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Technology Stocks : IFMX - Investment Discussion -- Ignore unavailable to you. Want to Upgrade?

To: Marq Spencer who wrote (10181)	4/7/1998 8:05:00 AM
From: RDH	Read Replies (1) \| Respond to of 14631

>>As an aside, this is the most CYA 10K that I've read in a long time. Brian please explain what "CYA" means. Thanks, RDH.

To: Marq Spencer who wrote (10181)	4/7/1998 10:06:00 AM
From: Mark Finger	Read Replies (1) \| Respond to of 14631

>>1. As expected, the restructuring charge of 100+ million is still >>not completely spent - $26.6MM remains. This is expected to be spent >>by the end of Q2 (per the 10K). This means that by taken a larger >>than needed charge during the Q2/Q3 announcements, they're showing >>artificially lower operating costs in subsequent quarters. >>Therefore, I would expect that Q1 operating costs will be >>artificially lower by about $15MM and Q2 by about $12MM. The above statement is based on a misunderstanding of some accounting terms. Further, not all the "expenses" will actually consume cash, but some actually will be helpful. Here are some details. First, "operating expenses" are the ongoing costs of producing and selling products. As such, they should not include the one time costs associated with laying off people, closing offices, and discontinuing products that are part of a major restructuring. These are broken out separately because otherwise they would skew the numbers normally used to predict future sales and profit. Some of these are part of normal operations and would normally be part of operating expenses, but the amount is usually relatively small. What Informix had to do in 1997 was not "normal" by any criteria, and so was accounted for separately. Second, when layoffs occur or offices closed, an estimate must be made of the amount of expense that should occur. The estimates will tend to overstate rather than understate the true expenses involved. So not all of the remaining "expenses" may actually occur. Third, a major portion of the "expenses" is the exercise of vested stock options by the former employees. Although there may be an accounting "expense" associated with the exercise--the amount of value realized by the employee above the option price--this is not an actual cost to the company (does not consume cash). In fact, the company will actually realize a gain in cash due to the exercise of the option. Further, the "expense" may be lower than expected because the stock price at exercise was not as high as anticipated, so some "expense" may simply disappear. For example, it was reported that Ken Coulter (VP of sales somewhere) exercised 300,000 shares of stock at $7.50 when the price was around $8.25. That would have a "wages" expense of $225,000 ($.75 per share). This is not a cash cost to the company, but actually is an expense to reduce future income taxes (by the way, that is why nearly all stock options now are "non-qualified" rather than "incentive"). Further, Informix got $2.25M in cash. Finally, assume that the price used to estimate the possible expenses may have been $10 instead; that means that another $525K of expenses "disappeared". Fourth, some of the "expenses" due to stock options will simply disappear, because the stock will not be high enough to make the holder want to exercise (this happened to some of my options) before the options expire. In this case, the price earlier this year was significantly below what it was last summer, so there may have been potential "expense" that simply disappeared. In my case, I held a portion of my options (at $8.375) on a gamble that IFMX would recover sooner and I would get a good return. As it turns out, I should have sold last summer when it was above ten for a few days; instead they expired during Q1. I am including the above as some explanations of the amount you quote. I do not know the actual amounts and I am not an accountant, so some of my calculations may be in error (in particular, the "estimate" numbers). I just wanted to show some alternate explanations. Mark P.S. The "expenses" involved with vested options may be why the numbers for restructuring are often considerably above the normally estimated numbers for salaries as applied to vacation, severance and retraining. Could we get an explanation from a "real" accountant on this area?