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Informix hit with 5th class action

A lawsuit alleges that Informix misrepresented the company's growth potential and reported inflated and deceptive earnings.

Informix Software (IFMX) has been slapped with yet another shareholder lawsuit as the company's financial disclosures come under increased scrutiny.

The suit, filed in the U.S. District Court for Northern California, is the fifth such class-action lawsuit brought against the company since April 14. The latest suit has been filed on behalf of stock purchasers during the period of April 16, 1996 through March 31, 1997.

On April 1, the company shocked investors and Wall Street analysts by announcing that its first-quarter financial statement would reflect sharply lower revenues because of sluggish sales of its core database software line, adding that it would take a "substantial" loss.

The latest suit alleges that Informix and certain of its officers and directors violated federal securities laws by misrepresenting the company's earnings growth potential. The suit also alleges that the company reported inflated and deceptive earnings because of improperly recognized revenue.

An Informix representative said the company has no comment on any of the suits.

Informix is expected to announce its first-quarter results on either Wednesday or Thursday, a company representative said. A final decision on the exact day will be announced later today.

Informix, the world's second-largest database software vendor, said on April 1 that it would generate revenues in the range of $130 million to $145 million for the quarter ending March 30. Before the announcement, Wall Street had expected the company to post revenues upward of $240 million and earnings of 12 cents a share, according to First Call.

The company attributed the expected decline in part to a slowdown in sales in all of its worldwide market regions, particularly in Europe.

Informix has been scrutinized in recent weeks as a result of the earnings shortfall. Wall Street analysts digging into the company's 1996 10-K statement now warn that the company may take longer than expected to get back on track.

Two specific issues raised in the 10-K--how the company sells its products through its channel partners and how certain revenue is derived through bartering of goods and services--have led several analysts to issue warnings to their investors and have raised questions about the true demand for the company's products.

"The 10-K disclosures stunned a lot of people," said Andrew Roskill, an analyst at Smith Barney. "They disclosed that 50 percent of their license revenue came through indirect sales of products to OEMs and VARs [Value Added Resellers], and up to half of the products may not have been sold through to end users. Oracle ran into this problem in the early 1990s and they wound up in trouble. They basically stuffed the channel," Roskill said.

He explained that the over-supplied channel may be one reason why the company's sales in the first quarter appeared to evaporate, as OEMs and VARs did not place new orders with Informix in the quarter and instead struggled to sell the products they had already bought.

Also in the 10-K, Informix said roughly five percent of its revenue came from the exchange of goods and services with other vendors. The so-called barter practice is common, said Roskill, but the percentage of Informix's revenues derived from barters is high.

"You have to wonder if that is real revenue or if people are taking Informix products in exchange for selling their own product," he said, adding that the trend does not bode well for future revenue growth.

The company's first-quarter earnings announcement may give investors more insight into the company's troubles. "Nobody really know what to expect on the bottom line for the first quarter," Roskill said. "Everybody is flying blind, and to be honest, I don't think this quarter matters. What matters is how long it will take Informix to return to profitability, how they will do that."