial results for fiscal 1996, 1995 and 1994 and for the first quarter of fiscal 1997. The Company publicly disclosed the results of the restatement in November 1997. See Note B to the Unaudited Condensed Consolidated Financial Statements. On May 20, 1998 the Company announced it would restate its financial results for the fiscal quarter ended March 31, 1998 to defer recognition of approximately $6.2 million in license revenue related to license agreements with industrial manufacturers which revenue the Company expects to recognize over approximately two years. See Note B to the Unaudited Condensed Consolidated Financial Statements. Financial statements and related disclosures contained in this filing reflect, where appropriate, changes to conform to the restatements of the Company's financial results discussed above. INDEX
PAGE ----- Part I. Financial Information.............................................................................. 3 Item 1. Condensed Consolidated Financial Statements (Unaudited).......................................... 3 Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 1998 and March 30, 1997................................................................................. 3 Condensed Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997................... 4 Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 1998 and March 30, 1997................................................................................. 5 Notes to Condensed Consolidated Financial Statements............................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 40 Part II. Other Information................................................................................. 41 Item 1. Legal Proceedings................................................................................ 41 Item 2. Changes in Securities and Use of Proceeds........................................................ 44 Item 3. Defaults Upon Senior Securities.................................................................. 44 Item 4. Submission of Matters to a Vote of Security Holders.............................................. 44 Item 5. Other Information................................................................................ 44 Item 6. Exhibits and Reports on Form 8-K................................................................. 44 Signature page............................................................................................. 45
2 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INFORMIX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
RESTATED--SEE NOTE B -------------------- THREE MONTHS ENDED MARCH 31, MARCH 30, 1998 1997 --------- --------- Net revenues: Licenses............................................................. $ 83,431 $ 86,393 Services............................................................. 77,568 63,509 --------- --------- 160,999 149,902 Costs and expenses: Cost of software distribution........................................ 9,833 29,134 Cost of services..................................................... 37,425 41,152 Sales and marketing.................................................. 63,353 131,023 Research and development............................................. 36,619 35,289 General and administrative........................................... 13,151 28,027 Write-off of goodwill and other long-term assets..................... -- 30,473 Write-off of acquired research and development....................... -- 7,000 Restructuring........................................................ (3,252) -- --------- --------- 157,129 302,098 --------- --------- Operating income (loss)................................................ 3,870 (152,196) Interest income...................................................... 2,038 1,267 Interest expense..................................................... (1,882) (2,468) Other income/(expense), net.......................................... (315) 12,036 --------- --------- Income (loss) before income taxes...................................... 3,711 (141,361) Income taxes........................................................... 1,900 2,800 --------- --------- Net income (loss)...................................................... $ 1,811 $(144,161) Preferred stock dividend............................................. (603) -- Value assigned to warrants........................................... (1,594) -- --------- --------- Net loss applicable to common stockholders............................. $ (386) $(144,161) --------- --------- --------- --------- Net loss per common share: Basic................................................................ $ (0.00) $ (0.95) --------- --------- --------- --------- Diluted.............................................................. $ (0.00) $ (0.95) --------- --------- --------- --------- Shares used in per share calculation: Basic................................................................ 160,172 151,049 --------- --------- --------- --------- Diluted.............................................................. 160,172 151,049 --------- --------- --------- ---------
See Notes to Condensed Consolidated Financial Statements. 3 INFORMIX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED, IN THOUSANDS)
DECEMBER 31, 1997 MARCH 31, ------------ 1998 ------------ (RESTATED) (SEE NOTE B) ASSETS Current assets: Cash and cash equivalents............................................................ $ 149,208 $ 139,396 Short-term investments............................................................. 16,282 16,069 Accounts receivable, net........................................................... 128,892 142,048 Deferred taxes..................................................................... 13,219 12,249 Other current assets............................................................... 27,045 26,243 ------------ ------------ Total current assets............................................................... 334,646 336,005 Property and equipment, net.......................................................... 86,913 96,012 Software costs, net.................................................................. 38,826 40,854 Deferred taxes....................................................................... 45,906 56,345 Intangible assets, net............................................................... 7,068 8,277 Other assets......................................................................... 29,834 25,751 ------------ ------------ Total assets....................................................................... $ 543,193 $ 563,244 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................................... $ 30,845 $ 36,155 Accrued expenses................................................................... 56,125 64,538 Accrued employee compensation...................................................... 43,393 49,154 Income taxes payable............................................................... 4,442 3,031 Deferred maintenance revenue....................................................... 109,277 100,828 Advances from customers and financial institutions................................. 156,505 180,048 Accrued restructuring costs........................................................ 17,344 26,597 Other liabilities.................................................................. 8,468 15,802 ------------ ------------ Total current liabilities........................................................ 426,399 476,153 Other liabilities.................................................................... 6,187 6,311 Deferred taxes....................................................................... 20,903 21,716 Stockholders' equity: Convertible Series A Preferred Stock............................................... -- 2 Convertible Series B Preferred Stock............................................... 1 1 Common stock; par value............................................................ 1,674 1,526 Additional paid-in capital......................................................... 368,497 347,582 Accumulated deficit................................................................ (276,333) (278,144) Unrealized gain/(loss) on available-for-sale securities............................ 3,207 (767) Foreign currency translation adjustment............................................ (7,342) (11,136) ------------ ------------ Total stockholders' equity....................................................... 89,704 59,064 ------------ ------------ Total liabilities and stockholders' equity..................................... $ 543,193 $ 563,244 ------------ ------------ ------------ ------------
See Notes to Condensed Consolidated Financial Statements. 4 INFORMIX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
RESTATED--SEE NOTE B ------------------------- THREE MONTHS ENDED MARCH 31, MARCH 30, 1998 1997 ----------- ------------ Operating Activities: Net income (loss)....................................................................... $ 1,811 $ (144,161) Adjustments to reconcile net income (loss) to net cash and cash equivalents used in operating activities: License fees received in advance...................................................... (15,148) (15,277) Depreciation and amortization......................................................... 12,078 24,897 Amortization of capitalized software.................................................. 4,974 5,484 Write-off of capitalized software..................................................... 771 14,749 Write-off of long term assets......................................................... 742 6,799 Write-off of intangibles.............................................................. -- 20,032 Write-off of acquired research & development.......................................... -- 7,000 Foreign currency transaction loss..................................................... 3,794 5,066 Gain on sales of strategic investments................................................ 47 -- Gain on disposal of property and equipment............................................ (306) (50) Provisions for losses on accounts receivable.......................................... -- 11,006 Restructuring charges................................................................. (9,253) 3,642 Stock-based employee compensation..................................................... 461 -- Changes in operating assets and liabilities: Accounts receivable................................................................. 7,578 14,284 Other current assets................................................................ (1,670) (9,853) Other long term assets.............................................................. 10,439 -- Accounts payable and accrued expenses............................................... (31,817) (4,957) Deferred maintenance revenue........................................................ 7,800 6,825 Other long term liabilities......................................................... (813) -- ----------- ------------ Net cash and cash equivalents used in operating activities.............................. (8,512) (54,514) Investing Activities: Investments of excess cash: Purchases of available-for-sale securities............................................ (9,500) (10,374) Maturities of available-for-sale securities........................................... 4,997 9,585 Sales of available-for-sale securities................................................ 4,300 -- Purchases of strategic investments...................................................... -- (1,750) Purchases of property and equipment..................................................... (1,676) (81,931) Proceeds from disposal of property and equipment........................................ 327 279 Additions to software costs............................................................. (3,717) (8,104) Business combinations, net of cash acquired............................................. -- (8,786) Other................................................................................... 727 (21) ----------- ------------ Net cash and cash equivalents used in investing activities.............................. (4,542) (101,102) Financing Activities: Advances from customers and financial institutions...................................... -- 19,694 Proceeds from issuance of common stock, net............................................. 6,500 1,617 Proceeds from issuance of preferred stock, net.......................................... 14,100 -- Principal payments on capital leases.................................................... (1,341) (885) ----------- ------------ Net cash and cash equivalents provided by financing activities.......................... 19,259 20,426 ----------- ------------ Effect of exchange rate changes on cash and cash equivalents............................ 3,607 (6,238) ----------- ------------ Increase (decrease) in cash and cash equivalents........................................ 9,812 (141,428) Cash and cash equivalents at beginning of period........................................ 139,396 226,508 ----------- ------------ Cash and cash equivalents at end of period.............................................. $ 149,208 $ 85,080 ----------- ------------ ----------- ------------
See Notes to Condensed Consolidated Financial Statements. 5 INFORMIX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (UNAUDITED) NOTE A--PRESENTATION OF INTERIM FINANCIAL STATEMENTS All significant adjustments, in the opinion of management, which are normal, recurring in nature and necessary for a fair presentation of the financial position and results of the operations of the Company, have been consistently recorded. The operating results for the interim periods presented are not necessarily indicative of expected performance for the entire year. The Company has elected to change from the 4-4-5 week quarterly convention previously followed to a calendar quarter convention. The change resulted in an additional two days of operations for the first quarter of 1998 as compared to the previous year. The impact on the Company's financial statements was to increase revenue by $11.4 million, or 8 percent. The impact on operating expenses was immaterial. NOTE B--RESTATEMENT OF FINANCIAL STATEMENTS RESTATEMENT OF FINANCIAL STATEMENTS FOR FISCAL 1996, 1995 AND 1994 AND THE FIRST QUARTER OF FISCAL 1997 Subsequent to the filing of its Quarterly Report on Form 10-Q for the quarter ended March 30, 1997 with the Securities and Exchange Commission, the Company became aware of errors and irregularities that ultimately affected the timing and dollar amount of reported earned revenues from license transactions for all periods in the three years ended December 31, 1996 and the quarter ended March 30, 1997. The irregularities took numerous forms and were primarily the result of lack of compliance with or circumvention of the Company's procedures and controls. These errors and irregularities included unauthorized and undisclosed arrangements or agreements between Company personnel and resellers, recognition of revenue on certain transactions in reporting periods prior to contract acceptance, the recording of certain transactions that lacked economic substance and the recording of maintenance revenue as license revenue. The unauthorized and undisclosed agreements with resellers introduced acceptance contingencies, permitted resellers to return unsold licenses for refunds, extended payment terms or committed the Company to assist resellers in selling the licenses to end-users. Accordingly, license revenue from these transactions that was recorded at the time product was delivered to resellers should have instead been recorded at the time all conditions on the sale lapsed. Because of the pervasiveness of the unauthorized arrangements with resellers in the 1994, 1995 and 1996 accounting periods, the Company concluded that all revenue from license agreements with resellers in these accounting periods, except for those licenses sold and billed on a per copy basis, should be recognized only when the licenses were resold or utilized by resellers and all related obligations had been satisfied. Amounts received from resellers as prepayments of software license fees in advance of revenue recognition have been recorded as advances from customers and financial institutions. This revised application of accounting policy has been followed for all transactions with resellers, other than those licenses sold and billed on a per-copy basis. In response to the errors and irregularities discussed above, a number of conditions which collectively represented a material weakness in the Company's internal accounting controls were identified. These conditions included a deterioration in the Company's internal accounting controls at corporate and regional management levels, and a related failure to stress the importance of these controls, an inappropriate level of influence, principally by the Company's sales organization, over the revenue recognition process and an apparent lack of clarity and consistent understanding within the Company concerning the 6 INFORMIX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 (UNAUDITED) NOTE B--RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED) application of the Company's revenue recognition policies to large, complex reseller license transactions. The Company is implementing a plan to strengthen the Company's internal accounting controls. This plan includes updating the Company's policies regarding accounting and reporting for large, complex reseller license transactions, developing and conducting educational programs to implement such policies, changing the Company's corporate and regional accounting and reporting structure, and re-establishing an internal audit function reporting to the Company's Board of Directors. RESTATEMENT OF FINANCIAL STATEMENTS FOR FIRST QUARTER OF FISCAL 1998 On May 20 1998, the Company announced that it had restated its financial results for the first quarter ended March 31, 1998. In its original report of the financial results for the quarter ended March 31, 1998, the Company had recognized approximately $6.2 million in license revenue from software license agreements with industrial manufacturers in the same manner as revenue resulting from agreements with end users. After discussions with the Company's former independent accountants, the Company concluded that revenue recognition of license transactions with industrial manufacturers should be reported on a sell- through basis. Accordingly, approximately $6.2 million in license revenue previously recognized has been deferred and will be recognized when the related software licenses are resold to end user customers over a period which the Company expects to be approximately two years. The effects of the restatement of the Company's financial reports for the quarter ended March 31, 1998 are as follows:
THREE MONTHS ENDED MARCH 31, 1998 AS REPORTED RESTATED ----------- ---------- (IN THOUSANDS EXCEPT PER SHARE DATA) Net Revenues Licenses........................................................... 89,462 83,431 Services........................................................... 77,720 77,568 ----------- ---------- 167,182 160,999 Operating income..................................................... 9,137 3,870 Income tax........................................................... 1,900 1,900 Net income........................................................... 7,078 1,811 Net income (loss) applicable to common shareholders.................. 4,881 (386) Net income (loss) per share Basic.............................................................. 0.03 (0.00) Diluted............................................................ 0.03 (0.00) Accumulated Deficit.................................................. (271,066) (276,333) Advances from customers and financial institutions................... 156,505 156,505
In connection with its audit of the Company's fiscal 1997 consolidated financial statements, the Company's former independent accountants determined that a material weakness existed, based on the lack of appropriate resources in the accounting and financial reporting departments of the Company and other conditions. To address these conditions, the Company plans to hire additional finance personnel to 7 INFORMIX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 (UNAUDITED) NOTE B--RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED) serve in the accounting and financial reporting departments. In the interim, the Company has hired a number of consultants to ensure that appropriate accounting control measures are in place. NOTE C--REVENUE RECOGNITION POLICY In October 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2 (SOP 97-2), "Software Revenue Recognition" which superseded SOP 91-1 and provides guidance on generally accepted accounting principles for recognizing revenue on software transactions. SOP 97-2 was amended in February 1998 by Statement of Position 98-4 (SOP 98-4) "Deferral of the Effective Date of a Provision of SOP 97-2" which deferred for one year the specification of what was considered vendor specific objective evidence of fair value for the various elements in a multiple element arrangement. The Company has adopted the provisions of these SOP's as of January 1, 1998 and as a result, changed certain business practices. The adoption has, in certain circumstances, resulted in the deferral of software license revenues that would have been recognized upon delivery of the related software under preceding accounting standards. Neither the changes in certain business practices nor the deferral of certain revenues have resulted in a material impact on the Company's operating results, financial position or cash flows for the period ended March 31, 1998. In the first quarter of 1998, the Company entered into a material transaction with an industrial manufacturer ("IM"). The Company defines an IM as a developer who owns and licenses or sells to others a product using the IM's application embedding one of the Company's products in a manner which renders the Informix product invisible to the end user. The Company is not obligated to provide sales support to the IM or support to the end user. The Company accounts for these types of transactions in a manner similar to reseller transactions where license revenue from such transactions is recognized as earned when the licenses are resold or utilized by the IM and all related obligations have been satisfied. NOTE D--COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted Financial Accounting Standards Board Statement 130 (FAS 130), "Reporting Comprehensive Income." FAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income/(loss) or stockholders' equity. FAS 130 requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, which 8 INFORMIX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 (UNAUDITED) NOTE D--COMPREHENSIVE INCOME (CONTINUED) prior to adoption were reported separately in stockholders' equity to be included in other comprehensive income.
RESTATED -------------------- THREE MONTHS ENDED MARCH 31, MARCH 30, 1998 1997 --------- --------- (IN THOUSANDS) Net income (loss)...................................................... $ 1,811 $(144,161) Other comprehensive income (loss), net of income tax Unrealized gains (losses) on available-for-sale securities........... 3,974 (3,853) Foreign currency translation adjustment.............................. 3,794 (297) --------- --------- Comprehensive income (loss)............................................ $ 9,579 $(148,311) --------- --------- --------- ---------
NOTE E--NET INCOME (LOSS) PER SHARE The following table sets forth the computation of basic and diluted net income (loss) per common share:
RESTATED ------------------------ THREE MONTHS ENDED MARCH 31, MARCH 30, 1998 1997 ----------- ----------- (IN THOUSANDS EXCEPT PER SHARE DATA) Numerator: Net income (loss)................................................ $ 1,811 $(144,161) Preferred stock dividend......................................... (603) -- Value assigned to warrants....................................... (1,594) -- ----------- ----------- Numerator for basic and diluted net loss per common share........ $ (386) $(144,161) ----------- ----------- ----------- ----------- Denominator: Weighted average shares 160,172 151,049 Effect of dilutive securities: Employee stock options........................................... -- -- Series A-1 Convertible Preferred Stock........................... -- -- ----------- ----------- Denominator for diluted net income (loss) per common share....... 160,172 151,049 ----------- ----------- ----------- ----------- Basic net loss per common share.................................. $ (0.00) $ (0.95) Diluted net loss per common share................................ $ (0.00) $ (0.95) ----------- ----------- ----------- -----------
Weighted average employee stock options were not included in the computation of diluted earnings per share because the effect was antidilutive. In addition, at March 31, 1998, 13,215,467 shares of common stock that would have been issued upon the assumed conversion of the Series B Convertible Preferred Stock at the beginning of the period were also excluded from the computation of diluted earnings per share because the effect was antidilutive. 9 INFORMIX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 (UNAUDITED) NOTE F--STOCKHOLDERS' EQUITY In December 1997, the Company's Board of Directors authorized a second stock option repricing which was effective January 9, 1998 (the "Second Repricing Effective Date") based upon the closing sales price of the Company's Common Stock as of the Second Repricing Effective Date. Under the terms of the second repricing, each employee, excluding officers and directors of the Company, could exchange any option granted and outstanding as of May 1, 1997 for a new option with an exercise price equal to the closing sales price on the Second Repricing Date and with terms consistent with those of the original option, except that options exchanged in the second repricing could not be exercised for a period of one year from the Second Repricing Effective Date. Employees elected to reprice 3,128,524 options at a price of $5.094, the closing sales price of the Company's Common Stock on the Repricing Effective Date. On February 13, 1998, the holders of the Series A-1 Preferred Stock exercised warrants to purchase 60,000 additional shares of Series A-1 Preferred at $250 per share resulting in net proceeds to the Company of $14.1 million. In addition, pursuant to the Series A-1 Subscription Agreement, the Series A-1 Preferred stockholders converted 220,000 shares of Series A-1 Preferred into 12,769,908 shares of the Company's Common Stock. Reconciliation of outstanding shares:
Shares outstanding at December 31, 1997............................. 152,587,051 Shares issued upon exercises of stock options....................... 1,825,484 Shares sold and issued to employees under ESPP...................... 282,499 Shares issued upon conversion of Series A-1 Preferred............... 12,769,908 -------------- Shares outstanding at March 31, 1998................................ 167,464,942 -------------- --------------
NOTE G--RESTRUCTURING CHARGES In June and again in September 1997, the Company approved plans to restructure its operations in order to bring expenses in line with forcasted revenues. In connection with the restructuring, the Company substantially reduced its worldwide headcount and operations to improve efficiency. The following analysis sets forth the significant components of the restructuring charge included in current liabilities at March 31, 1998:
RESTRUCTURING NON-CASH CASH ACCRUAL BALANCE EXPENSE COSTS PAYMENTS AT MARCH 31, 1998 ------------- ----------- ----------- ----------------- (IN MILLIONS) Severance & Benefits....................................... $ 19.9 $ -- $ 19.4 $ 0.5 Write-off of Assets........................................ 48.2 48.2 -- -- Facility Charges........................................... 33.0 7.8 8.9 16.3 Other...................................................... 3.8 2.6 0.7 0.5 ------ ----- ----- ----- $ 104.9 $ 58.6 $ 29.0 $ 17.3 ------ ----- ----- ----- ------ ----- ----- -----
Severance and benefits represent the reduction of approximately 670 employees, primarily sales and marketing personnel, on a worldwide basis. As of March 31, 1998, the Company had completed this 10 INFORMIX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 (UNAUDITED) NOTE G--RESTRUCTURING CHARGES (CONTINUED) component of its restructure plan. Temporary employees and contractors were also reduced. Write-off of assets included write-off or write-down in carrying value of equipment as a result of the Company's decision to reduce the number of Information Superstores throughout the world, as well as the write-off of equipment associated with headcount reductions. The equipment subject to write-offs and write-downs consisted primarily of computer servers, workstations, and personal computers that are no longer utilized in the Company's operations. These assets were written down to their fair value less cost to sell. As of March 31, 1998, these assets have a carrying value of approximately $2.2 million. Facility charges include early termination costs associated with the closing of certain domestic and international sales offices. Total restructuring expense decreased by $1.2 million and by $3.3 million during the fourth quarter of 1997 and the first quarter of 1998, respectively. These decreases were primarily due to adjusting the original estimate of the loss to be incurred on the sale of land to the actual loss (fourth quarter 1997) and to adjust the estimated severance and facility charges to actual costs incurred (first quarter 1998). The Company expects to complete most of the actions associated with its restructuring by the end of the second quarter of fiscal 1998. NOTE H--LITIGATION Commencing in April 1997, a series of class action lawsuits purportedly by or on behalf of stockholders and a separate but related stockholder action were filed in United States District Court for the Northern District of California. These actions name as defendants the Company, certain of its present and former officers and directors and in some cases, its independent auditors. The complaints allege various violations of the federal securities laws and seek unspecified but potentially significant damages. Similar actions were also filed in California state court and in Newfoundland, Canada. Stockholder derivative actions, purportedly on behalf of the Company and naming virtually the same individual defendants and the Company's independent auditors, were also filed, commencing in August 1997, in California state court. While these actions allege various violations of state law, any monetary judgments in the derivative actions would accrue to the benefit of the Company. Pursuant to Delaware law and certain indemnification agreements between the Company and each of its current and former officers and directors, the Company is obligated to indemnify its current and former officers and directors for certain liabilities arising from their employment with or service to the Company. This includes the costs of defending against the claims asserted in the above-referenced actions and any amounts paid in settlement or other disposition of such actions on behalf of these individuals. The Company's obligations do not permit or require it to provide such indemnification to any such individual who is adjudicated to be liable for fraudulent or criminal conduct. Although the Company has purchased directors' and officers' liability insurance to reimburse it for the costs of indemnification for its directors and officers, the coverage presumes that 100 percent of the costs incurred in defending claims asserted jointly against the Company and its current and former directors and officers are allocable to the individuals' defense. With respect to the claims described above, the Company does not have insurance to cover the costs of its own defense or to cover any liability for any claims asserted against it. The Company has not set aside any financial reserves relating to any of the above-referenced actions. 11 INFORMIX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 (UNAUDITED) NOTE H--LITIGATION (CONTINUED) The pending federal and state securities actions are in the early stages of discovery. Consequently, at this time it is not reasonably possible to estimate the damages, or the range of damages, that the Company might incur in connection with such actions. In addition, in July 1997, the Securities and Exchange Commission issued a formal order of investigation of the Company and certain unidentified individuals associated with the Company with respect to non-specified accounting matters, public disclosures and trading activity in the Company's securities. The Company is cooperating with the investigation and is providing all information subpoenaed by the Commission. In the ordinary course of business, various other lawsuits and claims are filed from time to time against the Company. It is the Company's opinion that the resolution of these disputes or such other litigation will not have a material effect on the Company's financial position, results of operations or cash flows. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS DESCRIBED HEREIN AND IN OTHER DOCUMENTS. READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS DESCRIBED IN THE DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, SPECIFICALLY THE QUARTERLY REPORTS ON FORM 10-Q TO BE FILED BY THE COMPANY IN 1998 AND ANY CURRENT REPORTS ON FORM 8-K FILED BY THE COMPANY. As a result of the restatement of the Company's financial statements for the first quarter of 1997 and the years 1996, 1995 and 1994 as updated in subsequent filings made by the Company, certain information contained in this item related to the quarter ended March 30, 1997 has changed from that which appeared in the Company's originally filed Form 10-Q for that period. In addition, as a result of the restatement of the Company's financial statements for the first quarter of 1998, certain information contained in this item related to such period has changed from that which appeared in the Company's originally filed Form 10-Q for that period. The Company has elected to change from the 4-4-5 week quarterly convention previously followed to a calendar quarter convention. The change resulted in an additional two days of operations for the first quarter of 1998 as compared to the previous year. References to or comparisons between the same "period" in this Form 10-Q refer to the Company's first fiscal quarter of the relevant fiscal year. OVERVIEW The Company is a leading multinational supplier of information management software. It derives license revenues principally from licensing its relational database management systems ("RDBMS") software and derives service revenues from providing technical product support and product updates and consulting and training services to customers. The Company's products are sold directly to end-users and IMs and indirectly through application resellers, original equipment manufacturers ("OEM") and distributors. In the first quarter of fiscal 1997, the Company experienced a substantial shortfall in license revenues compared to forecasts, resulting in a substantial loss for that quarter. The shortfall in revenue was due to slow growth in demand for RDBMS products as well as the Company's inability to close a number of sales transactions that management anticipated would close by quarter's end, particularly in Europe. As a result of the shortfall in license revenues for the first quarter of fiscal 1997, the Company, in the second quarter and again in the third quarter of fiscal 1997, initiated an internal restructuring of its operations intended to reduce operating expenses and improve the Company's financial condition. These restructurings included selective reductions in headcount and leased facilities and the downsizing, elimination or conversion into solution labs of the Company's planned Information Superstores. Costs associated with the restructurings totaled approximately $104.9 million and had a material adverse effect on the Company's results of operations for fiscal 1997. In addition, in 1997, the Company issued two newly designated series of its Preferred Stock Series A-1 Preferred Stock (the "Series A-1 Preferred") and Series B Preferred Stock (the "Series B Preferred") in two financing transactions which resulted in aggregate net proceeds of $87.6 million to the Company (excluding a $1.0 million fee paid to a financial advisor of the Company in connection with the sale of the Series B Preferred). In February 1998, the Company issued an additional 60,000 shares of its Series A-1 Preferred pursuant to the partial exercise of a warrant to purchase shares of Series A-1 Preferred (the "Series A-1 Warrant") which warrant was issued in connection with the sale of the Series A Preferred in August 1997. The partial exercise of the Series A-1 Warrant resulted in net proceeds of $14.1 million to the Company. At March 31, 1998, the Series A-1 13 Warrant remained exercisable for up to 80,000 shares of Series A-1 Preferred at a puchase price of $250 per share. In December 1997, the Company entered into a senior secured credit facility agreement with available proceeds of up to $75.0 million, of which the Company was eligible to borrow $40.6 million at March 31, 1998, based on certain eligibility criteria. See "--Liquidity and Capital Resources." RESTATEMENT OF FINANCIAL RESULTS FOR FISCAL 1996, 1995 AND 1994 AND FOR THE FIRST QUARTER OF FISCAL 1997 In August 1997, the Company announced that it had become aware of errors and irregularities that affected the timing and the dollar amount of reported earned revenues from license transactions for all annual periods in the three years ended December 31, 1996. These errors and irregularities included unauthorized and undisclosed arrangements or agreements between Company personnel and resellers, recognition of revenue on certain transactions in reporting periods prior to contract acceptance, the recording of certain transactions that lacked economic substance and the recording of maintenance revenue as license revenue. The unauthorized and undisclosed agreements with resellers introduced acceptance contingencies, permitted resellers to return unsold licenses for refunds, extended payment terms or committed the Company to assist resellers in selling the licenses to end-users. Accordingly, license revenues from these transactions that were recorded at the time product was delivered to resellers should have instead been recorded at the time all conditions to the sale lapsed. Because of the pervasiveness of the unauthorized arrangements with resellers in the 1994, 1995 and 1996 accounting periods, the Company concluded that all revenue from license agreements with resellers, except for those licenses sold and billed on a per copy basis, should be recognized only when the licenses were resold or utilized by resellers and all related obligations had been satisfied. In addition, amounts received from resellers or financial institutions as prepayments of software license fees in advance of revenue recognition should be recorded as advances from customers and financial institutions. The financial review undertaken by the Company resulted in the restatement of the Company's financial results for fiscal 1996, 1995 and 1994 and for the first quarter of fiscal 1997. The Company publicly disclosed the results of the restatement in November 1997. The nature of the Company's business in 1992 and 1993 was such that there was not a material amount of revenues recorded under prepaid software license transactions conducted with resellers during these years. Additionally, as a result of the Company's extended procedures, there were no material errors or irregularities identified affecting revenues recognized prior to the third quarter of 1994. The Company concluded based on those circumstances that it was not necessary to restate the financial statements for 1992 and 1993. In connection with the errors and irregularities discussed above, a number of conditions which collectively represented a material weakness in the Company's internal accounting controls were identified. These conditions included a deterioration in the Company's accounting controls at corporate and regional management levels, and a related failure to stress the importance of these controls, an inappropriate level of influence, principally by the Company's sales organization, over the revenue recognition process and an apparent lack of clarity and consistent understanding within the Company concerning the application of the Company's revenue recognition policies to large, complex reseller license transactions. To address the material weakness represented by these conditions, the Company is implementing a plan to strengthen the Company's internal accounting controls. This plan includes updating the Company's revenue recognition policies regarding accounting and reporting for large, complex reseller license transactions, developing and conducting educational programs to help implement such policies, changing the Company's corporate and regional accounting and reporting structure and re-establishing the internal audit function reporting to the Company's Board of Directors. The restatement resulted in substantial reductions in total revenues and net income for fiscal 1996, 1995 and 1994. For the quarter ended March 31, 1997, the restatement resulted in an increase in revenues of $16.2 million from $133.7 million as originally reported to $149.9 million. The restatement had a material adverse effect on the Company's financial condition, most notably evidenced by substantial reductions in retained earnings and working capital. At March 30, 1997, after giving effect to the 14 restatement, the Company's working capital decreased $251.9 million from $101.8 million as originally reported to a deficit of $150.1 million. The substantial reduction in working capital at March 30, 1997 reflects substantial operating losses and the addition of "advances from customers and financial institutions" as a current liability on the Company's balance sheet. Such advances totaled $239.3 million at March 30, 1997. At March 31, 1998, the Company's working capital deficit decreased to $91.8 million. The reduction in the deficit reflects the Company's restructuring and cost containment efforts both of which resulted in a reduction in cash used by operations of $46 million in the quarter ended March 31, 1998 compared to the similar period in the prior year. In addition, the liability for "advances from customers and financial institutions" decreased to $156.5 million at March 31, 1998. The Company's public announcement of the pending restatement, delays in reporting operating results for the second and third quarters of fiscal 1997 while the restatement was being compiled, threatened de-listing of the Company's Common Stock from the Nasdaq National Market as a result of the Company's failure to satisfy its public reporting obligations, corporate actions to restructure operations and reduce operating expenses, and customer uncertainty regarding the Company's financial condition adversely affected the Company's ability to sell its products in fiscal 1997. In addition, since the beginning of 1997, the Company and its competitors have experienced substantially slower growth in the market for RDBMS products. The financial restatement has now been completed, its results have been publicly disclosed and the Company is current with respect to its public reporting obligations. In addition, the Company believes that it has effectively controlled its operating expenses and significantly improved its financial condition. Nevertheless, adverse market conditions, including significant competitive pressures in the Company's markets and ongoing customer uncertainty about the Company's financial condition and business prospects, may continue to have an adverse effect on the Company's ability to sell its products and results of operations. RESTATEMENT OF FINANCIAL RESULTS FOR FIRST QUARTER OF FISCAL 1998 In May 1998, the Company announced that it had restated its financial results for the first quarter ended March 31, 1998. Total revenues for the quarter restated were $161.0 million which is a reduction of approximately $6.2 million from the previously reported $167.2 million. In addition, the restatement resulted in a reduction in net income of $5.3 million from $7.1 million as originally reported to $1.8 million for the quarter ended March 31, 1998. The restatement also affected the Company's financial condition as evidenced by a reduction in working capital and an increase in accumulated deficit. The working capital deficit at March 31, 1998, increased $5.3 million from $86.5 million as originally reported to $91.8 million. The Company's accumulated deficit also increased $5.3 million from $271.0 million as originally reported to $276.3 million. In its original report of the financial results for the quarter ended March 31, 1998, the Company had recognized approximately $6.2 million in license revenue from software license agreements with IM's in the same manner as revenue resulting from agreements with end users. After discussions with the Company's former independent accountants, the Company concluded that revenue recognition of license transactions with industrial manufacturers should be reported on a sell-through basis. Accordingly, approximately $6.2 million in license revenue previously recognized has been deferred and will be recognized when the related software licenses are resold to end user customers over a period which the Company expects to be approximately two years. In connection with its audit of the Company's fiscal 1997 consolidated financial statements, the Company's former independent accountants determined that a material weakness existed, based on the lack of appropriate resources in the accounting and financial reporting departments of the Company and other conditions. To address these conditions, the Company plans to hire additional finance personnel to serve in the accounting and financial reporting departments. In the interim, the Company has hired a number of consultants to ensure that appropriate accounting control measures are in place. As noted above, ongoing customer uncertainty about the Company's financial condition and business prospects may 15 continue to have an adverse effect on the Company's ability to sell its products and results of operations. See "Business Risks--Dependence on Key Personnel; Personnel Changes; Ability to Recruit Personnel." RESULTS OF OPERATIONS The following table sets forth operating results as a percentage of net revenues for the three-month periods ended March 31, 1998 (as restated) and March 30, 1997 (as restated), respectively.
PERCENT OF NET REVENUES --------------------- THREE MONTHS ENDED --------------------- MARCH 31, MARCH 30, 1998 1997 --------- --------- (RESTATED) Net revenue: Licenses......................... 52% 58% Services......................... 48 42 --- --- Total net revenue.............. 100 100 Costs and expenses: Cost of software distribution.... 6 19 Cost of services................. 23 28 Sales and marketing.............. 39 87 Research and development......... 23 24 General and administrative....... 8 19 Write-off of goodwill and long term assets.................... -- 20 Write-off of acquired research and development................ -- 5 Restructuring charges............ (2) -- --- --- Total operating expenses....... 97 202 --- --- Operating income (loss)............ 3 (102) --- --- Interest income.................... 1 1 Interest expense................... (1) (1) Other income/(expense), net........ -- 8 --- --- Income (loss) before tax........... 3 (94) Income taxes....................... (1) 2 --- --- Net income (loss).................. 2% (96)% --- --- --- ---
Informix's operating results for the quarter ended March 31, 1998 increased significantly from the same period of the prior year due to a 7% increase in revenue and a 48% decrease in operating expenses. REVENUES The Company derives revenues from licensing its software and providing post-license technical product support and updates to customers and from consulting and training services. License revenues may involve the shipment of product by the Company or the granting of a license to a customer to manufacture products. Service revenues consist of customer telephone or direct support, product update rights, consulting and training fees. LICENSE REVENUES The Company's products are sold directly to end-user customers and IMs or through resellers, including OEMs, distributors and value added resellers (VAR's). In 1996, the Company increased its focus 16 on its reseller channels in order to focus on partnerships with several hardware vendors to utilize their sales forces, obtain access to their installed base of customers, and benefit from their consulting and systems integration organizations. This increased focus on reseller channels resulted in a significant build-up of licenses that had not been resold or utilized by such resellers. Unsold licenses in the amount of $156.5 million and $239.3 million have not been recognized as earned revenue as of March 31, 1998 and March 30, 1997, respectively. License revenues were $83.4 million and $86.4 million for the periods ended March 31, 1998 and March 30, 1997, respectively. This represented an approximate three percent decrease. There were no individual transactions greater than $2.5 million in the quarter ended March 31, 1998. The Company's license transactions can be relatively large in size and difficult to forecast both in timing and dollar value. As a result, these transactions have caused fluctuations in net revenues and net income (loss) because of the relatively high gross margin on such revenues. As is common in the industry, a disproportional amount of the Company's license revenue is derived from transactions that close in the last weeks or days of a quarter. The timing of closing large license agreements also increases the risk of quarter-to-quarter fluctuations. The Company expects that these types of transactions and the resulting fluctuations will continue. SERVICE REVENUES The increase in service revenue in absolute dollars over the same period in 1997 was attributable primarily to the continued growth of the Company's installed customer base, and the attendant renewal of maintenance contracts and increased consulting revenue. As the Company's products grow in complexity, more support services are expected to be required. The Company intends to satisfy this requirement through internal support, third-party services and OEM support. The gross margin on service revenue increased from 35% in the first quarter of 1997 to 52% in the first quarter of 1998. Service revenue continues to grow faster than license revenue and as a result, service revenue represents a larger percentage of total revenues than in the prior year comparable period. The Company continues to emphasize support services as a source of revenue and the growth achieved in absolute dollars versus the prior year quarter reflects the continued growth in the Company's installed base. GEOGRAPHIC DISTRIBUTION During the first quarter ended March 31, 1998, Informix's net revenues from sales to foreign customers was 51% of total revenue as compared to 55% of the total revenue during the same period in 1997. Foreign sales decreased insignificantly from $82.2 million in the quarter ended March 30, 1997 to $81.9 million in the quarter ended March 31, 1998. Sales in Europe and Asia/Pacific decreased 2% and 5%, respectively, while sales in Latin America increased 20% over the same period in 1997. The decrease in European sales from the prior year quarter was partially due to the disruption of the sales organization caused by management changes which took place in 1997. The decrease in Asia/Pacific sales was primarily the result of the impact of fluctuations in foreign currency exchange rates. Revenues for the Asia/Pacific region increased by approximately 10% for the quarter ended March 31, 1998 as compared to the same period in the prior year on a constant currency basis. Substantially all of the Company's Latin American revenue is U.S. dollar denominated. In Europe, Asia/Pacific, and Japan, most revenues and expenses are denominated in local currencies. The U.S. dollar strengthened in the first quarter of 1998 against the major European and Asia/Pacific currencies, which resulted in lower revenue and expenses recorded when translated into U.S. dollars, as compared with the same period in 1997. The Company's operating and pricing strategies take into account changes in exchange rates over time; however, the Company's results of operations may be significantly affected in the short term by 17 fluctuations in foreign currency exchange rates. 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 as a percentage of total revenues in the future. COST OF SOFTWARE DISTRIBUTION
FIRST QUARTER FIRST QUARTER PERCENTAGE 1998 1997 CHANGE --------------- --------------- ------------- (DOLLARS IN MILLIONS) Manufactured cost of software distribution.......... $ 4.1 $ 8.9 (54)% Percentage of license revenue..................... 5% 10% Amortization of capitalized software................ $ 4.9 $ 5.5 (11)% Percentage of license revenue..................... 6% 6% Write down to net realizable value.................. $ 0.8 $ 14.7 (95)% Percentage of license revenue..................... 1% 18% Total cost of software distribution................. $ 9.8 $ 29.1 (66)% Percentage of license revenue..................... 12% 34%
Software distribution costs consist primarily of: 1) manufacturing and related costs such as media, documentation, product assembly and purchasing costs, freight, customs and third party royalties; and 2) amortization of previously capitalized software development costs and any write-offs of previously capitalized software. The manufactured cost of software distribution as a percentage of license revenue decreased significantly in the first quarter of 1998 compared to the same period in 1997. This decrease was primarily caused by a decrease of $2.1 million in third party software royalties as well as a reduction in labor costs of approximately $0.9 million and a reduction of shipping and material costs of $0.5 million each. These cost reductions resulted from the continued conversion to electronic media. In the future, the cost of software distribution as a percentage of revenue may vary depending upon sales levels, the cost of third party software that is bundled with the Company's products and whether the product is reproduced by the Company or by customers. Amortization of capitalized software costs begin in the quarter following the commercial release of the product. The amortization of capitalized software remained flat at 6% of license revenues in the first quarter of 1998 compared to the first quarter of 1997. The absolute value of amortization of capitalized software will vary slightly quarter to quarter as new products are released and other products become fully amortized. In addition, due to the Company's acquisition of CenterView Software, Inc. in February 1997 and the announcement of its revised tool strategy, and in accordance with Financial Accounting Standards Board Statement No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," a net realizable value test performed on certain of the Company's tool products resulted in a write-down of $14.7 million of previously capitalized software costs in the first quarter of 1997. COST OF SERVICES Cost of services consists primarily of maintenance, consulting and training expenses. Cost of services for the first quarter of 1998 decreased by 9% as compared to the same period in 1997. This decrease was primarily attributable to an 18% reduction in headcount over the same period in 1997 as well as improved efficiency and better control of outsourced expenses. In the future, the Company expects that cost of services as a percentage of net service revenue will continue to approximate the rate incurred in the first quarter of 1998. 18 SALES AND MARKETING EXPENSES The decrease in sales and marketing expenses in the first quarter of 1998, in absolute dollars, as compared to the first quarter of 1997 was primarily the result of a significant reduction of sales and marketing personnel worldwide. Over the twelve-month period ending March 31, 1998, the headcount for sales and marketing personnel decreased from 2,009 to 1,177 or 41%, which accounts for the majority of the decrease both in percentage decline and absolute dollars spent. In addition, depreciation expense charged to sales and marketing decreased approximately $3.7 million versus the prior year quarter in connection with the Company's reassessment of its Superstores concept. The Company's decision to abandon the Superstores concept coupled with other cost cutting measures resulted in significant charges for restructuring in the second and third fiscal quarters of 1997. The decrease of costs as a percentage of revenue reflects the Company's success in applying cost containment measures to bring expenses in line with forecasted revenues. RESEARCH AND DEVELOPMENT EXPENSES The following table summarizes research and development costs for the periods ended March 31, 1998 and March 30, 1997:
FIRST QUARTER FIRST QUARTER PERCENTAGE 1998 1997 CHANGE --------------- --------------- ------------- (DOLLARS IN MILLIONS) Incurred product development expenditures........... $ 40.3 $ 41.6 (3)% Expenditures capitalized............................ 3.7 6.3 (41)% ----- ----- Research and development expense.................... $ 36.6 $ 35.3 4% ----- ----- ----- ----- Expenses capitalized as a percentage of incurred expenses.......................................... 9% 15%
Product development expenditures declined in absolute dollars by 3% in the first quarter of 1998 compared to the same period in 1997. The proportion of capitalized product development expenditures as a percentage of total incurred expenses decreased in the first quarter of 1998. The decrease is attributable to the fact that during the first quarter of 1997, a large portion of expenditures incurred were on products that had reached technological feasibility, but had not yet been commercially released. The Company expects the proportion of work on capitalized projects for the remainder of 1998 to remain relatively stable compared to the first quarter of 1998. Significant programs currently under development include improvements and enhancements of current products, with particular emphasis on parallel computer architecture, user-defined database extensions, web technology integration, database application tools and systems administration. The Company believes that research and development expenditures are essential to maintaining its competitive position in its primary markets and expects the expenditure levels to remain a significant percentage of revenues. The Company's product development efforts are expected to continue to require substantial investments by the Company, and there can be no assurance that the Company will have sufficient resources to make the necessary investments. In addition, there can be no assurance that the Company's product development efforts will be successful or that any new products will achieve significant market acceptance. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses decreased in absolute dollars in the first quarter of 1998 compared to the same period in 1997 due primarily to the implementation of the Company's restructuring plan which resulted in lower facility and other general and administrative expenses and a reduction in bad 19 debt expense of $11.0 million. This reduction reflects the Company's efforts to better manage both the amount and quality of its accounts receivable balances. In addition, headcount in general and administration decreased 14% from 489 at March 30, 1997 to 420 at March 31, 1998. WRITE-OFF OF GOODWILL AND LONG-TERM ASSETS In accordance with Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long Lived Assets and for Long-Lived Assets to be Disposed of," the Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the estimated future undiscounted cash flows to be generated by those assets are less than the assets' carrying amounts. During the first quarter of 1997, the Company's Japanese subsidiary experienced a significant sales shortfall and operating losses. Accordingly, the Company evaluated the ongoing value of the subsidiary's long-lived assets (primarily computer and other equipment) and related goodwill. Based on this evaluation, the Company determined that the subsidiary's assets had been impaired and wrote them down by $30.5 million to their estimated fair values. Fair value was determined by using estimated future discounted cash flows and/or resale market quotes as appropriate. The Company did not record any write-off of long-term assets in the quarter ended March 31, 1998. WRITE-OFF OF ACQUIRED RESEARCH AND DEVELOPMENT In February 1997, the Company acquired all of the outstanding capital stock of CenterView Software, Inc., a privately owned corporation that provides software tools for application development. The aggregate purchase price was approximately $8.7 million, which included cash plus direct costs of acquisition. For financial statement purposes, the acquisition has been accounted for as a purchase and, based on an independent appraisal of all the assets acquired and liabilities assumed, the purchase price was allocated to the specifically identifiable tangible and intangible assets acquired, including approximately $7 million of purchased research and development which has been charged to operations in the first quarter of 1997, the period the acquisition was consummated. The Company did not write-off any acquired research and development in the quarter ended March 31, 1998. OTHER INCOME/(EXPENSE), NET Other income/(expense) for the period ended March 30, 1997 resulted from a net foreign currency gain of $12.2 million. See "--Foreign Exchange Losses." PROVISION FOR INCOME TAXES The income tax expense resulted from taxable earnings and withholding taxes in certain foreign jurisdictions where the Company is unable to utilize its net operating loss carryforwards. FOREIGN EXCHANGE LOSSES The Company enters into forward foreign exchange contracts to hedge the value of accounts receivable or accounts payable denominated in foreign currencies against fluctuations in exchange rates until such receivables are collected or payables are disbursed. This program involves the use of forward foreign exchange contracts in the primary European and Asian currencies. The Company has limited unhedged transaction exposures in certain secondary currencies in Latin America, Eastern Europe and Asia Pacific because there are limited forward currency exchange markets in these currencies. In addition, in the quarter ended March 31, 1998, the Company initiated a program whereby it enters into forward foreign currency exchange contracts to hedge no more than 80% of anticipated net income of foreign subsidiaries for up to a maximum of one year in the future. The Company's outstanding forward exchange contracts used to hedge anticipated net income are marked to market. This hedging activity did not have a material impact on the Company's results of operations. 20 The restatement of the consolidated financial statements for the quarter ended March 30, 1997 resulted in a change in the Company's foreign currency denominated intercompany accounts receivable and accounts payable balances. As a result, certain foreign currency forward contracts were no longer effective as hedges. Transaction gains and losses realized due to fluctuations in foreign currency exchange rates that were only partially offset by gains and losses on forward foreign currency exchange contracts and the gains and losses on the forward exchange contracts resulted in a net foreign currency gain of $12.2 million in the quarter ended March 30, 1997. LIQUIDITY AND CAPITAL RESOURCES
AS OF OR FOR THE THREE MONTHS ENDED ------------------------ MARCH 31, MARCH 30, 1998 1997 ----------- ----------- (DOLLARS IN MILLIONS) Cash, cash equivalents, and short-term investments..................... $ 165.5 $ 120.4 Working capital deficit................................................ (91.8) (150.1) Cash and cash equivalents used by operations........................... (8.5) (54.5) Cash and cash equivalents used in investment activities, excluding investments in excess cash........................................... (4.5) (101.1) Cash and cash equivalents provided by financing activities............. 19.3 20.4
OPERATING CASH FLOWS Cash used by operations decreased significantly to $8.5 million for the quarter ended March 31, 1998 from $54.5 million in the same period in 1997 due primarily to the Company's efforts to reduce operating expenses. Net accounts receivable decreased by $13.2 million in the first quarter ended March 30, 1998 as compared to the fourth quarter of 1997. Days sales outstanding increased from approximately 71 days in December 1997 to 72 days in March 1998. The days sales outstanding ratio is dependent on many factors, including the mix of contract-based revenue with significant OEMs and large corporate and government end-users versus revenue recognized on shipments to application vendors and distributors. INVESTING CASH FLOWS Excluding investments of excess cash, net cash and cash equivalents used in investing activities decreased in the first quarter of 1998 compared to the same period in 1997 due in large part to the Company's emphasis on increasing its working capital position. In the first quarter of 1998, the Company acquired $1.7 million of capital equipment as compared to $20.4 million during the same period in 1997. The decrease of capital equipment purchases in the first quarter of 1998 resulted from the Company's reduction in employee headcount, the related cost containment program and the Company's decision to downsize, eliminate or convert its Superstores into solution labs managed by the Company's consulting practice. In the future, the Company anticipates the actual level of capital spending will be dependent on a variety of factors, including the Company's business requirements and general economic conditions. In January 1997, the Company entered into a two year land lease which required a pledge of $61.5 million in cash be placed into a non-interest bearing collateral account controlled by an affiliate of the lessor. In April 1997, the Company exercised its option to purchase the land for $61.5 million with the intent to arrange for the sale of the parcels to unrelated third parties. The $61.5 million is reflected in the "purchases of land and property and equipment" line of the cash flow statement. The land sales closed in the fourth quarter of fiscal 1997. The Company's investments in software costs were previously discussed under "Results of Operations." 21 FINANCING Net cash and cash equivalents provided by financing activities in the first quarter of 1998 consist primarily of proceeds from the sale of the Company's common stock to employees, and the purchase of 60,000 additional shares of Series A-1 Preferred at $250 per share for net proceeds to the Company of $14.1 million. The Company's programs with third-party financing institutions in the first quarter of 1997 provided financing for extended credit terms instead of such financing being provided by the Company. This was the primary source of net cash and cash equivalents provided by financing activities in the first quarter of 1997. Cash received from customers and third-party financial institutions in advance of revenue being recognized is reflected in the Statement of Cash Flows under "Advances from Customers and Financial Institutions" as a financing activity. The Company no longer enters into third-party financing arrangements involving the sale of its receivables. See "Business Risks--Need for Additional Financing: Customer Financing and Working Capital Deficit." BUSINESS RISKS THIS REPORT, INCLUDING THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS FORWARD-LOOKING STATEMENTS AND OTHER PROSPECTIVE INFORMATION RELATING TO FUTURE EVENTS. THESE FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THE FOLLOWING: UNCERTAIN IMPACT OF RESTATEMENT OF FINANCIAL STATEMENTS RESTATEMENT OF FINANCIAL RESULTS FOR FISCAL 1996, 1995 AND 1994 AND THE FIRST QUARTER OF FISCAL 1997 Subsequent to the filing with the Commission of its Quarterly Report of Form 10-Q for the quarter ended March 30, 1997, the Company became aware of errors and irregularities that ultimately affected the timing and dollar amount of reported earned revenues from license transactions for all annual periods in the three years ended December 31, 1996, in particular transactions involving unauthorized or undisclosed arrangements or agreements with resellers. As a result of its investigation into these errors and irregularities, in August 1997, the Company announced that it would restate its financial results for fiscal 1996 and 1995. The financial review undertaken by the Company to determine the extent of the restatement ultimately resulted in the restatement of the Company's financial results for fiscal 1996, 1995 and 1994 and for the first quarter of fiscal 1997. The Company publicly disclosed the results of the restatement in November 1997. The errors and irregularities identified in connection with the Company's investigation and the restatement included unauthorized and undisclosed arrangements or agreements between Company personnel and resellers, recognition of revenue on certain transactions in reporting periods prior to contract acceptance, the recording of certain transactions that lacked economic substance and the recording of maintenance revenue as license revenue. The unauthorized and undisclosed agreements with resellers introduced acceptance contingencies, permitted resellers to return unsold licenses for refunds, extended payment terms or committed the Company to assist resellers in selling the licenses to end-users. Accordingly, license revenues from these transactions that were recorded at the time product was delivered to resellers should have instead been recorded at the time all conditions to the sale lapsed. Because of the pervasiveness of the unauthorized arrangements with resellers in the 1994, 1995 and 1996 accounting periods, the Company concluded that all revenue from license agreements with resellers, except for those licenses sold and billed on a per copy basis, should be recognized only when the licenses were resold or utilized by resellers and all related obligations had been satisfied. In addition, amounts received from resellers or financial institutions as prepayments of software license fees in advance of revenue recognition should be recorded as advances on unearned license revenue. The financial review undertaken by the Company resulted in the restatement of the Company's financial results for fiscal 1996, 1995 and 1994 and 22 for the first quarter of fiscal 1997. The Company publicly disclosed the results of the restatement in November 1997. As a result of the restatement, total revenues were reduced from amounts previously reported by $204.8 million from $939.3 million as originally reported to $734.5 million, by $77.7 million from $714.2 million as originally reported to $636.5 million and by $18.1 million from $470.1 million as originally reported to $452.0 million for fiscal 1996, 1995 and 1994, respectively. The restatement also resulted in an increase in revenues of $16.2 million from $133.7 million as originally reported to $149.9 million for the first quarter of fiscal 1997. In addition, the restatement resulted in a reduction in net income of $171.4 million from $97.8 million as originally reported to a loss of $73.6 million for fiscal 1996; a reduction in net income of $59.0 million from $97.6 million as originally reported to $38.6 million for fiscal 1995; and a reduction in net income of $13.6 million from $61.9 million as originally reported to $48.3 million for fiscal 1994. The restatement had a material adverse effect on the Company's financial condition, most notably evidenced by the elimination of retained earnings and working capital. At December 31, 1996, after giving effect to the restatement, the Company's working capital decreased $255.3 million from $258.4 million as originally reported to $3.1 million. At December 31, 1997, the Company had a working capital deficit of $140.2 million and at March 31, 1998, the Company had a working capital deficit of $91.8 million. The substantial reductions in working capital at December 31, 1997 and 1996 reflect substantial operating losses and the addition of "advances from customers and financial institutions" as a current liability on the Company's balance sheet. Such advances totaled $180.0 million at December 31, 1997 and $239.5 million at December 31, 1996. At March 31, 1998, such advances totaled $156.5 million. See "--Working Capital Deficit." In connection with the errors and irregularities discussed above, a number of conditions which collectively represented a material weakness in the Company's internal accounting controls were identified. These conditions included a deterioration in the Company's accounting controls at corporate and regional management levels, and a related failure to stress the importance of these controls, an inappropriate level of influence, principally by the Company's sales organization, over the revenue recognition process and an apparent lack of clarity and consistent understanding within the Company concerning the application of the Company's revenue recognition policies to large, complex reseller license transactions. To address the material weakness represented by these conditions, the Company is implementing a plan to strengthen the Company's internal accounting controls. This plan includes updating the Company's revenue recognition policies regarding accounting and reporting for large, complex reseller license transactions, developing and conducting educational programs to help implement such policies, changing the Company's corporate and regional accounting and reporting structure and re-establishing the internal audit function reporting to the Company's Board of Directors. Such implementation is expected to require substantial management attention. See "--Dependence on Key Personnel; Personnel Changes; Ability to Recruit Personnel." The Company's public announcement of the pending restatement, delays in reporting operating results for the second and third quarters of fiscal 1997 while the restatement was being compiled, threatened de-listing of the Company's Common Stock from the Nasdaq National Market as a result of the Company's failure to satisfy its public reporting obligations, corporate actions to restructure operations and reduce operating expenses and customer uncertainty regarding the Company's financial condition adversely affected the Company's ability to sell its products in fiscal 1997. In addition, since the beginning of fiscal 1997, the Company and its competitors in the RDBMS industry have experienced substantially slower growth in the market for RDBMS products. The financial restatement has now been completed, its results have been publicly disclosed, and the Company is current with respect to its public reporting obligations. In addition, the Company believes that it has effectively controlled its operating expenses and significantly improved its financial condition. Nevertheless, adverse market conditions, including significant competitive measures in the Company's markets and ongoing customer uncertainty about the Company's financial condition and business prospects may continue to have an adverse effect on the 23 Company's ability to sell its products and results of operations. See "--Fluctuations in Quarterly Results; Seasonality." RESTATEMENT OF FINANCIAL RESULTS FOR FIRST QUARTER OF FISCAL 1998 In May 1998, the Company announced that it had restated its financial results for the first quarter ended March 31, 1998. Total revenues for the quarter restated were $161.0 million which is a reduction of approximately $6.2 million from the previously reported $167.2 million. In addition, the restatement resulted in a reduction of net income of $5.3 million from $7.1 million as originally reported to $1.8 million for the quarter ended March 31, 1998. The restatement also affected the Company's financial condition as evidenced by a reduction in working capital and an increase in accumulated deficit. The working capital deficit at March 31, 1998 increased $5.3 million from $86.5 million as originally reported to $91.8 million. The Company's accumulated deficit also increased $5.3 million from $271.0 million as originally reported to $276.3 million. In its original report of the financial results for the quarter ended March 31, 1998, the Company had recognized approximately $6.2 million in license revenue from software license agreements with IM's in the same manner as revenue resulting from agreements with end users. After discussions with the Company's former independent accountants, the Company concluded that revenue recognition of license transactions with industrial manufacturers should be reported on a sell-through basis. Accordingly, approximately $6.2 million in license revenue previously recognized has been deferred and will be recognized when the related software licenses are resold to end user customers over a period which the Company expects to be approximately two years. In connection with its audit of the Company's fiscal 1997 consolidated financial statements, the Company's former independent accountants determined that a material weakness existed, based on the lack of appropriate resources in the accounting and financial reporting departments of the Company and other conditions. To address these conditions, the Company plans to hire additional finance personnel to serve in the accounting and controlling departments. In the interim, the Company has hired a number of consultants to ensure that appropriate accounting control measures are in place. As noted above, ongoing customer uncertainty about the Company's financial condition and business prospects may continue to have an adverse effect on the Company's ability to sell its products and results of operations. See "--Dependence on Key Personnel; Personnel Changes; Ability to Recruit Personnel." NEED FOR ADDITIONAL FINANCING During fiscal 1997, the Company experienced substantial short-term liquidity problems as its cash, cash equivalents and short term investments declined to a quarter-end low of $104.4 million at June 29, 1997 from $261.0 million at December 31, 1996. The Company raised net proceeds of $37.6 million in August 1997 and $50.0 million (excluding a $1.0 million fee paid to a financial advisor of the Company) in November 1997 in separate financing transactions in which the Company issued newly authorized series of convertible Preferred Stock. In the fourth quarter of 1997, the Company raised aggregate net proceeds of $59.3 million through the sale of real property it had purchased earlier in the year. As a result of such financing activities during the second half of 1997, the Company's cash, cash equivalents and short term investments increased to $155.5 million at December 31, 1997. In addition, in the first quarter of fiscal 1998, the Company raised aggregate net proceeds of $14.1 million in connection with the partial exercise of a warrant to acquire additional shares of the Company's convertible Preferred Stock. The Company believes that these actions have substantially improved its financial condition since early 1997. Nevertheless, adverse market conditions, including continued slower growth rates in the markets for RDBMS products or on-going customer uncertainty about the Company's financial condition and business prospects, could continue to have an adverse effect on license revenues and results of operations. In addition, recent instability in the Asian-Pacific economies and financial markets, which accounted for approximately 12% and 13% of the Company's total revenues for the years ended December 31, 1997 and 1996, respectively, and 12% of the Company's total revenues for the quarter ended March 31, 1998, respectively, has created further uncertainty concerning the Company's revenues, cash flows and results of operations. 24 In December 1997, Informix Software, Inc., a Delaware corporation and the Company's principal operating subsidiary ("Informix Software"), entered into a Senior Secured Credit Agreement with a syndicate of commercial banks, including BankBoston, N.A. as administrative agent and Canadian Imperial Bank of Commerce as syndication agent, providing for a revolving credit facility of up to $75 million (the "Credit Facility"). The actual amount available under the Credit Facility, for either direct borrowings or issuances of letters of credit, is based on 80% of the eligible domestic accounts receivable and 50% of the eligible foreign accounts receivable, which are measured on a revolving basis. Accounts receivable for an account debtor are ineligible for purposes of the Credit Facility when (a) such account receivable is outstanding for longer than 60 days, (b) the account debtor or any other person obligated to make payment thereon asserts any defense, offset, counterclaim or other right to avoid or reduce the amount of the account receivable, but only to the extent the lenders reasonably determine a valid defense, offset, counterclaim or other right exists and then only to the extent of such right, (c) the account debtor or other person required to make payment thereon is insolvent, subject to bankruptcy or receivership proceedings or has made an assignment for the benefit of creditors or whose credit standing is unacceptable to the lenders, and the lenders have so notified the Company, (d) the account debtor is a lender under the Credit Facility, (e) 30% or more of the accounts receivable of any account debtor is deemed ineligible because such accounts are outstanding for longer than 60 days thus rendering all the accounts receivable of that debtor ineligible and (f) the lender reasonably deems not to qualify an account receivable as eligible and provides a reasonably detailed written explanation to the Company. Under the Credit Facility, foreign accounts receivable that are backed by a letter of credit issued or confirmed by a financial institution approved by the lenders are deemed to be domestic accounts receivable. As a result, the aggregate amount available under the Credit Facility will vary from time to time based on the amount and eligibility of the Company's receivables. As of March 31, 1998, no borrowings were outstanding under the Credit Facility, the Company's accounts receivable totalled $128.9 million and its borrowing base was approximately $40.6 million. The purpose of the Credit Facility is to provide the Company working capital and finance general corporate purposes. The term of the Credit Facility is two years. Amounts outstanding under the Credit Facility bear interest at a premium over one of two alternative variable rates selected by the Company. The "Base Rate" equals the greater of (i) the rate of interest announced by BankBoston, N.A. as its "base rate" and (ii) the Federal Funds Effective Rate plus 1/2 of 1% per year. The "Adjusted LIBOR Rate" equals (i) the London Interbank Offered Rate divided by (ii) one minus the applicable reserve requirement under Regulation D of the Federal Reserve Board. The maximum premium over the Base Rate is 1.25%, and the maximum premium over the LIBOR Rate is 2.50%, subject to downward adjustment based on the Company's realizing certain financial thresholds. The Credit Facility is secured by all of the assets of Informix Software and the capital stock of the Company's subsidiaries that are domiciled in the United States, including Informix Software. The availability of the Credit Facility is also subject to the Company's compliance with certain covenants, including financial covenants requiring the Company to (a) maintain a ratio of 1.25 to 1.00 in respect of the sum of cash and accounts receivable to the difference of current liabilities less deferred and unearned revenues, (b) maintain quarterly revenues which do not include any restated revenue resulting from the Company's November 1997 restatement of its financial statements of $150.0 million through June 1998 and $160.0 million thereafter, (c) maintain quarterly operating loss of no more than $10.0 million through the quarter ending March 31, 1998 and a quarterly operating profit of at least $10 million for the quarter ending June 30, 1998 and a quarterly operating profit of at least $15 million thereafter, (d) maintain, for the quarter ending June 30, 1998 and each quarter thereafter, a positive quarterly cash flow consisting of operating income which does not include any restated revenue resulting from the Company's November 1997 restatement of its financial statements, capitalized software costs, capital expenditures or cash outlays in respect of accrued expenses arising from restructuring charges (but which income figure does take into account depreciation and amortization expenses), (e) maintain an interest coverage ratio of 1.25 to 1.00 in respect of quarterly operating cash flow to interest expense plus scheduled amortization of debt, (f) refrain from making additional investments in fixed or capital assets, in any fiscal year, in excess of $15.0 million, plus any carry forward amount, which carry forward amount 25 cannot exceed $5.0 million and (g) refrain from entering into any merger, consolidation, reorganization or other transaction resulting in a fundamental change. At March 31, 1998, the Company was in compliance with all financial covenants under the Credit Facility except for the attainment of Minimum Quarterly Revenue (as defined in the Credit Facility) for the fiscal quarter ended March 31, 1998. However, the Company has secured a waiver from BankBoston, N.A., the Canadian Imperial Bank of Commerce and each of the lenders under the Credit Facility regarding this covenant as it relates to the Company's financial results for the fiscal quarter ended March 31, 1998. In addition, in connection with such waiver, the Credit Facility was amended to reduce the Minimum Quarterly Revenue from $150.0 million to $144.0 million through June 1998 and from $160.0 million to $154.0 million thereafter. There can be no assurance that amounts raised in connection with the Preferred Stock financing and real property sales transactions described above and amounts available under the Credit Facility will be sufficient to cover the Company's working capital needs or that the Company will not require additional debt or equity financing in the future. In addition, there can be no assurance that additional debt or equity financing will be available, if and when needed or that, if available, such financing could be completed on commercially favorable terms. Failure to obtain additional financing, if and when needed, could have a material adverse effect on the Company's business, results of operations and financial condition. To the extent the terms of any available financing are materially unfavorable to the Company, such a financing could impair the Company's ability to obtain additional financing in the future, to implement its business plan, or to engage in various corporate transactions, including potential acquisitions of the Company. See "--Working Capital Deficit," "--Risks Associated with Preferred Stock Financings," "--Antitakeover Protections" and "Description of Capital Stock--Preferred Stock." Prior to January 1, 1998, the Company often arranged for non-recourse financing through the sale of customer accounts receivable to third-party financial institutions. The Company had traditionally relied on a limited number of financial institutions for most of the customer financings it arranged. The terms of the Credit Facility prevent the Company from selling accounts receivable with an aggregate face value in excess of $20 million during any twelve month period. The Company does not expect to enter into third-party financing arrangements involving the sale of its receivables on a going forward basis. See "--Working Capital Deficit." WORKING CAPITAL DEFICIT The restatement of the Company's financial statements has had a material adverse effect on the Company's financial condition, most notably evidenced by substantial reductions in retained earnings and working capital. At December 31, 1996, after giving effect to the restatement, the Company's working capital totaled $3.1 million, compared to $258.4 million as originally reported. At December 31, 1997, the Company had a working capital deficit of $140.2 million. The substantial reduction in working capital, as restated, at December 31, 1996 reflects net losses in fiscal 1996 of $73.6 million and the addition of $239.5 million of "advances from customers and financial institutions" as a current liability on the Company's balance sheet. The working capital deficit at December 31, 1997 reflects net losses of $356.9 million for the year ended December 31, 1997, $180.0 million in advances from customers and financial institutions as of such date, and substantial uses of cash as a result of the Company's internal restructuring, which commenced in the second quarter of 1997. At March 31, 1998, the Company had a working capital deficit of $91.8 million. "Advances from customers and financial institutions" reflects amounts previously received from customers or in connection with accounts receivable financing transactions with third party financial institutions in advance of revenue being recognized. Prior to the restatement, these amounts were improperly recognized as earned but have now been designated as advances. A substantial majority of such revenues arose in connection with license agreements between the Company and hardware partners, distributors and other resellers. In connection with the review of its historical financial results, the Company determined that sufficient post-contractual contingencies existed in connection with certain reseller license arrangements so as to preclude recognizing revenue. In addition, the Company concluded 26 that informal or otherwise undisclosed arrangements with a number of resellers have resulted or could result in significant concessions or allowances that were not accounted for when revenue was originally reported as earned. Although the Company's license agreements provide for a non-refundable fee payable by the customer in single or multiple installments at the beginning or over the term of the license arrangements, amounts received by the Company under its license agreements could be subject to refund in the event the Company fails to satisfy certain post-signing obligations. At March 31, 1998 approximately $20 million of such amounts received from customers were subject to commercial disputes, several of which have proceeded to litigation. Of the $20 million subject to commercial disputes, $5.0 million has been reflected on the balance sheet as accrued expenses, and the Company believes that the remainder is properly booked as advances from customers and financial institutions as the Company believes the likelihood of refund is remote. Any such refunds, were they to occur, would not have a material effect on the Company's results of operations as revenue has not been recognized on such transactions. The Company has abandoned its plans to construct a new headquarters facility and in December 1997 sold the real property it had purchased earlier in the year, raising aggregate net proceeds of approximately $59.3 million. In August 1997 and November 1997, the Company sold and issued newly designated series of Preferred Stock in two separate financing transactions, raising aggregate net proceeds of approximately $87.6 million (excluding a $1.0 million fee paid to a financial advisor of the Company in connection with the sale of the Series B Preferred). In addition, in the fourth quarter of 1997, the Company entered into the Credit Facility. In the first quarter of fiscal 1998, the Company raised aggregate net proceeds of $14.1 million in connection with a Series A-1 Preferred stockholders' exercise of a warrant to acquire additional shares of the Company's convertible Preferred Stock. Although these financing transactions have improved the Company's working capital position, in the event the Company continues to maintain a substantial working capital deficit, such a deficit could materially impair the Company's ability to sell its products as a result of customer uncertainty about the Company's financial condition. See "--Uncertain Impact of Restatement of Financial Statements" and "--Need for Additional Financing." FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY The Company's quarterly operating results have varied significantly in the past and may vary significantly in the future depending upon a number of factors, many of which are beyond the Company's control. These factors include, among others, (i) customer uncertainty about the Company's financial condition and business prospects, (ii) market demand for the Company's software, including changes in industry growth rates for the Company's products, (iii) changes in pricing policies by the Company or its competitors, including aggressive price discounting to encourage volume purchases by customers, (iv) the size, timing and contractual terms of significant orders, the effects of which may be exacerbated by aggressive price discounting, (v) the timing of the introduction of new products or product enhancements by the Company or its competitors, (vi) budgeting cycles of customers and potential customers, (vii) changes in the mix of revenues attributable to domestic and international sales and (viii) seasonal trends in technology purchases and other general economic conditions. In particular, the Company's quarterly results may be adversely affected by the industry's historical practice of aggressively discounting the price of its products to encourage volume purchasing by customers. In the event the Company experiences substantial pricing pressure with respect to one or more large transactions in any given quarter, such revenue could result in a substantial shortfall in revenues. The Company has operated historically with little or no backlog and has generally recognized a substantial portion of its revenues in the last weeks or days of a quarter. As a result, license revenues in any quarter are substantially dependent on orders booked and shipped in the last weeks or days of that quarter. In addition, the sales cycle for the Company's products is relatively long and may vary depending on a number of factors, including the size of the transaction and the level of competition the Company encounters in its selling activities. Due to the foregoing factors, quarterly revenues and operating results are not predictable with any significant degree of accuracy. In the event of any downturn in potential customers' businesses, the domestic economy in general, or in international economies where the Company derives substantial revenues, planned 27 purchases of the Company's products may be deferred or canceled, which could have a material adverse effect on the Company's business, operating results, and financial condition. Because the Company's operating expenses are based on anticipated revenue levels and because a high percentage of the Company's expenses are relatively fixed, delays in the recognition of revenues from even a limited number of license transactions could cause significant variations in operating results from quarter to quarter and could cause net income to fall significantly short of anticipated levels. In the quarters ended September 28, 1997 and June 29, 1997, costs associated with the Company's internal restructuring, aggregating $109.4 million, had a material adverse effect on results of operations. The total restructuring charges decreased by $1.2 million during the fourth quarter of fiscal 1997 primarily due to adjusting the original estimate of the loss to be incurred on the sale of land to the actual loss. The total restructuring charges decreased by $3.3 million during the first quarter of 1998 primarily due to adjusting the original estimate of severance and facility charges to actual costs incurred. Management continues to evaluate the Company's cost structure in light of projected revenues and cash-flows, both of which are variable and uncertain. There can be no assurance that the Company will not be required to undertake additional restructuring activities in the future, which would have a material adverse effect on the Company's business, results of operations and financial condition. The Company's business has experienced and is expected to continue to experience seasonality. International revenues comprise a significant percentage of the Company's total revenues, and the Company may experience additional variability in demand associated with seasonal buying patterns in foreign markets. In particular, the Company's third quarter tends to reflect the effects of summer slowing of international business activity, particularly in Europe. In addition, variability and seasonality in the Company's business may result from customer capital spending cycles, which tend to peak in the Company's fourth quarter, and the Company's sales incentive plans for sales personnel, which are measured on a calendar year basis. See "--Competition; Pricing Risks" and "--International Operations; Currency Fluctuations." LITIGATION ACTIONS ARISING UNDER FEDERAL AND STATE SECURITIES LAWS Beginning on or about April 16, 1997, a total of 24 complaints alleging violations of the federal securities laws were filed against the Company, Ernst & Young LLP ("Ernst & Young"), the Company's independent accountants and certain Named Individual Defendants (listed below) in the United States District Court for the Northern District of California. Of the 24 complaints, 22 have been filed as purported class actions by individuals who allege that they are individual investors who purchased the Company's Common Stock during the purported class period; the alleged class periods in the different complaints vary according to the date on which the complaints were filed. The complaints name some or all of the following current and former officers and directors of the Company as defendants: Phillip E. White, Howard H. Graham, David H. Stanley, Ronald M. Alvarez, Karen Blasing, D. Kenneth Coulter, Ira H. Dorf, Stephen E. Hill, Myron (Mike) Saranga, Steven R. Sommer, Michael R. Stonebraker and Edwin C. Winder (the "Named Individual Defendants"). On August 20, 1997, the District Court entered an order consolidating all of the separately-filed class actions pending at that time, designating the action as IN RE INFORMIX CORPORATION SECURITIES LITIGATION, and designating as "related cases" all cases brought under the federal securities laws then pending and any that may be filed after that date. A consolidated amended class action complaint was filed on April 6, 1998. As required by the provisions of the Exchange Act, as amended by the Private Securities Litigation Reform Act of 1995, the Court has designated the lead plaintiffs in the federal action and has appointed lead plaintiffs' counsel. Two related non-class actions, TEACHERS' RETIREMENT SYSTEM OF LOUISIANA ET AL. V. INFORMIX CORPORATION ET AL. and STATE BOARD OF ADMINISTRATION OF FLORIDA V. INFORMIX CORPORATION ET AL., have been consolidated with IN RE INFORMIX CORPORATION SECURITIES LITIGATION for all pre-trial purposes. The LOUISANA and FLORIDA plaintiffs 28 request a total of $10.173 million in damages. An amended consolidated complaint was filed by the LOUISIANA and FLORIDA plaintiffs on April 3, 1998. The existing federal court complaints allege that the Company, the Named Individual Defendants and Ernst & Young issued false or misleading statements in the Company's filings with the Commission, press releases, statements to securities analysts and other public statements regarding its financial results and business prospects. The alleged class period in the amended consolidated complaints extends from February 7, 1995 through November 18, 1997. In particular, plaintiffs allege that defendants overstated the Company's revenue and earnings during the time period by improperly recognizing revenue from sales of software licenses. All of these actions allege that the defendants' false and misleading statements violate section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. The complaints further allege that the Named Individual Defendants sold the Company's Common Stock while in the possession of adverse material non-public information. The existing complaints, in general, do not specify the amount of damages that plaintiffs seek. On or about March 19, 1998, a complaint alleging securities and common law fraud and misrepresentation causes of action was filed in the United States District Court for the Northern District of California. This complaint, captioned WILLIAMS V. INFORMIX CORPORATION, ET AL., alleges both individual and class claims on behalf of former securities holders of Illustra Information Technologies, Inc. ("Illustra") who exchanged their Illustra securities for securities of the Company in February 1996 in connection with the Company's February 1996 acquisition of Illustra pursuant to an Agreement and Plan of Reorganization (the "Illustra Agreement"). This matter has been consolidated with IN RE INFORMIX CORPORATION SECURITIES LITIGATION. The WILLIAMS complaint, like the previously-filed federal complaints, alleges that the Company and certain of its former officers and/or directors, and its independent auditors, issued false or misleading statements regarding the Company's reported financial results and business prospects. The WILLIAMS plaintiffs have moved to be severed from the consolidated class action; the defendants and lead plaintiffs in the consolidated class actions have opposed the motion. A hearing on this motion is set for June 19, 1998. Defendants are scheduled to file responses to the complaints on June 16, 1998. Three purported securities class actions containing allegations similar to the federal actions were filed in the Superior Court of the State of California, County of San Mateo between May 19, 1997 and August 25, 1997. Those actions, captioned RILEY V INFORMIX CORPORATION ET AL., DAYANI V. INFORMIX CORPORATION ET AL., AND GOLDSTEIN V. WHITE ET AL., contained factual allegations nearly identical to the allegations set forth in the federal court complaints. The Superior Court has consolidated these actions into the DAYANI case, and has appointed lead plaintiffs' counsel. By stipulation, plaintiffs filed a consolidated, amended complaint on December 23, 1997. The state court consolidated, amended complaint names as defendants the Company, Ernst & Young and the Named Individual Defendants. The claims in the consolidated amended state complaint arise under California securities, fraud and unfair business practices statutes. The state court consolidated, amended complaint alleges that the defendants issued false financial statements which were not prepared in conformity with Generally Accepted Accounting Principles for fiscal years 1996, 1995 and 1994, materially overstating the Company's revenue. Plaintiffs allege that defendants recorded as revenue approximately $300 million from software license sales which should not have been recorded because INTER ALIA, revenue was recognized on sales to resellers before end-users were identified; revenue was recognized in circumstances where customers had rights of return or cancellation; and the Company recognized revenue from barter transactions in which the Company allegedly exchanged software licenses for products that had no value to the Company. Plaintiffs further allege that while the Company's stock price was artificially inflated due to the overstatement of revenue, the defendants used the Company's stock to make corporate acquisitions, and the Named Individual Defendants sold stock while in possession of material adverse non-public information. The alleged class period in the state court consolidated, amended complaint is February 7, 1995 through November 18, 1997. 29 Defendants filed demurrers to the state court consolidated, amended complaint on February 13, 1998. Defendants base their demurrers to the consolidated, amended complaint in this action on the grounds that certain of the individual defendants made no actionable statements during the alleged class period, the Company did not engage in any market activity during the alleged class period, the plaintiffs did not actually rely upon any of the alleged false and misleading statements, the California statutory unfair business practices claims are inapplicable to securities transactions, and the consolidated, amended complaint fails to plead the alleged fraud with sufficient particularity. On May 28, 1998 the Court announced its tentative order overruling defendants' demurrers with respect to the state statutory securities causes of action against the Company, and sustaining the demurrers on all other grounds. In addition, the Court tentatively granted permission for plaintiffs to amend certain elements of their complaint. The Court will issue a formal written order ruling on the demurrers in the next few weeks. The Company is not in a position to state its factual defenses to plaintiffs' claims until the Court issues its formal order, plaintiffs file their second amended consolidated complaint and the Court rules upon any subsequent demurrers. DERIVATIVE ACTIONS The Company also was named as a nominal defendant in eight derivative actions, purportedly brought on its behalf, filed in the Superior Court of the State of California, County of San Mateo. The cases have been consolidated under the caption IN RE INFORMIX CORPORATION DERIVATIVE LITIGATION, and the Court has appointed lead plaintiff's counsel in the consolidated actions. The consolidated, amended complaint alleges that, based upon the facts alleged in the federal and state securities class actions, defendants breached their fiduciary duties to the Company, engaged in abuses of their control of the Company, were unjustly enriched by their sales of the Company's Common Stock, engaged in insider trading in violation of California law and published false financial information in violation of California law. The consolidated, amended complaint names as defendants Ernst & Young, the Named Individual Defendants and Albert F. Knorp, Jr., James L. Koch, Thomas A. McDonnell and Cyril J. Yansouni, non-management directors of the Company. The plaintiff seeks unspecified damages on the Company's behalf from each of the defendants. On December 18, 1997, plaintiffs served their first amended, consolidated derivative complaint. The Company, on whose purported behalf the derivative action is asserted, and the individual defendants and Ernst & Young, against whom the claims are alleged, filed demurrers to the consolidated derivative complaint on February 6, 1998. The Company's demurrer in this action is based upon the fact that the plaintiff did not make demand on the Company's board prior to filing the derivative action as is required by governing Delaware law. In addition, the Company's current and former officers and directors have brought demurrers to the consolidated, amended complaint on the grounds that plaintiffs fail to plead any of their claims with sufficient particularity and that certain of plaintiffs' California statutory causes of action do not apply, by their terms, to officers and directors of a Delaware corporation. On April 1, 1998, the Court sustained Informix's demurrer based upon the plaintiffs' failure to make demand. The Court has given plaintiffs leave to amend their complaint. On May 28, 1998, the Court issued a tentative order sustaining defendants' demurrers. The Court indicated that it will permit plaintiffs to amend certain elements of their complaint. The Court will issue a formal order reflecting its ruling in the next few weeks. Defendants will not file an answer in this action unless the Court overrules any subsequent demurrers. Further, the defendants are not in a position to state their factual defenses to the plaintiffs' claims until the Court issues its formal order, the plaintiffs serve their second consolidated amended complaint, and the Court rules upon any future demurrers. Because of the nature of derivative litigation, any recovery in the action would inure to the benefit of the Company. INDEMNIFICATION AGREEMENTS AND LIABILITY INSURANCE Pursuant to Delaware law, the Company's Certificate of Incorporation, its Bylaws and the indemnification agreements between the Company and each of its current and former officers and directors, the 30 Company is obligated to indemnify its current and former officers and directors for certain liabilities arising from their employment with or service to the Company. These indemnification obligations require the Company to indemnify its current and former officers and directors for any suit or other proceeding, threatened or actual, whether civil, criminal, administrative, investigative, appellate or any other type of proceeding, that arises as a result of any act or omission in the indemnitee's capacity as an officer or director of the Company to the fullest extent permitted under Delaware or any other applicable law. The indemnification extends to any and all expenses (including but not limited to attorneys' fees and costs, and any other out-of-pocket expense) and/or liabilities of any type (including but not limited to judgments, fines, excise taxes or penalties under the Employee Retirement Income Security Act ("ERISA"), and amounts paid in settlement) reasonably incurred in connection with the investigation, defense, settlement or appeal of such proceedings. The obligation to provide indemnification does not apply if the indemnitee is adjudicated to be liable for fraudulent or criminal conduct. The Company has purchased directors' and officers' liability insurance to reimburse it for the costs incurred in connection with its indemnification obligations described above. For the period from August 1996 to August 1997, the period in which most of the claims against the Company and certain of its directors and officers were asserted, the Company had in place three directors and officers liability insurance policies (the "1996 and 1997 D&O Policies"), each providing $5 million in coverage for an aggregate of $15 million. The primary policy and first excess policy were issued by Lloyds of London. The second excess policy was issued by Admiral Insurance Company. The insurance carriers have taken the position that litigation filed after the policy periods of the 1996 and 1997 D&O Policies but arising from the same facts and circumstances as claims filed during the period from August 1996 to August 1997, "relates back" to the 1996 and 1997 D&O Policies. Thus, the issuance carriers assert that actions filed after August 1997 do not implicate coverage under the Company's D&O insurance policies for the period August 1997 to August 1998 (the "Current D&O Policies"). The Current D&O Policies provide aggregate coverage of $20 million, subject to various exclusions, including claims relating to the restatement of the Company's financial statements. The 1996 and 1997 D&O Policies provide that 100 percent of the costs incurred in defending claims asserted jointly against the Company and its current and former officers and directors are allocable to the individuals' defense and, thus, are covered by the policy. However, the 1996 and 1997 D&O Policies do not provide any separate coverage for the Company. Moreover, the Company does not have separate insurance to cover the costs of its own defense or to cover any liability for any claims asserted against it. The Company has not currently set aside any financial reserves relating to any of the above-referenced actions. ILLUSTRA ESCROW In January 1997, pursuant to the Illustra Agreement, Informix made a claim to certain shares held in an escrow fund. In response, the Illustra shareholders have claimed that the Company wrongfully caused these shares to be retained in escrow, thereby harming the Illustra shareholders. The Illustra securities holders have filed a demand for arbitration with the private arbitration service agreed upon by the parties to the Illustra Agreement; however, at present, no litigation or arbitration proceedings have been commenced with respect to the Illustra escrow. In March 1998, a complaint was filed against the Company on behalf of former Illustra shareholders alleging securities and common law fraud and misrepresentation causes of actions. See "--Actions Arising Under Federal and State Securities Laws." SECURITIES AND EXCHANGE COMMISSION INVESTIGATION In addition, in July 1997, the Commission issued a formal order of investigation of the Company and certain unidentified individuals associated with the Company with respect to non-specified accounting matters, financial reports, other public disclosures and trading activity in the Company's securities. The Company is cooperating with the investigation and is providing all information subpoenaed by the 31 Commission. The Company is in the process of producing documents and a number of current and former officers have been contacted to appear before the Commission. GENERAL The pending federal and state securities actions are in the early stages of discovery. Consequently, at this time it is not reasonably possible to estimate the damages, or the range of damages, that the Company might incur in connection with such actions. The uncertainty associated with substantial unresolved litigation can be expected to have an adverse impact on the Company's business. In particular, such litigation could impair the Company's relationships with existing customers and its ability to obtain new customers. Defending such litigation will likely result in a diversion of management's time and attention away from business operations, which could have a material adverse effect on the Company's results of operations. Such litigation may also have the effect of discouraging potential acquirors from bidding for the Company or reducing the consideration such acquirors would otherwise be willing to pay in connection with an acquisition. DEPENDENCE ON KEY PERSONNEL; PERSONNEL CHANGES; ABILITY TO RECRUIT PERSONNEL The Company's future performance will depend to a significant extent on its ability to attract and retain highly skilled technical, sales, consulting, marketing and management personnel. In particular, the Company is dependent upon a number of key management and technical personnel, including Robert J. Finocchio, Jr., the Company's Chairman, President and Chief Executive Officer, Jean-Yves F. Dexmier, the Company's Executive Vice President and Chief Financial Officer, and Myron (Mike) Saranga, the Company's Senior Vice President, Product Management and Development. Mr. Finocchio and Mr. Dexmier have only recently joined the Company, and of the officers and key employees, only Mr. Finocchio is bound by an employment agreement, the terms of which are nonetheless at-will. The loss of the services of one or more of the Company's executive officers or key employees could have a material adverse effect on the Company's business, results of operations and financial condition. Since the beginning of 1997, a number of senior management personnel and other key employees have departed the Company, and to date, the Company has been able to replace most but not all of the positions that have been vacated. Since the first quarter of 1997, the Company has experienced a significant number of voluntary resignations and has taken selective actions to reduce the number of employees in certain functional areas. The Company had approximately 3,486 regular employees at March 31, 1998, compared to approximately 4,632 at March 30, 1997. Voluntary attrition has remained high across all functional areas. In particular, in fiscal 1997, the Company experienced high attrition rates in its product development group and has had difficulty attracting replacement development personnel. The competition for employees in the software industry is intense, and the Company expects that such competition will continue for the foreseeable future. The Company has experienced difficulty in locating candidates with appropriate qualifications and believes that recent financial and business developments at the Company have made recruitment more difficult. In particular, the Company has identified certain needs within its accounting and financial reporting departments. See "--Uncertain Impact of Restatement of Financial Statements." In November 1997, the Company implemented an option repricing program in an effort to retain existing employees and, following further declines in the price of its Common Stock, announced a second repricing in December 1997, which was effective in January 1998. There can be no assurance that such programs will be effective in retaining existing employees. There can be no assurance that the Company will be successful in attracting, training and retaining qualified personnel, and the failure to do so, particularly in key functional areas such as product development and sales, could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, new employees hired by the Company generally require substantial training in the use and implementation of the 32 Company's products and in the Company's procedures. As a result, substantial employee turnover could have an adverse effect on results of operations in future quarters. RISKS ASSOCIATED WITH PREFERRED STOCK FINANCINGS In August 1997, the Company raised net proceeds of $37.6 million through the issuance of a newly designated Series A Convertible Preferred Stock (the "Series A Preferred"). In November 1997, the Company raised an additional $50.0 million in net proceeds (excluding a $1.0 million fee paid to a financial advisor of the Company) through the issuance of the Series B Preferred. Simultaneously with the closing of the Series B Preferred, the holders of the Series A Preferred exchanged all their outstanding shares of Series A Preferred for the Series A-1 Preferred, having substantially similar rights, preferences and privileges as the Series A Preferred with the exception of certain amendments, including revisions to the terms under which such shares become mandatorily redeemable. While the issuance of the Preferred Stock in these transactions provided the Company with additional working capital required to fund the Company's continuing operations, the Company's agreements with the purchasers of the Series A-1 Preferred and the Series B Preferred contain covenants that could impair the Company's ability to engage in various corporate transactions in the future, including financing transactions and certain transactions involving a change-in-control or acquisition of the Company, or that could otherwise disadvantage the Company and the holders of its Common Stock. In particular, acquisitions of the Company may not be effected without the consent of the holders of the outstanding Preferred Stock or without requiring the acquiring entity to assume the Preferred Stock or cause such Preferred Stock to be redeemed. These provisions are likely to make an acquisition of the Company more difficult and expensive and could discourage potential acquirors. Certain covenants of the Company, made in connection with the issuance of the Preferred Stock, may also have the effect of limiting the Company's ability to obtain additional financing by, for example, providing the holders of Preferred Stock certain rights of first offer and prohibiting the Company from issuing additional Preferred Stock without the consent of such holders. The terms of the financing agreements pursuant to which the Preferred Stock was issued also include certain penalty provisions that are triggered in the event the Company fails to satisfy certain obligations. In particular, assuming the exercise of the Series A-1 Warrant (as such term is defined below) for 80,000 shares of Series A-1 Preferred (which were the maximum number of shares of Series A-1 Preferred purchasable under the warrant at March 31, 1998) the holders of the Series A-1 Preferred will become entitled to an annual dividend of approximately $3.0 million, payable quarterly in cash, in the event the Company fails to satisfy certain covenants, including the failure to have a registration statement covering the Common Stock issuable upon conversion of the Series A-1 Preferred declared effective by the Commission within 180 days of a registration request from the holders of Series A-1 Preferred (at the time of this report no shares of A-1 Preferred were outstanding and, accordingly, the Company had not received such a registration request); the failure to obtain stockholder approval of the issuance of the Common Stock issuable upon conversion of the Series A-1 Preferred in the event that such approval becomes required by the rules of the Nasdaq National Market; and the failure to redeem any shares of Series A-1 Preferred held by a holder of Series A-1 Preferred who objects to a change-in-control transaction, if the transaction does not satisfy certain financial thresholds relating to the market capitalization and trading volume of any acquiring entity. In the event the Company becomes obligated to pay such dividends, the holders of the Series A-1 Preferred will become immediately entitled to designate a number of members of the Company's Board of Directors corresponding, as a percentage of the total number of members, to the percentage of the Company's outstanding Common Stock held by such holders (assuming the conversion into Common Stock of the outstanding Series A-1 Preferred). The holders of the Series B Preferred are entitled to receive a cumulative dividend at an annual rate of 5% of the face value of each share of Series B Preferred, resulting in an aggregate annual dividend of $2.5 million based upon the 50,000 shares of Series B Preferred (face value $1,000 per share) outstanding at March 31, 1998. The dividend is generally 33 payable upon the conversion of the Series B Preferred or redemption of the Series B Preferred and may be paid in cash or, at the Company's election and subject to certain conditions, in shares of Common Stock. In the event the holders of Preferred Stock become entitled to receive cash dividends or to have their Preferred Stock redeemed, there can be no assurances that the Company will be able to fund such a payment or redemption, and even if funding is available, substantial dividend payments could have a material adverse effect on the Company's business and financial condition. See "--Need for Additional Financing; Customer Financing," "--Antitakeover Protection," and "Description of Capital Stock-- Preferred Stock." Both the Series A-1 Preferred and the Series B Preferred are convertible into shares of the Company's Common Stock based on the trading prices of the Common Stock during future periods that are described in the respective financing agreements. The number of shares of Common Stock that may ultimately be issued upon conversion is therefore presently indeterminate. If, in accordance with the terms of the financing agreements, the conversion price of the Preferred Stock is determined during a period when the trading price of the Common Stock is low, the resulting number of shares of Common Stock issuable upon conversion of the Preferred Stock could result in substantial dilution to the holders of Common Stock. In addition, the Company issued to the holders of the Series A-1 Preferred a warrant to acquire up to an additional 140,000 shares of Series A-1 Preferred for an aggregate purchase price of $35.0 million (the "Series A-1 Warrant"). The Series A-1 Warrant was exercised in part in February 1998 for 60,000 shares of Series A-1 Preferred, resulting in $14.1 million in net proceeds to the Company. In February 1998, all 220,000 shares of Series A-1 Preferred which were then outstanding were converted into 12,769,908 shares of Common Stock. The Company is also obligated to issue upon conversion of the Series B Preferred additional warrants to acquire shares of Common Stock equal to 20% of the total number of shares of Common Stock into which the Series B Preferred converts; together with an additional increment of warrants to purchase 200,000 shares of Common Stock (collectively, the "Warrants"). The Series A-1 Warrant and the Warrants, to the extent exercised, will have a further dilutive effect. COMPETITION; PRICING RISKS The Company faces intense competition in the market for RDBMS software products. The market for the Company's products is subject to rapid technological change and frequent new product introductions and enhancements, and the Company's competitors in the market include several large vendors that develop and market databases, applications, development tools or decision support products. The Company's principal competitors include Computer Associates International, Inc., International Business Machines Corporation ("IBM"), Microsoft Corporation, NCR Corporation/Teradata ("NCR/Teradata"), Oracle Corporation ("Oracle") and Sybase, Inc. ("Sybase"). Several of the Company's competitors have significantly greater financial, technical, marketing and other resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products than the Company. Any failure by the Company to compete successfully with its existing competitors or future competitors could have a material adverse effect on the Company's business, results of operations and financial condition. Several of the Company's competitors have announced the development of enhanced versions of their principal database products that are intended to improve the performance or expand the capabilities of their existing products. New or enhanced products by existing competitors or new competitors could result in greater price pressure on the Company's products. In addition, the industry movement to new operating systems, like Windows NT, access through low-end desktop computers and access to data through the Internet may cause downward pressure on prices of database software and related products. The bundling of software products for promotional purposes or as a long-term pricing strategy by certain of the Company's competitors could also result in reductions in the price the Company may charge for its products. In addition, the Company's own practices of bundling its software products for enterprise 34 licenses or for promotional purposes with the Company's partners also could result in reduction in the price the Company may charge for its products. In particular, the pricing strategies of competitors in the industry have historically been characterized by aggressive price discounting to encourage volume purchasing by customers. If such downward pressure on prices were to occur, the Company's operating margins would be adversely affected. Existing and future competition or changes in the Company's product or service pricing structure or product or service offerings could result in an immediate reduction in the prices of the Company's products or services. If significant price reductions in the Company's products or services were to occur and not be offset by increases in sales volume, the Company's business, results of operations and financial condition would be adversely affected. There can be no assurance that the Company will continue to compete successfully with its existing competitors or will be able to compete successfully with new competitors. UNCERTAIN GROWTH RATES; TECHNOLOGICAL CHANGE AND NEW PRODUCTS Over the last several years, the RDBMS industry has expanded at significant growth rates, due in part to the continuing development of new technologies and products responsive to customer requirements. Recently, however, both industry analysts and competitors have predicted that such high growth rates will not be maintained in future periods. Recent instability in the Asian-Pacific economies and financial markets, which had previously been cited as a potentially strong source of revenue growth for relational database software companies, has introduced additional uncertainty concerning industry growth rates. In the event industry growth rates should decline for any reason, the markets for the Company's products would likely be adversely affected, which would have a negative impact on the Company's business, results of operations, financial condition and cash flows. See "--Fluctuations in Quarterly Results; Seasonality" and "International Operations; Currency Fluctuations." In addition, the market for the Company's products and services is characterized by rapidly changing technology, changing customer needs, frequent new product introductions and evolving industry standards that may render existing products and services obsolete. The life cycles of the Company's products are difficult to estimate. The Company's growth and future financial performance will depend upon its ability to enhance its existing products and to introduce new products on a timely and cost-effective basis that meet dynamic customer requirements. There can be no assurance that the Company will be successful in developing new products or enhancing its existing products or that such new or enhanced products will receive market acceptance or be delivered timely to the market. The Company's product development efforts are expected to continue to require substantial investments by the Company, and there can be no assurance that the Company will have sufficient resources to make the necessary investments. The Company has experienced product development delays in the past and may experience delays in the future. In particular, the Company has experienced high attrition in its product development group in recent months and has had difficulty attracting qualified replacement development personnel, which could have an adverse effect on the Company's ability to develop new products or product enhancements that respond to changing market requirements. Delays in the scheduled availability or a lack of market acceptance of its products or failure to accurately anticipate customer demand and meet customer performance requirements could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, products as complex as those offered by the Company may contain undetected errors or bugs when first introduced or as new versions are released. There can be no assurance that, despite testing, new products or new versions of existing products will not contain undetected errors or bugs that will delay the introduction or commercial acceptance of such products. A key determinative factor in the Company's success will continue to be the ability of the Company's products to operate and perform well with existing and future leading, industry-standard application software products intended to be used in connection with RDBMS. Failure to meet in a timely manner existing or future interoperability and performance requirements of certain independent vendors could adversely affect the market for the Company's products. Commercial acceptance of the Company's products and services could also be adversely affected by critical or negative statements or reports by brokerage firms, industry and financial 35 analysts and industry periodicals concerning the Company, its products, business or competitors or by the advertising or marketing efforts of competitors, or other factors that could affect consumer perception. See "Uncertain Impact of Restatement of Financial Statements," "--Need for Additional Financing; Customer Financing," "--Working Capital Deficit" and "--Dependence on Key Personnel; Personnel Changes; Ability to Recruit Personnel." In recent years, the types and quantities of data required to be stored and managed has grown increasingly complex and includes, in addition to conventional character data, audio, video, text, and three-dimensional graphics in a high-performance scalable environment. During 1996, the Company invested substantial resources in developing its ORDBMS product line. The market for products offering object-relational database functionality is new and evolving, and its growth depends upon a growing need to store and manage complex data and on broader market acceptance of the Company's products as a solution for this need. As a result, there can be no assurance that organizations will choose to make the transition from conventional RDBMS to ORDBMS. Delays in market acceptance of object-relational database management products offered by the Company could have an adverse effect on the Company's results of operations and financial condition. INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS International sales represented approximately 54% of total revenues for both years ended December 31, 1997 and 1996, and 51% of total revenues for the quarter ended March 31, 1998. The Company's international operations and financial results could be significantly affected by factors associated with international operations such as changes in foreign currency exchange rates and uncertainties relative to regional, political and economic circumstances, as well as by other factors associated with international activities. In particular, recent instability in the Asian-Pacific economies and financial markets, which accounted for approximately 12% and 13% of the Company's total revenues in the years ended December 31, 1997 and December 31, 1996, respectively, and 12% of the Company's total revenues in the quarter ended March 31, 1998, could have an adverse effect on the Company's operating results in future quarters. Most of the Company's international revenue and expenses are denominated in local currencies. Due to the substantial volatility of currency exchange rates, among other factors, the Company cannot predict the effect of exchange rate fluctuations on future operating results. Although the Company takes into account changes in exchange rates over time in its pricing strategy, it does so only on an annual basis, resulting in substantial pricing exposure as a result of foreign exchange volatility during the period between annual pricing reviews. The Company attempts to reduce this pricing exposure by entering into forward foreign currency exchange contracts to hedge up to 80% of the forecasted net income of its foreign subsidiaries of up to one year in the future. In addition, the sales cycles for the Company's products is relatively long, depending on a number of factors including the level of competition and the size of the transaction. Foreign currency fluctuations could, therefore, result in substantial changes in the financial impact of a specific transaction between the time of initial customer contact and revenue recognition. As a result of the foregoing factors, the Company's business, results of operations and financial condition could be materially and adversely affected by fluctuations in foreign currency exchange rates. See "--Fluctuations in Quarterly Results; Seasonality." In addition to the hedging program described above, the Company has implemented a foreign exchange hedging program consisting of the purchase of forward foreign exchange contracts, which is intended to hedge the value of accounts receivable or accounts payable denominated in foreign currencies against fluctuations in exchange rates until such receivables are collected or payables are disbursed. This program involves the use of forward contracts in the primary European and Asian currencies. The Company has limited unhedged transaction exposures in certain secondary currencies in Latin America, Eastern Europe and Asia because there are limited forward currency exchange markets in these currencies. Notwithstanding the Company's efforts to manage foreign exchange risk, there can be no assurances 36 that the Company's hedging activities will adequately protect the Company against the risks associated with foreign currency fluctuations. YEAR 2000 RISKS Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists in the software industry concerning the potential effects associated with such compliance. The Company has recently commenced a program, to be substantially completed by the Fall of 1999, to review the Year 2000 compliance status of the software and systems used in its internal business processes, to obtain appropriate assurances of compliance from the manufacturers of these products and agreement to modify or replace all non-compliant products. In addition, the Company is considering converting certain of its software and systems to commercial products that are known to be Year 2000 compliant. Implementation of software products of third parties, however, will require the dedication of substantial administrative and management information resources, the assistance of consulting personnel from third party software vendors and the training of the Company's personnel using such systems. Based on the information available to date, the Company believes it will be able to complete its Year 2000 compliance review and make necessary modifications prior to the end of 1999. Software or systems which are deemed critical to the Company's business are scheduled to be Year 2000 compliant by the end of 1998. Nevertheless, particularly to the extent the Company is relying on the products of other vendors to resolve Year 2000 issues, there can be no assurances that the Company will not experience delays in implementing such products. If key systems, or a significant number of systems were to fail as a result of Year 2000 problems or the Company were to experience delays implementing Year 2000 compliant software products, the Company could incur substantial costs and disruption of its business, which would potentially have a material adverse effect on the Company's business and results of operations. The Company in its ordinary course of business tests and evaluates its own software products. The Company believes that its software products are generally Year 2000 compliant, meaning that the use or occurrence of dates on or after January 1, 2000 will not materially affect the performance of the Company's software products with respect to four digit date dependent data or the ability of such products to correctly create, store, process and output information related to such date data. However, there can be no assurance that the Company will not subsequently learn that certain of its software products do not contain all necessary software routines and codes necessary for the accurate calculation, display, storage and manipulation of data involving dates. In addition, in certain circumstances, the Company has warranted that the use or occurrence of dates on or after January 1, 2000 will not adversely affect the performance of the Company's products with respect to four digit date dependent data or the ability to create, store, process and output information related to such data. If any of the Company's licensees experience Year 2000 problems, such licensees could assert claims for damages against the Company. The Company's license agreements in most cases limit liability to prevent unlimited exposure from such claims. The Company has identified a separate budget of approximately $1.7 million for investigating and remedying issues related to Year 2000 compliance involving software or systems used in its internal operations. However, the Company has only recently initiated its Year 2000 compliance program and there can be no assurances that the program will be completed on a timely basis and within the current projected budget. To the extent the costs of implementing the program greatly exceed the budget, such costs will have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the purchasing patterns of customers and potential customers may be affected by Year 2000 issues. Many companies are expending significant resources to correct their current software systems 37 for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those offered by the Company, which could have an adverse effect on the Company's business, results of operations and financial condition. DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT The Company's success depends on proprietary technology. To protect its proprietary rights, the Company relies primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures, contractual provisions contained in its license agreements and technical measures. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which provide only limited protection. The Company holds one United States patent and several pending applications. There can be no assurance that any other patents covering the Company's inventions will issue or that any patent, if issued, will provide sufficiently broad protection or will prove enforceable in actions against alleged infringers. The Company's products are generally licensed to end-users on a "right-to-use" basis pursuant to a license that restricts the use of the products for the customer's internal business purposes. The Company also relies on "shrink wrap" licenses, which include a notice informing the end-user that, by opening the product packaging, the end-user agrees to be bound by the Company's license agreement printed on the package. Despite such precautions, it may be possible for unauthorized third parties to copy aspects of its current or future products or to obtain and use information that the Company regards as proprietary. In particular, the Company has licensed the source code of its products to certain customers under certain circumstances and for restricted uses. The Company has also entered source code escrow agreements with a number of its customers that generally require release of source code to the customer in the event of the Company's bankruptcy, liquidation or otherwise ceasing to conduct business. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar or superior technology. Policing unauthorized use of the Company's software is difficult, and while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States, and "shrink-wrap" licenses may be wholly or partially unenforceable under the laws of certain jurisdictions. Litigation may be necessary in the future to enforce the Company's intellectual property rights, to protect the Company's trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of resources and management attention and could have a material adverse effect on the Company's business, results of operations and financial condition. The Company is not aware that any of its software product offerings infringes the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company with respect to its current or future products. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect on the Company's business, results of operations and financial condition. PRODUCT LIABILITY The Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in the Company's license agreements may not be effective under the laws of 38 certain jurisdictions. Although the Company has not experienced any product liability claims to date, the sale and support of products by the Company may entail the risk of such claims, and there can be no assurance that the Company will not be subject to such claims in the future. A product liability claim brought against the Company could have a material adverse effect on the Company's business, operating results and financial condition. ANTITAKEOVER PROTECTIONS The Company is authorized to issue 5,000,000 shares of undesignated Preferred Stock, of which 440,000 shares have been designated Series A Preferred, none of which is outstanding; of which 440,000 shares have been designated Series A-1 Preferred, of which 220,000 shares were previously outstanding (including 60,000 shares of Series A-1 Preferred which were issued upon partial exercise of the Series A-1 Warrant) and converted into 12,769,908 shares of Common Stock in February 1998 and of which 80,000 shares remain issuable upon exercise of the Series A-1 Warrant; and of which 50,000 shares have been designated Series B Preferred, of which 50,000 shares are outstanding. Subject to the prior consent of the holders of the Series A-1 Preferred and the Series B Preferred, the Board of Directors has the authority to issue additional shares of Preferred Stock in one or more series and to fix the price, rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting a series or the designation of such series, without any further vote or action by the Company's stockholders. To date, the Company has used its ability to designate and issue new series of Preferred Stock in transactions intended to raise additional capital for the Company. The ability to issue additional shares of Preferred Stock, however, also provides desirable flexibility in connection with possible acquisitions and other corporate purposes but could also have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders and may adversely affect the market price of the Common Stock and the voting and other rights of the holders of Common Stock. The issuance of Preferred Stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, including the loss of voting control to others. In particular, certain rights, preferences and privileges of the Series A-1 Preferred and Series B Preferred could have the effect of preventing or discouraging potential bids to acquire the Company unless the terms of such acquisition are approved by such stockholders. See "--Risks Associated with Convertible Preferred Stock Financings." Certain provisions of the Company's Amended and Restated Certificate of Incorporation and Bylaws eliminate the right of stockholders to act by written consent without a meeting and specify certain procedures for nominating directors and submitting proposals for consideration at stockholder meetings. The Board of Directors of the Company is divided into three classes, with each class standing for election once every three years. Such provisions are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and to discourage certain types of transactions which may involve an actual or threatened change of control of the Company. Such provisions are designed to reduce the vulnerability of the Company to an unsolicited acquisition proposal and, accordingly, could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. Such provisions are also intended to discourage certain tactics that may be used in proxy fights but could, however, have the effect of discouraging others from making tender offers for the Company's shares and, consequently, may also inhibit fluctuations in the market price of the Company's Common Stock that could result from actual or rumored takeover attempts. These provisions may also have the effect of preventing changes in the management of the Company. In addition, the Company has adopted a Rights Agreement (the "Rights Agreement"), commonly referred to as a "poison pill," which could also discourage potential acquirors. The Company is subject to Section 203 of the Delaware General Corporation Law (the "Antitakeover Law"), which regulates corporate acquisitions. The Antitakeover Law prevents certain Delaware corporations, including those whose securities are listed for trading on the Nasdaq National Market, from 39 engaging, under certain circumstances, in a "business combination" with any "interested stockholder" for three years following the date that such stockholder became an interested stockholder. For purposes of the Antitakeover Law, a "business combination" includes, among other things, a merger or consolidation involving the Company and the interested stockholder and the sale of more than 10% of the Company's assets. In general, the Antitakeover Law defines an "interested stockholder" as any entity or person beneficially owning 15% or more of the outstanding voting stock of the Company and any entity or person affiliated with or controlling or controlled by such entity or person. A Delaware corporation may "opt out" of the Antitakeover Law with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from amendments approved by the holders of at least a majority of the company's outstanding voting shares. The Company has not "opted out" of the provisions of the Antitakeover Law. STOCK PRICE VOLATILITY The market price of the Company's Common Stock has in the past been highly volatile and is expected to continue to be subject to significant price and volume fluctuations in the future based on a number of factors, including market uncertainty about the Company's financial condition or business prospects or the prospects for the RDBMS market in general; shortfalls in the revenues or results of operations of the Company or its principal competitors from revenues or results of operations expected by securities analysts; announcements of new products by the Company or its competitors; quarterly fluctuations in the Company's financial results or the results of other software companies, including those of direct competitors of the Company; changes in analysts' estimates of the Company's financial performance, the financial performance of competitors, or the financial performance of software companies in general; the introduction of new products or product enhancements by the Company or its competitors; general conditions in the software industry; changes in prices for the Company's products or competitors' products; changes in revenue growth rates for the Company, its competitors or the RDBMS market in general; changes in the mix of revenues attributable to domestic and international sales; and seasonal trends in technology purchases and other general economic conditions. In addition, the stock market may from time to time experience extreme price and volume fluctuations, which particularly affect the market for the securities of many technology companies and which have often been unrelated to the operating performance of the specific companies. There can be no assurance that the market price of the Company's Common Stock will not experience significant fluctuations in the future. See "--Uncertain Impact of Restatement of Financial Statements," "--Need for Additional Financing; Customer Financing," and "--Fluctuations in Quarterly Results; Seasonality." ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Subsequent to fiscal year end 1997, the Company began entering into forward foreign currency exchange contracts to hedge no more than 80% of anticipated net income of foreign subsidiaries of up to one year maximum in the future. From an accounting perspective, these hedges are considered to be speculative. The Company's outstanding forward exchange contracts used to hedge anticipated net income are marked to market. This hedging activity did not have a material impact on the Company's results of operations. 40 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ACTIONS ARISING UNDER FEDERAL AND STATE SECURITIES LAWS Beginning on or about April 16, 1997, a total of 24 complaints alleging violations of the federal securities laws were filed against the Company, Ernst & Young LLP ("Ernst & Young"), the Company's former independent accountants and certain Named Individual Defendants (listed below) in the United States District Court for the Northern District of California. Of the 24 complaints, 22 have been filed as purported class actions by individuals who allege that they are individual investors who purchased the Company's Common Stock during the purported class period; the alleged class periods in the different complaints vary according to the date on which the complaints were filed. The complaints name some or all of the following current and former officers and directors of the Company as defendants: Phillip E. White, Howard H. Graham, David H. Stanley, Ronald M. Alvarez, Karen Blasing, D. Kenneth Coulter, Ira H. Dorf, Stephen E. Hill, Myron (Mike) Saranga, Steven R. Sommer, MichaelR. Stonebraker and Edwin C. Winder (the "Named Individual Defendants"). On August 20, 1997, the District Court entered an order consolidating all of the separately-filed class actions pending at that time, designating the action as IN RE INFORMIX CORPORATION SECURITIES LITIGATION, and designating as "related cases" all cases brought under the federal securities laws then pending and any that may be filed after that date. A consolidated amended class action complaint was filed on April 6, 1998. As required by the provisions of the Exchange Act, as amended by the Private Securities Litigation Reform Act of 1995, the Court has designated the lead plaintiffs in the federal action and has appointed lead plaintiffs' counsel. Two related non-class actions, TEACHERS' RETIREMENT SYSTEM OF LOUISIANA ET AL. V. INFORMIX CORPORATION ET AL. and STATE BOARD OF ADMINISTRATION OF FLORIDA V. INFORMIX CORPORATION ET AL., have been consolidated with IN RE INFORMIX CORPORATION SECURITIES LITIGATION for all pre-trial purposes. The LOUISANA and FLORIDA plaintiffs request a total of $10.173 million in damages. An amended consolidated complaint was filed by the LOUISIANA and FLORIDA plaintiffs on April 3, 1998. The existing federal court complaints allege that the Company, the Named Individual Defendants and Ernst & Young issued false or misleading statements in the Company's filings with the Commission, press releases, statements to securities analysts and other public statements regarding its financial results and business prospects. The alleged class period in the amended consolidated complaints extends from February 7, 1995 through November 18, 1997. In particular, plaintiffs allege that defendants overstated the Company's revenue and earnings during the time period by improperly recognizing revenue from sales of software licenses. All of these actions allege that the defendants' false and misleading statements violate section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. The complaints further allege that the Named Individual Defendants sold the Company's Common Stock while in the possession of adverse material non-public information. The existing complaints, in general, do not specify the amount of damages that plaintiffs seek. On or about March 19, 1998, a complaint alleging securities and common law fraud and misrepresentation causes of action was filed in the United States District Court for the Northern District of California. This complaint, captioned WILLIAMS V. INFORMIX CORPORATION, ET AL., alleges both individual and class claims on behalf of former securities holders of Illustra Information Technologies, Inc. ("Illustra") who exchanged their Illustra securities for securities of the Company in February 1996 in connection with the Company's February 1996 acquisition of Illustra pursuant to an Agreement and Plan of Reorganization (the "Illustra Agreement"). This matter has been consolidated with IN RE INFORMIX CORPORATION SECURITIES LITIGATION. The WILLIAMS complaint, like the previously-filed federal complaints, alleges that the Company and certain of its former officers and/or directors, and its independent auditors, issued false or misleading statements regarding the Company's reported financial results and business prospects. The WILLIAMS plaintiffs have moved to be severed from the consolidated class action; the defendants and lead plaintiffs in the consolidated class actions have opposed the motion. A hearing on this motion is set for June 19, 1998. 41 Defendants are scheduled to file responses to the complaints on June 16, 1998. Three purported securities class actions containing allegations similar to the federal actions were filed in the Superior Court of the State of California, County of San Mateo between May 19, 1997 and August 25, 1997. Those actions, captioned RILEY V INFORMIX CORPORATION ET AL., DAYANI V. INFORMIX CORPORATION ET AL., AND GOLDSTEIN V. WHITE ET AL., contained factual allegations nearly identical to the allegations set forth in the federal court complaints. The Superior Court has consolidated these actions into the DAYANI case, and has appointed lead plaintiffs' counsel. By stipulation, plaintiffs filed a consolidated, amended complaint on December 23, 1997. The state court consolidated, amended complaint names as defendants the Company, Ernst & Young and the Named Individual Defendants. The claims in the consolidated amended state complaint arise under California securities, fraud and unfair business practices statutes. The state court consolidated, amended complaint alleges that the defendants issued false financial statements which were not prepared in conformity with Generally Accepted Accounting Principles for fiscal years 1996, 1995 and 1994, materially overstating the Company's revenue. Plaintiffs allege that defendants recorded as revenue approximately $300 million from software license sales which should not have been recorded because INTER ALIA, revenue was recognized on sales to resellers before end-users were identified; revenue was recognized in circumstances where customers had rights of return or cancellation; and the Company recognized revenue from barter transactions in which the Company allegedly exchanged software licenses for products that had no value to the Company. Plaintiffs further allege that while the Company's stock price was artificially inflated due to the overstatement of revenue, the defendants used the Company's stock to make corporate acquisitions, and the Named Individual Defendants sold stock while in possession of material adverse non-public information. The alleged class period in the state court consolidated, amended complaint is February 7, 1995 through November 18, 1997. Defendants filed demurrers to the state court consolidated, amended complaint on February 13, 1998. Defendants base their demurrers to the consolidated, amended complaint in this action on the grounds that certain of the individual defendants made no actionable statements during the alleged class period, the Company did not engage in any market activity during the alleged class period, the plaintiffs did not actually rely upon any of the alleged false and misleading statements, the California statutory unfair business practices claims are inapplicable to securities transactions, and the consolidated, amended complaint fails to plead the alleged fraud with sufficient particularity. On May 28, 1998 the Court announced its tentative order overruling defendants' demurrers with respect to the state statutory securities causes of action against the Company, and sustaining the demurrers on all other grounds. In addition, the Court tentatively granted permission for plaintiffs to amend certain elements of their complaint. The Court will issue a formal written order ruling on the demurrers in the next few weeks. The Company is not in a position to state its factual defenses to plaintiffs' claims until the Court issues its formal order, plaintiffs file their second amended consolidated complaint, and the Court rules upon any subsequent demurrers. DERIVATIVE ACTIONS The Company also was named as a nominal defendant in eight derivative actions, purportedly brought on its behalf, filed in the Superior Court of the State of California, County of San Mateo. The cases have been consolidated under the caption IN RE INFORMIX CORPORATION DERIVATIVE LITIGATION, and the Court has appointed lead plaintiff's counsel in the consolidated actions. The consolidated, amended complaint alleges that, based upon the facts alleged in the federal and state securities class actions, defendants breached their fiduciary duties to the Company, engaged in abuses of their control of the Company, were unjustly enriched by their sales of the Company's Common Stock, engaged in insider trading in violation of California law and published false financial information in violation of California law. The consolidated, amended complaint names as defendants Ernst & Young, the Named Individual Defendants and Albert F. Knorp, Jr., James L. Koch, Thomas A. McDonnell and Cyril J. Yansouni, non-management directors of the 42 Company. The plaintiff seeks unspecified damages on the Company's behalf from each of the defendants. On December 18, 1997, plaintiffs served their first amended, consolidated derivative complaint. The Company, on whose purported behalf the derivative action is asserted, and the individual defendants and Ernst & Young, against whom the claims are alleged, filed demurrers to the consolidated derivative complaint on February 6, 1998. The Company's demurrer in this action is based upon the fact that the plaintiff did not make demand on the Company's board prior to filing the derivative action as is required by governing Delaware law. In addition, the Company's current and former officers and directors have brought demurrers to the consolidated, amended complaint on the grounds that plaintiffs fail to plead any of their claims with sufficient particularity and that certain of plaintiffs' California statutory causes of action do not apply, by their terms, to officers and directors of a Delaware corporation. On April 1, 1998, the Court sustained Informix's demurrer based upon the plaintiffs' failure to make demand. The Court has given plaintiffs leave to amend their complaint. On May 28, 1998, the Court issued a tentative order sustaining defendants' demurrers. The Court indicated that it will permit plaintiffs to amend certain elements of their complaint. The Court will issue a formal order reflecting its ruling in the next few weeks. Defendants will not file an answer in this action unless the Court overrules any subsequent demurrers. Further, the defendants are not in a position to state their factual defenses to the plaintiffs' claims until the Court issues its formal order, the plaintiffs serve their second consolidated amended complaint, and the Court rules upon any future demurrers. Because of the nature of derivative litigation, any recovery in the action would inure to the benefit of the Company. ILLUSTRA ESCROW In January 1997, pursuant to the Illustra Agreement, Informix made a claim to certain shares held in an escrow fund. In response, the Illustra shareholders have claimed that the Company wrongfully caused these shares to be retained in escrow, thereby harming the Illustra shareholders. The Illustra securities holders have filed a demand for arbitration with the private arbitration service agreed upon by the parties to the Illustra Agreement; however, at present, no litigation or arbitration proceedings have been commenced with respect to the Illustra escrow. In March 1998, a complaint was filed against the Company on behalf of former Illustra shareholders alleging securities and common law fraud and misrepresentation causes of actions. See "--Actions Arising Under Federal and State Securities Laws." SECURITIES AND EXCHANGE COMMISSION INVESTIGATION In addition, in July 1997, the Commission issued a formal order of investigation of the Company and certain unidentified individuals associated with the Company with respect to non-specified accounting matters, financial reports, other public disclosures and trading activity in the Company's securities. The Company is cooperating with the investigation and is providing all information subpoenaed by the Commission. The Company is in the process of producing documents and a number of current and former officers have been contacted to appear before the Commission. GENERAL The pending federal and state securities actions are in the early stages of discovery. Consequently, at this time it is not reasonably possible to estimate the damages, or the range of damages, that the Company might incur in connection with such actions. However, the uncertainty associated with substantial unresolved litigation can be expected to have an adverse impact on the Company's business. In particular, such litigation could impair the Company's relationships with existing customers and its ability to obtain new customers. Defending such litigation will likely result in a diversion of management's time and attention away from business operations, which could have a material adverse effect on the Company's results of operations. Such litigation may also have the effect of discouraging potential acquirors from bidding for the Company or reduce the consideration such acquirors would otherwise be willing to pay in connection with an acquisition. 43 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION On May 13, 1998, the Company announced that it had dismissed Ernst & Young LLP as its independent accountants and that it was in the process of engaging KPMG Peat Marwick LLP as its independent accountants. See Item 6 below. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NO. EXHIBIT - ------------- ----------------------------------------------------------------------------------------------------- 27.1 Financial Data Schedule.
(b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K on February 27, 1998 related to the sale of 60,000 shares of Series A-1 Preferred Stock. The Company filed a Current Report on Form 8-K on May 28, 1998 related to the dismissal of Ernst & Young LLP as its independent accountants and the subsequent engagement of KPMG Peat Marwick LLP as the Company's independent accountants. The Company's Report on Form 8-K was subsequently amended to include the written statement of Ernst & Young LLP. 44 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INFORMIX CORPORATION By: /s/ JEAN-YVES DEXMIER ----------------------------------------- Jean-Yves Dexmier EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL Dated: June 8, 1998 AND ACCOUNTING OFFICER)
45 EXHIBIT INDEX
EXHIBIT NO. EXHIBIT TITLE - ------------- ----------------------------------------------------------------------------------------------------- 27.1 Financial Data Schedule.
46 EX-27.1 2 EXHIBIT 27.1
5 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 149,208 16,282 128,892 0 0 334,646 266,048 179,135 543,193 426,399 0 0 1 1,674 88,029 543,193 83,431 160,999 9,833 47,258 109,871 0 1,882 3,711 1,900 1,811 0 0 0 1,811 0.00 0.00
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