<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 11, 2000
INFORMIX CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 0-15325 94-3011736
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(STATE OR OTHER JURISDICTION OF (COMMISSION FILE NUMBER) (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4100 BOHANNON DRIVE, MENLO PARK, CALIFORNIA 94025
- -------------------------------------------------------------------------------
(Address of principal executive offices of Registrant, including zip code)
(650) 926-6300
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(Registrant's telephone number, including area code)
<PAGE>
ITEM 5. OTHER EVENTS.
In July 1997, the Securities and Exchange Commission ("SEC") issued
a formal order of private investigation of Informix Corporation (the
"Company") and certain unidentified other entities and persons with respect
to non-specified accounting matters, public disclosures and trading activity
in the Company's securities. During the course of the investigation, the
Company learned that the investigation concerned the events leading to the
restatement of the Company's financial statements, including fiscal years
1994, 1995 and 1996, that was publicly announced in November, 1997.
The Company and the SEC have entered into a settlement of the
investigation as to the Company. Pursuant to the settlement, the Company
consented to the entry by the SEC of an Order Instituting Public
Administrative Proceedings Pursuant to Section 8A of the Securities Act of
1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings,
and Imposing a Cease and Desist Order (the "Order"). The Cease and Desist
Order was issued by the SEC on January 11, 2000. Pursuant to the Order, the
Company neither admitted nor denied the findings, except as to jurisdiction,
contained in the Order.
The Order directs the Company to cease and desist from committing or
causing any violation, and any future violation, of Section 17(a) of the
Securities Act of 1933 ("Securities Act"), and Sections 10(b), 13(a) and
13(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules
10b-5, 12b-20 13a-1, 13a-13 and 13b2-1 under the Exchange Act. Pursuant to
the Order, the Company also is required to cooperate in the SEC's continuing
investigation of other entities and persons. As a consequence of the issuance
of the Order, the Company is statutorily disqualified, pursuant to Section
27A(G)(1)(A)(ii) of the Securities Act and Section 21E(b)(1)(A)(ii) of the
Exchange Act, for a period of three years from the date of the issuance of
the Order, from relying on the protections of the "safe harbor" for
forward-looking statements set forth in Section 27(A)(c) of the Securities
Act and Section 21(E)(c) of the Exchange Act.
The Order prohibits the Company from violating and causing any
violation of the anti-fraud provisions of the federal securities laws, for
example by making materially false and misleading statements concerning its
financial performance. The Order also prohibits the Company from violating or
causing any violation of the provisions of the federal securities laws
requiring the Company to: (1) file accurate quarterly and annual reports with
the SEC; (2) maintain accurate accounting books and records; and (3) maintain
adequate internal accounting controls. Pursuant to the Order, the Company is
also required to cooperate in the SEC's continuing investigation of other
entities and persons. In the event that the Company violates the Order, the
Company could be subject to substantial monetary penalties.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) EXHIBITS
99.1 Order instituting public administrative proceedings
pursuant to Section 8A of the Securities Act of 1933 and
Section 21C of the Securities Exchange Act of 1934, making
findings, and imposing a cease-and-desist order, dated
January 11, 2000.
99.2 Press Release dated January 11, 2000.
<PAGE>
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.
Dated: January 18, 2000
INFORMIX CORPORATION
(Registrant)
/s/ Gary Lloyd
-------------------------------
Gary Lloyd
VICE PRESIDENT, GENERAL COUNSEL
<PAGE>
EXHIBIT 99.1
UNITED STATES OF AMERICA
BEFORE THE
SECURITIES AND EXCHANGE COMMISSION
SECURITIES ACT OF 1933
RELEASE NO. 7788/January 11, 2000
SECURITIES EXCHANGE ACT OF 1934
RELEASE NO. 42326/January 11, 2000
ACCOUNTING AND AUDITING ENFORCEMENT
RELEASE NO. 1215/January 11, 2000
ADMINISTRATIVE PROCEEDING
FILE NO. 3-10130
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: ORDER INSTITUTING PUBLIC ADMINISTRATIVE
IN THE MATTER OF : PROCEEDINGS PURSUANT TO SECTION 8A OF
: THE SECURITIES ACT OF 1933 AND SECTION 21C
INFORMIX CORPORATION, : OF THE SECURITIES EXCHANGE ACT OF 1934,
: MAKING FINDINGS, AND IMPOSING A CEASE-
RESPONDENT. : AND-DESIST ORDER
:
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I.
The Securities and Exchange Commission ("Commission") deems it
appropriate to institute public administrative proceedings pursuant to
section 8A of the Securities Act of 1933 ("Securities Act") and section 21C
of the Securities Exchange Act of 1934 ("Exchange Act") against Informix
Corporation ("Respondent" or "Company").
II.
In anticipation of the institution of these administrative
proceedings, Respondent has submitted an Offer of Settlement ("Offer"), which
the Commission has determined to accept. Solely for the purpose of these
proceedings and any other proceedings brought by or on behalf of the
Commission, or in which the Commission is a party, and without admitting or
denying the findings, except as to the Commission's jurisdiction over it and
over the subject matter of the proceedings, which are admitted, Respondent
consents to the entry of this Order Instituting Public Administrative
Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section
21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a
Cease-and-Desist Order ("Order").
<PAGE>
Accordingly, it is ordered that the proceedings pursuant to section
8A of the Securities Act and section 21C of the Exchange Act be, and hereby
are, instituted.
III.
FINDINGS
On the basis of this Order and Respondent's Offer, the Commission
makes the findings set forth below.(1)
A. RESPONDENT
Informix Corporation is a multinational database software company
with its principal executive offices located in Menlo Park, California. Its
common stock is registered pursuant to section 12(g) of the Exchange Act and
is traded on NASDAQ. The Company's fiscal year ends on December 31.
B. INTRODUCTION
In November 1997, the Company restated its financial statements for
fiscal years 1994 through 1996 and the fiscal quarter ended March 30, 1997.
During the period covered by the restatements, former employees of the
Company, including salespersons, members of management and others engaged in
a variety of fraudulent and other practices that inflated annual and
quarterly revenues and earnings in violation of generally accepted accounting
principles ("GAAP"). These practices included the following:
(1) backdating license sale agreements;
(2) entering into side agreements granting rights to refunds and
other concessions to customers;
(3) recognizing revenue on transactions with reseller
customers(2) that were not creditworthy;
(4) recognizing amounts due under software maintenance
agreements as software license revenues; and
(5) recognizing revenue on disputed claims against customers.
- ------------------------
(1) The findings herein are made pursuant to the Offer and are not
binding on any other person or entity in this or any other proceeding.
(2) A reseller is a software distributor or an entity that includes
software with products or services that the entity sells. SEE Software
Revenue Recognition, Statement of Position 91-1, Section .03 (American Inst.
of Certified Pub. Accountants 1991). A reseller differs from an end-user in
that an end-user is the party that ultimately uses the software in an
application. ID.
-2-
<PAGE>
In numerous instances, revenue from software license purchase
commitments by resellers was recognized improperly because the earnings
process had not been completed due to the Company's obligations under side
agreements to perform all, or substantially all, of the reselling effort. No
disclosure of the fraudulent or other improper practices appeared in the
Company's filings with the Commission. The filings also omitted or
misrepresented information concerning the extent to which revenues were
derived from nonmonetary exchanges and the extent to which revenues were
derived from transactions with resellers that had not yet resold software
licenses to end-users.
During 1997, after the Company filed its 1996 Form 10-K, former
members of management, aware of evidence of material accounting
irregularities, took actions to prevent the Company from restating its
previously issued financial statements. They limited the scope of an internal
investigation of 1995 and 1996 transactions with European resellers,
concealed a side agreement with an Asian reseller given to obtain rescission
of an earlier side agreement, and concealed other side agreements with a
European reseller. In late July 1997, a former member of the Company's
corporate finance staff learned of certain side agreements and informed the
Company's auditors.(3) The Company's new management then determined that its
1996 financial statements would need to be restated. On August 7, 1997, the
Company publicly announced the need to restate those financial statements.
In the restatement process, the Company and its auditors identified
$114 million of accounting irregularities in 1995 and 1996 involving more
than a hundred transactions, mostly with resellers. Because the
irregularities relating to reseller purchase commitments were so pervasive,
the Company and its auditors determined that all such transactions for the
three-year period ended in 1996 should be restated to defer revenue
recognition until the resellers resold the licenses to end-users. After
making this determination, the Company no longer attempted specifically to
identify irregularities involving resellers, although additional
irregularities subsequently were discovered. In November 1997, the Company
filed restated annual financial statements for fiscal years 1994, 1995, and
1996 and restated quarterly financial statements for each interim quarter of
1996 and the first quarter of 1997. The restatements had a material effect on
previously reported annual operating results:
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During the time of the conduct described in this Order, the accounting
principles applicable to software revenue recognition were set forth in
Software Revenue Recognition, Statement of Position 91-1, SUPRA. In October
1997, that Statement of Position was superseded by Software Revenue
Recognition, Statement of Position 97-2 (Amer. Inst. of Certified Pub.
Accountants 1997), which became effective for transactions emerged into for
fiscal years beginning after December 15, 1997. The software revenue
recognition accounting principles discussed in this Order are those set forth
in Software Revenue Recognition, Statement of Position 91-1, SUPRA.
(3) After the Company restated its financial statements, it replaced its
auditors. All references to the auditors in this Order are to the former
auditors.
-3-
<PAGE>
<TABLE>
<CAPTION>
NET REVENUES NET INCOME
(MILLIONS) (MILLIONS)
ORIGINALLY AS % ORIGINALLY AS %
REPORTED RESTATED OVERSTATED REPORTED RESTATED OVERSTATED
---------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1996 $939.3 $727.8 +29% $97.8 $(73.6) +233%
1995(4) $714.2 $632.8 +13% $97.6 $38.6 +153%
1994 $470.1 $452.0 +4% $61.9 $48.3 +28%
</TABLE>
The restatements also significantly affected the Company's
previously reported quarterly revenues and earnings for 1996 and the first
quarter of 1997:
<TABLE>
<CAPTION>
NET REVENUES NET INCOME
(MILLIONS) (MILLIONS)
ORIGINALLY AS % ORIGINALLY AS %
REPORTED RESTATED MISSTATED REPORTED RESTATED MISSTATED
---------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Q1'96 $204.0 $164.6 +24% $15.9 $(15.4) +203%
Q2'96 $226.3 $159.3 +42% $21.6 $(34.1) +163%
Q3'96 $238.2 $187.1 +27% $26.2 $(17.1) +253%
Q4'96 $270.8 $216.8 +25% $34.1 $(7.0) +587%
Q1'97 $133.7 $149.2 -10% $(140.1) $(141.4) -1%
</TABLE>
As a result of the conduct of former management and others, the
Company filed annual and quarterly reports and other filings with the
Commission that contained materially false and misleading financial
statements and other information. Also as a result of the conduct, the
Company's books, records, and accounts were falsified and thus did not
accurately and fairly reflect the Company's transactions and dispositions of
assets. Furthermore, the Company failed to devise and maintain a system of
internal accounting controls sufficient to provide reasonable assurances that
transactions were recorded as necessary to permit preparation of financial
statements in conformity with GAAP.
C. FACTS
Prior to the quarter ended March 30, 1997, the Company regularly
characterized itself in press releases as the fastest growing company in the
database software industry. In reality, its apparent growth in revenues and
earnings largely was the result of the use of a multitude of fraudulent and
other improper practices. As a result of these practices by former managers
and employees, the Company's filings with the Commission were materially
false and misleading.
- ------------------------
(4) The 1995 "Originally Reported" amounts have been adjusted to reflect
a 1996 pooling-of-interest business combination, which is also reflected in
the 1995 "As Restated" amounts.
-4-
<PAGE>
1. USE OF FRAUDULENT PRACTICES TO INFLATE REVENUES AND
EARNINGS
The fraudulent conduct described herein was driven by some former
managers' perceived need to meet or exceed the Company's internal revenue and
earnings goals, which were based, in part, on financial analysts'
expectations. As it became increasingly difficult to achieve these goals,
some former managers and other employees increased their reliance on
fraudulent and other practices to inflate reported revenues and earnings.
(A) BACKDATING AGREEMENTS
As the end of each quarter neared, Company sales personnel routinely
rushed to conclude as many transactions as possible to meet revenue and
earnings goals for that quarter. In numerous instances, however, they were
unable to complete negotiations and obtain signed license agreements from
customers prior to quarter-end, as required for revenue recognition under
GAAP.(5) Notwithstanding the Company's written policy that revenue on license
agreements should not be recognized unless the agreements were signed and
dated before quarter-end, there was an accepted practice of signing license
agreements after quarter-end and then backdating them to appear as if they
had been executed prior to quarter-end. By engaging in this conduct, former
management and others fraudulently inflated quarterly and annual revenues and
earnings.
The Company had inadequate controls for determining whether, or
ensuring that, software license agreements had been negotiated and signed by
both parties in the quarter in which revenue was recognized. The dating of
signatures on agreements was essentially controlled by salespersons, who were
under constant pressure to meet quarterly sales goals. The Company had no
requirement for signed agreements to be submitted at or before quarter-end,
and the Company regularly accepted agreements submitted several days
thereafter for revenue recognition. In at least one instance, the Company
recognized revenue on an agreement that was not signed until approximately
one month after the end of the quarter.
(B) USE OF SIDE AGREEMENTS
Former sales personnel, managers, and others at the Company used a
variety of written and oral side agreements with customers as a means to
inflate revenues and earnings. The terms of the side agreements varied and
included provisions
(1) allowing resellers to return and to receive a refund or
credit for unsold licenses;
(2) committing the Company to use its own sales force to find
customers for resellers;
(3) offering to assign future end-user orders to resellers;
- ------------------------
(5) Under GAAP, revenue on a software license agreement to be documented
by a written contract should not be recognized until the contract is signed.
Software Revenue Recognition, Statement of Position 91-1, SUPRA Section .50.
-5-
<PAGE>
(4) extending payment dates beyond twelve months;(6)
(5) committing the Company to purchase computer hardware or
services from customers under terms that effectively
refunded all, or a substantial portion, of the license fees
paid by the customer;
(6) diverting the Company's own future service revenues to
customers as a means of refunding their license fees; and
(7) paying fictitious consulting or other fees to customers to
be repaid to the Company as license fees.
The terms of these side agreements should have prevented the Company from
recognizing revenue on the transactions under GAAP.(7)
Former salespersons and managers often entered into side agreements
in order to "park" software licenses with resellers and thereby accelerate
revenue recognition.(8) These former salespersons and managers sometimes
entered into such agreements because they were unable to complete
transactions with identified end-users by the end of the period in which they
wished to recognize revenue. On other occasions, they entered into such
agreements because they needed additional revenue but had not yet found
end-users prepared to purchase software licenses.
One of the most notable examples of the use of side agreements
occurred with a European reseller some Company employees referred to as a
revenue "bank" and a "virtual warehouse". The reseller was ineffective at
selling the Company's software. For 1995, the reseller entered into purchase
commitments for $9.5 million of software licenses but resold only $2.8
million of those licenses in 1995. For the first half of 1996, the reseller
entered into purchase commitments for $5.9 million of licenses but, during
1996, resold only $6.2 million of licenses purchased in 1995 and
- ------------------------
(6) Under GAAP, a fee is presumed not to be fixed if the payment is not
due until more than 12 months after delivery. ID. Section .57. As discussed
INFRA at note 7, one of the requirements for revenue recognition under GAAP
is that the fee is fixed.
(7) Under GAAP, a software vendor such as the Company may recognize
revenue from the sale of software licenses if the software has been
delivered, the vendor has no continuing obligations under the sale or license
agreement, and the fee is fixed and irrevocable and collectibility is
probable. ID. Sections .32-.34, .57-.58. In some instances, the side
agreements were entered into contemporaneously with the formal agreements to
induce customers to enter into the formal agreements and, if not concealed,
would have prevented the Company from initially recognizing revenue. In other
instances, the side agreements were entered into after the parties had
signed, and the Company had recognized revenue on, the formal agreements and,
if not concealed, would have required the Company to adjust its financial
statements to reduce revenues and earnings.
(8) The Company entered into what was known as "pool-of-funds"
agreements with resellers. Under these agreements, a reseller made an
irrevocable commitment to purchase a certain amount of software licenses at a
discount to the Company's list price for resale to end-users and other
customers. When the reseller obtained an order, customer information usually
was provided to the Company, and the Company then delivered the software to
the reseller's customer. The Company thus, in most cases, was able to gauge
the reseller's progress or lack of progress in reselling its software.
-6-
<PAGE>
none of the licenses purchased in the first two quarters of 1996.
Notwithstanding the reseller's inability to sell a substantial amount of the
licenses it committed to purchase, to inflate the Company's 1995 and 1996
revenues and earnings, former Company employees repeatedly induced the
reseller to agree to quarter-end purchase commitments by entering into a
variety of side agreements with the reseller.
In the third quarter of 1995, the Company recorded two purchase
commitments from the "bank" reseller. To induce the reseller to enter into
one of these commitments, former Company employees offered to assign the
reseller a transaction that the Company's own sales force was negotiating
with an end-user. Company employees also offered to assign the same end-user
transaction to two other resellers to induce them to make purchase
commitments. As a result, the Company recognized revenue three times from
purchase commitments based on offers to assign this one end-user transaction.
At the end of the fourth quarter of 1995, the "bank" reseller had $5
million of unsold licenses it had committed to purchase and was reluctant to
enter into an additional commitment. The reseller, which was also a computer
equipment distributor, agreed to an additional $2.5 million commitment only
after Company employees agreed to a $2 million purchase of computer hardware,
including obsolete equipment that Company employees understood the reseller
otherwise would have to write-off.
In the first half of 1996, former Company employees induced the
"bank" reseller to purchase $5.9 million in additional software licenses by
assigning several large transactions negotiated by the Company's own sales
staff to reduce the reseller's outstanding purchase commitment by $929,000.
To enable the reseller further to reduce the remaining balance of its
purchase commitment, these former employees also agreed to find customers
whose license purchases would be applied against the reseller's commitment.
By the end of the third quarter of 1996, certain former employees believed
that the reseller's outstanding, unsold commitment would cause the Company's
auditors to object to recognizing revenue from additional commitments to
purchase software licenses for resale. Under pressure to find additional
revenue to meet third quarter sales goals, former Company employees asked the
reseller to purchase $3.9 million of software licenses for its internal use.
The reseller agreed to this proposal only on the condition that the Company
pay back the license fees through a software maintenance outsourcing
agreement. A former Company employee entered into a side agreement providing
for the reseller to receive $3.9 million of profits from such maintenance
services. In addition, the side agreement provided for the Company to
purchase up to $3.9 million of computer hardware from the reseller.(9)
Side agreements with other resellers also permitted the Company
improperly to inflate revenues and earnings. For example, in both the third
and fourth quarters of 1996, sales personnel entered into side agreements
that allowed resellers to cancel software license purchase commitments. One
such side agreement allowed a reseller to cancel a third quarter commitment
of $6 million, which represented more than 14% of the Company's pretax income
for that quarter. Another side
- ------------------------
(9) After the filing of the Company's Form 10-K for 1996, the Company
allowed the reseller to convert the internal-use license, which the reseller
neither wanted nor needed, into an additional reseller purchase commitment.
-7-
<PAGE>
agreement allowed a different reseller to cancel a fourth quarter commitment
of $6.4 million, which represented more than 11% of the Company's pretax
income for that quarter. The terms of these and other side agreements made it
improper for the Company to recognize revenue on the underlying software
license purchase commitments.
(C) REVENUE FROM MAINTENANCE CONTRACTS RECORDED
AS LICENSE REVENUE
Under GAAP, revenue from a services agreement such as a software
maintenance contract must be recognized ratably over the periods covered by
the services agreement, whereas, if all other conditions for revenue
recognition have been satisfied, revenue from a license sale agreement can be
recognized upon delivery of the software.(10) Company employees recorded
service agreements as license sales, thereby improperly accelerating revenue
recognition. For example, in the fourth quarter of 1996, former employees
intentionally recorded the renewals of three software maintenance contracts
totaling $11.2 million as license sales and thus inflated reported pretax
income for the quarter by 25%.
(D) REVENUE RECOGNIZED WITHOUT PERSUASIVE
EVIDENCE OF AN ARRANGEMENT AND WITHOUT
ADEQUATE ASSESSMENT OF CREDITWORTHINESS
Under GAAP, revenue cannot be recognized "until persuasive evidence
of the agreement [with the customer] exists and an assessment of the
customer's creditworthiness has been made".(11) Former managers and others at
the Company violated both of these requirements. For example, in the second
and third quarters of 1996, a former sales manager pressured a member of the
European finance staff to recognize revenue on transactions with purported
end-user customers when no contracts had been signed with, and no formal
acceptance had been received from, the end-users. In connection with
transactions with newly established or undercapitalized resellers, former
sales managers also pressured the European finance staff to disregard the
Company's policy for assessing customer creditworthiness. As a result of
these revenue recognition practices, the Company improperly recognized
revenue in 1996 of at least $3.3 million in the first quarter, $9.1 million
in the second quarter, and $8.2 million in the third quarter.(12)
- ------------------------
(10) SEE Software Revenue Recognition, Statement of Position 91-1,
SUPRA, Sections .32, .41.
(11) ID. Sections .32, .50, .58, .78.
(12) None of the reseller or end-user customers made any payments prior
to the end of 1996. Prior to the filing of the Company's 1996 Form 10-K in
March 1997, former members of management learned that the lack of collections
was due to the absence of signed contracts, customer liquidity problems, or,
for resellers, the inability to pay the amount due until the software
licenses were resold. Former management, however, allowed only a small
increase in the bad debt reserves.
-8-
<PAGE>
(E) RECOGNITION OF REVENUE ON DISPUTED CLAIMS
AGAINST CUSTOMERS
On two occasions, the Company recognized revenue based on its
assertion that customers used more copies of software than allowed under
their license agreements. If true, the customers would owe additional license
fees to the Company. Under GAAP, such claims constitute gain contingencies
that should not be recorded as income until realized.(13)
In the fourth quarter of 1995, the Company invoiced a customer for
$5.4 million for excessive license use at full list price. At the time,
former members of the Company's European finance staff believed the claim
would be settled at a lesser amount reflecting a discount from list price. In
addition, the customer was told that the amount due could be applied against
a future software license purchase then under negotiation. The customer did
not agree to settle the claim until the first quarter of 1996. The Company
nevertheless improperly recognized the full amount of the claim as 1995
revenue, which increased fourth quarter 1995 pretax income by more than 13%.
After the claim was settled in the first quarter of 1996 for $3.6 million,
the $1.8 million excess amount should have been written off in that quarter.
Former managers instead mischaracterized the excess amount as an unbilled
maintenance fee receivable, which was written off over the last three
quarters of 1996.(14)
In the second quarter of 1996, the Company asserted a claim against
another customer based on alleged excessive license use. Although the
customer disputed the claim, former managers caused the Company to record
$2.2 million in revenue based on this disputed claim, which improperly
increased quarterly pretax income by 6%. The Company settled the claim for
$250,000 in the first quarter of 1997 and wrote off the excess amount against
first quarter 1997 operating results.
(F) FAILURE TO DELIVER USABLE SOFTWARE
Under GAAP, revenue from a software sale should not be recognized
until a copy of the software has been delivered to the customer.(15) At the
end of the fourth quarter of 1996, the Company recorded a $9.2 million
software sale to a computer hardware manufacturer ("OEM") that intended to
resell the software pre-installed on computer hardware. The Company, however,
had failed to deliver the required software code to the OEM prior to
year-end. In January 1997, the Company delivered a "beta" version of the
software code that did not function on the OEM's
- ------------------------
(13) SEE Accounting for Contingencies, Statement of Financial
Accounting Standards No. 5, PARA 17(a) (Financial Accounting Standards Bd.
1975).
(14) The write-off was spread over three quarters to minimize the impact
on the second quarter's earnings.
(15) SEE Software Revenue Recognition, Statement of Position 91-1,
SUPRA, Section 32.
-9-
<PAGE>
hardware.(16) The Company did not complete delivery of usable software code
to the OEM until more than six months after the end of 1996. The Company's
improper revenue recognition from this transaction alone increased its fourth
quarter 1996 pre-tax income by an approximately 13%.
2. OTHER IMPROPER PRACTICES THAT CAUSED THE COMPANY'S
REVENUES AND EARNINGS TO BE INFLATED
In addition to the fraudulent practices described above, former
employees of the Company engaged in a variety of other improper practices to
meet or exceed internal financial goals, resulting in the overstatement of
revenues and earnings.
(A) IMPROPER REVENUE RECOGNITION ON SUPERSTORE
TRANSACTIONS
In 1996, former management decided to open demonstration centers,
known as Superstores, located at various sites worldwide. A Superstore would
provide a location for the Company and an OEM to function as a team to sell a
joint hardware-software solution to a potential customer. Equipping the
Superstores required purchases of significant amounts of computer hardware.
During 1996, the Company employed a sales strategy whereby various OEMs were
approached with the concept of forming a "partnership" in which the Company
would buy computer hardware from the OEMs to be placed in the Superstores and
then used in joint sales efforts by the Company and the OEM "partner". In
return for the Company's hardware purchase commitments, the OEMs were asked
to enter into software license purchase commitments of similar or greater
magnitude. To increase the Company's revenues and earnings further, the OEMs
also were asked to commit to purchase licenses for the demonstration software
installed on the Superstore computer hardware owned by the Company.(17)
Internally, some Company personnel referred to the transactions with
Superstore OEM partners, and similar transactions involving mutual purchases,
as "swaps".(18) As a policy, however, the Company always structured the
software sales and hardware purchases as separate transactions with cash
exchanged. The timing of payments often was structured so that the Company's
payments
- ------------------------
(16) A "beta" version of software is a preliminary version of software
that is distributed at no charge to potential customers for initial testing
to identify problems that must be corrected prior to making a final version
of the software available for sale.
(17) In one instance, in desperate need of additional profits for the
third quarter of 1996, the Company negotiated a software sale and hardware
purchase with an OEM and agreed to purchase its own software as part of the
cost of the hardware it was buying.
(18) A variety of factors indicated that these mutual purchases were
nonmonetary exchanges. The level of hardware purchases should have been based
on the amount of equipment needed for the Superstores but instead varied
based on the size of the software license purchase commitment the customer
was willing to make. Former salespersons at times offered to increase the
amount of computer hardware purchases to induce large software license
purchase commitments from OEMs, and OEMs sometimes made counterproposals to
buy less software and to sell less hardware. In addition, most salespersons
involved were paid commissions at a "barter" rate, which was significantly
lower than normal commission rates for software sales.
-10-
<PAGE>
could provide cash flow for the OEMs at about the same time their software
license fee payments came due.
The OEMs' software purchase commitments were based on the premise
that the Company would incur the future costs of setting up and equipping the
Superstores, which then would be used to sell the software that the OEM
partners had committed to purchase. Many of the OEM partners lacked a sales
force familiar with Company products and expected the Company's sales force
to have a substantial involvement in the reselling effort. The expense of the
Company's involvement in reselling the software for the OEM partners was
indeterminable but substantial based on the Superstore program costs alone.
To encourage its sales force to assist the OEMs, in late 1996, the Company
began to offer higher commission rates if a sale was closed through an OEM
partner rather than directly by the Company. In the first quarter of 1997,
former management gave the sales force performance goals to obtain end-user
orders to be applied against the OEM partners' outstanding commitments.
Under GAAP, if "other vendor obligations remaining after delivery
are significant, revenue should not be recognized, because the earnings
process is not substantially completed."(19) The Company, however, recognized
revenue at the time the OEM partners agreed to the purchase commitments
notwithstanding that the Company was obligated to pay the costs and expenses
of establishing and operating the Superstores and that the Company's sales
force was to perform all, or a significant portion of, the future reselling
efforts.
(B) REVENUE RECOGNIZED FROM LICENSES SOLD TO
RESELLERS UNDER EXTENDED PAYMENT TERMS
As previously described, the ability to recognize revenue for a
software license sale under GAAP depends, in part, on whether the related fee
is fixed, and a fee is presumed not to be fixed if it is due more than twelve
months after delivery of the software.(20) GAAP thus requires restricting the
initial revenue recognition from a software license sale to only those
payments due within twelve months, with deferral of revenue recognition for
payments due beyond twelve months.
The Company routinely recognized revenue on reseller software
license purchase commitments that included payment terms that extended beyond
twelve months. To do so, the Company used third-party financing to accelerate
cash receipts to within twelve months of the sale.(21) The issue underlying
the twelve-month rule with respect to resellers is that, due to product
obsolescence or lack of end-user demand, resellers might make payment of
outstanding amounts conditional on receiving refunds or other concessions,
such as rights to additional products, and, to
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(19) Software Revenue Recognition, Statement of Position 91-1, SUPRA,
Section .68.
(20) SEE SUPRA note 7.
(21) GAAP did not provide an exception to the twelve-month rule if
third-party financing arrangements were used to accelerate a company's
receipt of cash.
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preserve the business relationship with the customer, the vendor might grant
such concessions.(22) The use of third-party financing, although accelerating
cash receipts, did not address the issue underlying the twelve-month rule. As
a result, the Company's use of third-party financing arrangements as a basis
to accelerate revenue recognition related to license payments not due within
twelve months was improper.
3. MISREPRESENTATIONS AND OMISSIONS IN THE COMPANY'S
FILINGS
As a result of the foregoing fraudulent and other improper practices
by former management and others, the Company's financial statements for 1995
and 1996 and the interim periods were misstated. In addition, former
management caused Company filings to omit certain information, and to
misrepresent other information, concerning nonmonetary exchanges and the
significant amount of software sold to resellers but not yet resold to
end-users. The Company's periodic reports and other Commission filings that
included financial information for 1995 and 1996 consequently were materially
false and misleading.
During 1996, the Company engaged in numerous nonmonetary exchanges
that included the Superstore transactions discussed above as well as other
software-for-hardware exchanges and software-for-software exchanges.(23)
These transactions materially increased the Company's reported revenues and
earnings. For the first quarter of 1996, nonmonetary exchanges represented
approximately 9% of reported revenues and 66% of reported pretax income; for
the second quarter of 1996, nonmonetary exchanges represented approximately
15% of reported revenues and 93% of reported pretax income; for the third
quarter of 1996, nonmonetary exchanges represented approximately 26% of
reported revenues and more than 100% of reported pretax income; and, for the
fourth quarter of 1996, nonmonetary exchanges represented approximately 12%
of reported revenues and 58% of reported pretax income. For the year,
according to the Company's 1996 amended Form 10-K, the nonmonetary exchanges
accounted for $170 million, or more than 18% of 1996 revenues. The net profit
from these nonmonetary exchanges represented more than 100% of the originally
reported 1996 pretax income.
Despite the impact of the nonmonetary exchanges on operating
results, prior to the March 1997 filing of the 1996 Form 10-K, former
management decided that no disclosures concerning the nonmonetary exchanges
would be included in the Company's filings with the Commission. In connection
with the 1996 Form 10-K, management decided to make some disclosure of the
nonmonetary exchanges. The resulting disclosure, however, was misleading
because it concerned only those nonmonetary exchanges in which the software
license sale recorded by the Company was within 25% of the dollar value of
the Company's corresponding purchase
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(22) In addition, where third-party financing was used, the vendor might
grant concessions to prevent defaults to the third-party financing company
and thus preserve the vendor's relationship with the financing company.
(23) As with the Superstore transactions, the other
software-for-hardware transactions and the software-for-software transactions
were structured to appear to be separate transactions. The transactions were,
in substance, nonmonetary exchanges and thus subject to the disclosure
requirements of Accounting Principles Board Opinion No. 29, Accounting for
Nonmonetary Transactions (Accounting Principles Bd. 1973).
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commitment.(24) Using this formula, the Company disclosed only that, in 1996,
it had sold approximately $55 million of software licenses to certain vendors
where the Company concurrently committed to acquire goods or services of
approximately the same dollar amount. In fact, during 1996, the Company
entered into nonmonetary exchanges by which it sold $170 million of licenses
and purchased $130 million of goods and services.
As a result of the conduct of former management, the Company also
omitted information concerning the extent to which the Company's revenues
were based on software license sales to resellers that had not resold the
licenses to end-users. By 1996, the Company was unable to meet its revenue
and earnings goals from sales directly to end-users. During 1996, former
management, therefore, turned to obtaining large software license purchase
commitments from OEMs and other resellers. The total amount of unsold
licenses from reseller commitments grew throughout 1996 primarily because
many resellers were unable to resell the software licenses. The level of the
resellers' unsold licenses was material information relating to the nature of
current reported revenue and earnings growth. In addition, the growth in the
level of unsold licenses was a known trend that reasonably could be expected
to have a material adverse impact on future revenue and earnings growth.
Notwithstanding the importance of the information, former management decided
that the Company would not disclose in its quarterly filings information
regarding the level of licenses not resold. At year-end, former management
decided that the Company would disclose in its Form 10-K that half of the
Company's 1996 license sales were to resellers and that almost half of those
licenses had not been resold to end-users, i.e. approximately a quarter of
the licenses recorded as sold had not been resold to end-users. Former
management, however, failed to cause the Company to disclose that, in many
instances, the Company was obligated to provide substantial assistance to the
resellers to find end-users to purchase the resellers' unsold licenses.
4. FORMER MANAGEMENT'S EFFORTS TO AVOID A RESTATEMENT
On March 31, 1997, the Company filed its Form 10-K for 1996, which,
for the first time, included disclosures concerning the nonmonetary exchanges
and the amount of license purchases by resellers that had not been resold to
end-users.(25) The next day, the Company unexpectedly announced that revenues
for the first quarter of 1997 would be $59 million to $74 million below
revenues for the first quarter of 1996.(26) The revenue shortfall resulted
largely from a significant decline in license purchase commitments from
resellers during the first quarter. On the day of the announcement, the
Company's stock price and market capitalization decreased 34.5%. The stock
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(24) The 25% formula was derived from accounting literature that does
not address the issue of disclosure. SEE Nonmonetary Transactions: Magnitude
of Boot and the Exceptions to the Use of Fair Value, Emerging Issues Task
Force Abstracts Issue No. 86-29 (Emerging Issues Task Force 1988). In any
event, that literature does not apply to the type of transactions involved
here. ID., Accounting for Nonmonetary Transactions, Accounting Principles
Board Opinion No. 29, PARA 21 (Accounting Principles Bd. 1973).
(25) SEE SUPRA Part III(C)(3).
(26) The Company announced its first quarter 1997 results several weeks
earlier than it otherwise would have due to the large revenue shortfall.
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price decreased from 15 1/8 to 9 29/32, and the market capitalization dropped
from $2.3 billion to $1.5 billion.
About two weeks after the announcement of the first quarter revenue
shortfall, the Company's auditors learned of potential accounting
irregularities relating to certain 1995 and 1996 transactions with European
customers. The auditors learned this information from customer correspondence
brought to their attention by a former Company employee. The auditors
informed former management and recommended that the Company conduct an
internal investigation of transactions with approximately twenty customers to
determine whether revenue recognition on those transactions had conformed
with GAAP. The Company retained a law firm and began an investigation.
Former management, aware that the results of the investigation could
cause a restatement, limited the scope of the investigation by decreasing the
number of customers whose transactions would be investigated to five and by
focusing the investigation on the legal enforceability of the formal license
agreements notwithstanding side agreements and other circumstances. Following
the investigation, the law firm rendered findings that the formal agreements
were legally binding on the customers. The firm did not address whether the
side agreements, or other circumstances surrounding the formal agreements,
affected revenue recognition under GAAP. The auditors reviewed the findings
and made determinations on whether revenue recognition on the transactions
had conformed with GAAP. They concluded that revenue on two transactions had
been recognized incorrectly(27) and that a bad debt reserve for a 1996
transaction should be recorded in 1997. No adjustments were proposed for two
of the transactions, one of which was the third quarter 1996 transaction with
the "bank" reseller for the sale of an internal use license.(28) Former
management and the auditors decided that it was not necessary to restate
financial statements for prior years.
In late June 1997, the auditors learned of a side agreement to a
transaction with an Asian reseller for which the Company had recognized $4.7
million of revenue in the fourth quarter 1996.(29) The Asian reseller had
requested that payment terms for the software licenses be extended to late
1998, approximately two years after the date of its software license purchase
agreement. The former Company salesperson insisted that the purchase
agreement had to reflect a final payment date of November 1997, i.e. within
the twelve-month period required by GAAP and the Company's policy for revenue
recognition, but provided a side agreement allowing payment to be extended
until November 1998.
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(27) The auditors determined that revenue on one transaction should not
have been recognized in 1995 and that revenue on the other transaction should
not have been recognized in 1996.
(28) SEE SUPRA Part III(C)(1)(b).
(29) The side agreement allowed the customer to delay the final payment
to November 1998, extending the date for the customer to pay the balance
beyond 12 months. These terms made revenue recognition on the transaction in
1996 improper under GAAP and the Company's revenue recognition policies.
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Upon learning of this side agreement from a former member of the
Company's corporate finance staff, the auditors told former management that
the 1996 financial statements needed to be restated unless the side agreement
could be rescinded without giving concessions or consideration to the Asian
reseller. A former member of senior management met with the Asian reseller
and negotiated a rescission of the side agreement. During these negotiations,
the former senior manager agreed that the Company would purchase
approximately $3 million of unspecified goods and services from the Asian
customer, the same amount that the customer owed the Company under its
software license purchase commitment.(30) The auditors subsequently were told
that the side agreement had been rescinded, but the existence of the related
purchase agreement was concealed from them. The auditors dropped their
insistence on the restatement.(31)
At about the time when management was discussing obtaining a
rescission of the side agreement with the Asian reseller, a former member of
senior management learned of several side letters relating to 1996
transactions with a European reseller. Aware that these side agreements would
cause a restatement, the former senior manager failed to inform the Company's
finance staff or auditors immediately.
Shortly thereafter, however, a member of the Company's Asian finance
staff informed the auditors of additional side agreements with other Asian
resellers that that employee had discovered. In response, the auditors
expanded their audit procedures with respect to the Company's previously
released 1996 financial statements. While the auditors were performing these
procedures, a former member of the Company's corporate finance staff learned
of, and alerted the auditors to, the side agreements with the European
reseller. That former finance staff member also learned, and informed the
auditors, that, notwithstanding the admonition against giving concessions or
consideration, the Company had agreed to purchase approximately $3 million of
unspecified goods and services from the Asian reseller. Based on the material
effect of the side agreements on revenue recognition, the Company, by then
under new management, decided to restate its 1996 financial statements. On
August 7, 1997, the Company announced the need for a restatement.
5. THE COMPANY'S RESTATEMENTS
By early September 1997, the Company and its auditors had identified
more than $100 million of irregularities recorded in its previously issued
financial statements. Many of the irregularities related to transactions with
resellers. Determination of the full extent of the irregularities that had
occurred proved difficult due to the lack of reliable documents caused by the
practice of back-dating and due to the large number of salespersons
knowledgeable about past
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(30) In fact, the Asian customer agreed to rescind the side letter only
if the Company agreed to make purchases from the Asian customer equal to the
remaining balance of approximately $3 million still owed to the Company. The
Company executive involved accepted this offer without any substantive
discussion as to the specific goods or services to be purchased.
(31) As discussed SUPRA at note 29, the terms of the side agreement made
it improper for the Company to recognize revenue on the transaction in 1996.
The rescission of the side agreement in 1997 could not remedy the improper
revenue recognition in 1996.
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<PAGE>
transactions who no longer were employed by the Company. Given the frequent
use in 1995 and 1996 of side agreements with resellers and the Company's
substantial involvement in the reselling effort, the Company and its auditors
determined that the Company should not have recognized revenue from reseller
software license purchase commitments until the software licenses were
resold. As a consequence, the Company restated its financial statements for
fiscal years 1994 though 1996 and the first quarter of fiscal year 1997.(32)
On November 18, 1997, the Company filed an amendment to its 1996
Form 10-K restating its financial statements for fiscal years 1994 through
1996. On November 19, 1997, the Company filed its Forms 10-Q for the second
and third quarters of 1997 and an amendment to its Form 10-Q for the first
quarter of 1997 restating its financial statements for each interim quarter
of 1996 and the first quarter of 1997. The effect of the restatements on the
Company's previously filed financial statements is summarized SUPRA at Part
III(B).
6. FALSE AND MISLEADING BOOKS, RECORDS, AND ACCOUNTS AND
INSUFFICIENT INTERNAL ACCOUNTING CONTROLS
As a result of the fraudulent and other improper practices discussed
SUPRA at Part III(B), (C)(1), (2), the Company's books, records, and accounts
were false and misleading. In addition, the Company failed to maintain a
system of internal accounting controls that was sufficient to enable it to
prepare financial statements in conformity with GAAP. The lack of sufficient
internal accounting controls contributed directly to the fraud and resulted
primarily from an organizational structure under which many key finance
personnel responsible for revenue recognition reported directly to sales
management rather than to senior finance executives. As a result of this
organizational structure, finance personnel came under pressure from former
sales management to recognize revenue from transactions that did not conform
with GAAP, such as backdated transactions, transactions with customers whose
creditworthiness had not been investigated, and transactions for future
maintenance services that were treated as license transactions.
D. LEGAL CONCLUSIONS
The type of conduct that occurred in this matter strikes at the
heart of the financial reporting system established by the federal securities
laws. As we have emphasized in the past, "[c]omplete and accurate financial
reporting by public companies is of paramount importance to the disclosure
system underlying the stability and efficient operation of our capital
markets. Investors need reliable financial information when making investment
decisions."(33) To achieve the objective of providing investors with complete
and accurate financial information, it is essential that public companies
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(32) GAAP generally requires the consistent application of accounting
principles for each period for which financial statements are presented. SEE
Accounting Changes, Accounting Principles Board Opinion No. 20, Section 15
(Accounting Principles Bd. 1971). As a result, regardless of whether
irregularities in 1994 and first quarter 1997 reseller transactions were
found, the 1994 and first quarter 1997 financial statements required
restatement.
(33) Request for Comment on Increasing the Level of Involvement of the
Independent Accountant with Interim Financial Information, Release Nos.
33-6837; 34-26929; 35-24907; IC-17016, 54 Fed. Reg. 27,023, at 27,024 (June
20, 1989).
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maintain accurate books, records, and accounts and establish and maintain
internal controls that serve to prevent and to detect fraudulent and other
improper conduct. In addition, management, through its own conduct and
through the policies and practices that it prescribes for others, must create
an environment in which only the highest standards of integrity will be
tolerated. Too often, accounting and disclosure rules are disregarded in
order that revenues and earnings can be inflated improperly to meet earnings
projections of analysts or others in the financial community or to achieve
some other objective. The financial information that an issuer discloses
simply should present completely and accurately the issuer's financial
condition for the relevant reporting period. Without this information,
investors are deprived of the opportunity to make informed investment
decisions.
In this matter, through former members of management and others, the
Company engaged in an accounting fraud that lasted more than two years and
resulted in the preparation of numerous materially false and misleading
financial statements and other disclosures that were included in filings with
the Commission and disseminated to investors.(34) As this fraud was being
uncovered, certain of these individuals engaged in further fraudulent conduct
that delayed the restatements of the Company's financial statements. In
addition, as a result of the conduct of former management and others, the
Company failed to maintain books, records, and accounts which, in reasonable
detail, accurately and fairly reflected its transactions and dispositions of
assets and failed to maintain a system of internal accounting controls
sufficient to permit the preparation of financial statements in conformity
with GAAP.
Based on the foregoing, the Commission concludes that the Company
violated section 17(a) of the Securities Act, sections 10(b), 13(a), and
13(b) of the Exchange Act, and Exchange Act rules 10b-5, 12b-20, 13a-1,
13a-13 and 13b2-1.
IV.
ORDER
Based on the foregoing, the Commission deems it appropriate and in
the public interest to accept the Company's Offer and to impose the sanctions
agreed to therein. In determining to accept the Offer, the Commission
considered remedial acts promptly undertaken by Respondent and cooperation
afforded the Commission staff. Accordingly,
IT IS HEREBY ORDERED that, pursuant to section 8A of Securities Act
and section 21C of the Exchange Act, Informix Corporation cease and desist
from committing or causing any violation, and any future violation, of
section 17(a) of the Securities Act, sections 10(b), 13(a), and 13(b) of the
Exchange Act, and Exchange Act rules 10b-5, 12b-20, 13a-1, 13a-13, and
13b2-1; and
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(34) In addition to annual and quarterly reports, the Company's filings
during the time period included registration statements filed pursuant to
Securities Act that incorporated materially false and misleading information
from the Company's annual and quarterly reports.
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IT IS FURTHER ORDERED that Informix Corporation comply with its
undertakings to do the following: A) upon reasonable request by the
Commission or its staff, and on reasonable notice and without
service of a subpoena, it will provide documents or other
information; B) at the request of the Commission or its staff, it
will appear and testify at any deposition, hearing, or trial in an
action or administrative proceeding arising out of the matters
described in the Order and, in connection with any such deposition,
hearing, trial, or administrative proceeding, Informix Corporation
hereby 1) appoints Gary Lloyd or any other senior officer of
Informix Corporation as Informix Corporation's agent to receive on
behalf of Informix Corporation any notice or subpoena for its
appearance and testimony, 2) agrees that any such notice or subpoena
for Informix Corporation's appearance and testimony may be served on
Gary Lloyd or any other senior officer of Informix Corporation by
mail, and 3) agrees that any such notice or subpoena for Informix
Corporation's appearance and testimony may be served and may request
testimony beyond the territorial limits imposed by rule 45 of the
Federal Rules of Civil Procedure, provided that the party requesting
the appearance and testimony reimburses Informix Corporation's
travel, lodging, and subsistence expenses at then prevailing U.S.
Government per diem rates; and C) at the request of the Commission
or its staff, it will take all reasonable actions to make its
officers, directors, employees, and agents available to testify at
any interview, investigative testimony, deposition, judicial
proceeding related to this Order, and any administrative proceeding
arising as a result of the Commission's investigation entitled In
the Matter of Informix Corporation.
By the Commission
Jonathan G. Katz
Secretary
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EXHIBIT 99.2
PRESS RELEASE
<PAGE>
EXHIBIT 99.2
INFORMIX ANNOUNCES SETTLEMENT
WITH SEC
MENLO PARK, CALIF.--JANUARY 11, 2000--Informix-Registered Trademark-
Corporation (NASDAQ: IFMX), the technology leader in the software
infrastructure for the i.Economy, today announced that it has reached a
settlement with the Securities and Exchange Commission relating to the SEC's
investigation of the events leading to the restatement of the Company's
financial statements including fiscal years 1994, 1995 and 1996. The
restatement was announced publicly in November 1997.
Pursuant to the settlement, Informix has consented to the entry of
an administrative cease and desist order, issued by the SEC, against future
violations of certain provisions of the federal securities laws. No monetary
fines or penalties were imposed against the Company. The Company will
continue to cooperate in the SEC's continuing investigation of other persons
and entities.
"The Company is gratified to have resolved the investigation," said
Robert J. Finocchio, Jr., the Chairman of the Company's Board of Directors.
"The resolution of the investigation and the recently-announced settlements
of the private securities litigation mean that the Company has closed the
book on the past and now can concentrate on the future."
Informix publicly announced final court approvals of the settlements of
the private securities litigation last month.
ABOUT INFORMIX
Based in Menlo Park, California, Informix Corporation specializes in
advanced information management technologies that help enterprises in the
i.Economy get to market quickly, generate new revenue, build a unique
strategic advantage, and solve their most complex business problems. Informix
offers customers a complete software infrastructure for the Web that delivers
highly scalable transaction processing, personalized content management,
integrated business intelligence, full multimedia capabilities and complete
e-commerce solutions. For more information, contact the sales office nearest
you or visit our Web site at www.informix.com.
EDITORIAL CONTACT
Gary Lloyd
Informix Corporation
(650) 926-6190
[email protected]
