<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-20059
----------------------------
ARDENT SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2818132
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 WASHINGTON STREET
WESTBORO, MASSACHUSETTS 01581-1021
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 366-3888
----------------------------
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 [ ]
The number of shares outstanding of each of the registrant's classes of
common stock as of:
DATE CLASS OUTSTANDING SHARES
June 30, 1998 Common stock, $.01 par value 14,726,649
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ARDENT SOFTWARE, INC.
FORM 10-Q/A
FOR THE QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NUMBERING IN
SEQUENTIAL NUMBERING SYSTEM
---------------------------
<S> <C>
PART I FINANCIAL INFORMATION
Introduction 3
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 (Restated) 4
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1998
and June 29, 1997 (Restated) 5
Condensed Consolidated Statement of Comprehensive Income
(Loss) for the three and six months ended June 30, 1998 and
June 29, 1997 (Restated) 6
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and June 29, 1997 (Restated) 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
<PAGE> 3
INTRODUCTION
On February 10, 1998, the Company merged with Unidata, Inc. ("Unidata") in a
transaction accounted for as a pooling of interests (see note 1). The statements
of operations and related statements of comprehensive income (loss) and cash
flows for the six months ended June 29, 1997 included in the Company's 10-Q
report filed on August 14, 1998 reflected the combination, for pooling purposes,
of the Company's accounts for the six months ended June 29, 1997 (its first
fiscal quarter of 1997) with Unidata's accounts for the six months ended
December 31, 1996 (Unidata's second fiscal quarter of 1997). The Company has
subsequently determined that, although such combination was in accordance with
generally accepted accounting principles, it is more appropriate (and also
equally in accordance with generally accepted accounting principles) that the
Company's fiscal quarters in 1997 be combined, for pooling purposes, with
Unidata's corresponding calendar, rather than fiscal quarters. The statements of
operations and related statement of comprehensive income (loss) and cash flows
included in this 10-Q/A reflect the change in combining quarters for 1997 for
pooling purposes (see note 7). Management's discussion and analysis of financial
condition and results of operations in this 10-Q/A has also been revised from
that filed with the initial 10-Q. In addition, the balance sheets as of December
31, 1997 and June 30, 1998 included in the Company's 10-Q report filed on August
14, 1998, reflected a charge against in-process research and development taken
by Unidata in December 1997. The Company has subsequently reduced the amount of
that charge and the balance sheets included in this 10-Q/A reflect this
reduction (see note 7).
These changes do not impact results for the three and six months ended June 30,
1998 as previously reported.
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PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ARDENT SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (RESTATED, SEE NOTE 7)
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, 1998 DEC. 31, 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $19,434 $24,155
Accounts receivable - net 20,345 21,161
Prepaid expenses, deferred income taxes and other
current assets 8,575 7,546
------- -------
Total current assets 48,354 52,862
------- -------
Property and equipment - net 6,345 15,916
------- -------
Long-term assets:
Intangible assets - net 16,495 17,245
Other long-term assets 10,166 8,020
------- -------
Total long-term assets 26,661 25,265
------- -------
Total assets $81,360 $94,043
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ -- $ 7,357
Accounts payable 5,082 4,995
Accrued expenses and other current liabilities 18,800 14,103
Accrued merger and restructuring costs 4,063 1,068
Deferred revenue 16,922 13,248
------- -------
Total current liabilities 44,867 40,771
------- -------
Long-term liabilities:
Non-current debt and other long-term liabilities 6,758 21,190
------- -------
Stockholders' equity 32,691 35,038
Cost of treasury stock (2,956) (2,956)
------- -------
Total stockholders' equity 29,735 32,082
------- -------
Total liabilities and stockholders' equity $81,360 $94,043
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
ARDENT SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 29, JUNE 30, JUNE 29,
1998 1997 1998 1997
-------- -------- -------- --------
(RESTATED, SEE (RESTATED, SEE
NOTE 7) NOTE 7)
<S> <C> <C> <C> <C>
Revenue:
Software $17,460 $17,242 $32,252 $32,193
Services and other 11,777 11,866 22,695 22,935
------- ------- ------- -------
Total revenue 29,237 29,108 54,947 55,128
------- ------- ------- -------
Costs and expenses:
Cost of software 1,884 2,215 3,555 4,315
Cost of services and other 5,597 6,889 10,952 13,263
Selling and marketing 9,924 10,067 19,213 19,354
Product development 4,543 4,692 8,783 8,674
General and administrative 2,578 3,060 5,206 6,016
Loss on disposal of subsidiary -- 602 -- 602
Merger costs -- -- 14,895 --
------- ------- ------- -------
Total costs and expenses 24,526 27,525 62,604 52,224
------- ------- ------- -------
Income (loss) from operations 4,711 1,583 (7,657) 2,904
Other income (expense) - net (76) (542) 78 (1,106)
------- ------- ------- -------
Income (loss) before provision for income taxes 4,635 1,041 (7,579) 1,798
Provision for (benefit from) income taxes 1,667 560 (1,190) 853
------- ------- ------- -------
Net income (loss) $ 2,968 $ 481 $(6,389) $ 945
======= ======= ======= =======
Basic income (loss) per common share $ 0.20 $ 0.04 $ (0.44) $ 0.07
======= ======= ======= =======
Basic shares used in calculation 14,618 13,570 14,412 13,558
======= ======= ======= =======
Diluted income (loss) per common share $ 0.18 $ 0.03 $ (0.44) $ 0.07
======= ======= ======= =======
Diluted shares used in calculation 16,753 14,213 14,412 14,159
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
5
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ARDENT SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 29, 1997 JUNE 30, 1998 JUNE 29, 1997
------------- ------------- ------------- -------------
(RESTATED, SEE (RESTATED, SEE
NOTE 7) NOTE 7)
<S> <C> <C> <C> <C>
Net income (loss) $2,968 $481 $(6,389) $ 945
Change in translation adjustment 249 266 158 154
------ ---- ------- ------
Comprehensive net income (loss) $3,217 $747 $(6,231) $1,099
====== ==== ======== ======
</TABLE>
See notes to condensed consolidated financial statements.
6
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ARDENT SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, JUNE 29,
1998 1997
-------- --------
(RESTATED, SEE
NOTE 7)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,389) $ 945
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Unidata activity for the period July 1 to December 31, 1996 694
Depreciation and amortization 3,260 5,135
Amortization of restricted stock awards 14 14
Loss on disposal of assets 1,023 251
Deferred income taxes (2,937) (574)
Increase (decrease)in cash from:
Current assets 1,910 6,084
Current liabilities 12,157 (270)
-------- -------
Cash provided by operating activities 9,038 12,279
-------- -------
Cash flows from investing activities:
Unidata activity for the period July 1 to December 31, 1996 (1,737)
Expenditures for property and equipment-net (946) (867)
Expenditures for capitalized software costs (1,669) (763)
Increase in cash surrender value of officers' life
insurance and deposits and other (1,815) (1,836)
-------- -------
Cash used in investing activities (4,430) (5,203)
-------- -------
Cash flows from financing activities:
Unidata activity for the period July 1 to December 31, 1996 7
Borrowings under line-of-credit arrangements 7,720 400
Repayments under line-of-credit arrangements (8,357) (3,062)
Sale of common stock 3,871 261
Repurchase of common stock -- --
Repayments under capital lease and other obligations (12,352) (291)
-------- -------
Cash used in financing activities (9,118) (2,685)
-------- -------
Effect of exchange rate changes on cash (211) (98)
-------- -------
Increase (decrease) in cash and equivalents (4,721) 4,293
Cash and equivalents, beginning of period 24,155 15,545
-------- -------
Cash and equivalents, end of period $ 19,434 $19,838
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements and should be read in conjunction with the audited financial
statements included in the Company's Annual Report to Stockholders for the
year ended December 31, 1997 and the Company's Registration Statement on
Form S-4, filed on December 31, 1997, related to the merger with Unidata,
Inc. ("Unidata").
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
interim periods presented. The operating results for the interim periods
presented are not necessarily indicative of the results which would be
expected for the full year.
On February 10, 1998 the Company merged with Unidata. The merger was
accounted for as a pooling-of-interests and, accordingly, the consolidated
financial statements have been restated to include the accounts of Unidata
for all fiscal periods prior to the merger. The Company's 1997 unaudited
quarterly results have been presented using the same calendar periods for
both the Company and Unidata.
2. Income (Loss) Per Common Share
Basic income (loss) per common share is computed using the weighted average
number of common shares outstanding during each period presented. Diluted
income (loss) per common share reflects the effect of the Company's
outstanding options (using the treasury stock method), except where such
items would be anti-dilutive.
3. Income Taxes
The Company provides for income taxes at the end of each interim period
based on the estimated effective tax rate for the full fiscal year, adjusted
for significant non-deductible costs. Cumulative adjustments to the tax
provision are recorded in the interim period in which a change in the
estimated annual effective rate is determined.
4. Litigation
The Company was a defendant, together with certain of its officers, in two
actions initially filed in October 1995 in the U.S. District Court in the
District of Massachusetts. The plaintiffs alleged in the Complaint that the
Company and certain of its officers, during July through October 1995, made
certain untrue statements and failed to disclose certain information
regarding the Company's prospective financial performance in violation of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder and that such statements and omissions artificially inflated the
market prices of the Company's stock. The Company denied the allegations.
Following completion of discovery, the defendants and their insurance
carrier reached, in September 1998, an agreement to settle the action. The
Company recorded its contribution to the agreed settlement in the third
quarter of 1998 which was not material to financial position or the results
of operations.
The Company is a defendant in two actions filed against Unidata prior to its
merger into the Company, one in May 1996 in the U.S. District Court for the
Western District of Washington and one in September 1996 in the U.S.
District Court for the District of Colorado. The plaintiff, a company
controlled by a former stockholder of Unidata and a distributor of its
products in certain parts of Asia, alleges in both suits the improper
distribution of certain Unidata products in the plaintiff's exclusive
territory and asserts damages of approximately $30,000,000 under claims for
fraud, breach of contract, unfair competition, RICO violations, and
trademark and copyright infringement, among other relief. Unidata denied the
allegations against it in its answers to the complaints and the proceedings
are currently in their early stages. Management of the Company believes that
the actions against it are without merit and plans to oppose them
vigorously.
The Company is a defendant in an action filed in July 1998 in the U.S.
District Court for the Southern District of Ohio. The plaintiff, with whom
the Company entered into a joint venture in 1996 to develop the Object
Studio product, alleges in its complaint that the Company is obligated to
support the joint venture in amounts up to $1,400,000 per year for an
aggregate present value liability of up to $8,000,000. The Company believes
the allegations are without merit and has denied its alleged liability and
filed certain counterclaims against the plaintiff seeking an amount in
excess of $9,000,000.
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5. Acquisition Costs
In connection with the merger with Unidata, the Company recorded a one-time
charge for merger costs of $14,895,000 in March, 1998. Included in these
costs were $3,910,000 for financial advisor, legal and accounting fees
related to the merger and $10,985,000 for costs associated with the
combining operations of the two companies including expenditures of
$6,209,000 for severance, benefits and other, $2,170,000 for closure of
facilities and $2,606,000 for the write-off of redundant assets. As of June
30, 1998, $3,183,000 remains unpaid, comprised principally of severance and
facility costs.
6. Comprehensive Income (Loss)
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which
requires the presentation of an additional primary financial statement
providing a prominent display of the components of items of other
comprehensive income or loss. The only item that the Company currently
records as other comprehensive income or loss is the change in cumulative
translation adjustment resulting from the changes in exchange rates and the
effect of those changes upon translation of the financial statements of the
Company's foreign operations. As of June 30, 1998 and December 31, 1997 the
cumulative translation adjustment was $3,000 and ($155,000), respectively.
7. Restatement
RECOMBINATION OF 1997
Following the merger with Unidata in February 1998, as described in Note 1,
the Company initially combined the two companies' results of operations for
the three and six months ended June 29, 1997 for the Company with the three
and six months ended December 31, 1996 for Unidata. This resulted in
Unidata's operating results for the six months ended December 31, 1997, a
net loss of $12,295,000, being recorded as an increase in accumulated
deficit as of December 31, 1997, rather than as a component of the 1997
statement of operations. Subsequent to the issuance of the Company's
quarterly report on Form 10-Q for the quarterly period ended June 30, 1998,
the Company's management determined that the results for 1997 are more
fairly presented including both companies' results on a calendar year basis.
As a result, the accompanying statement of operations for the three and six
months ended June 29, 1997 has been restated from amounts previously
reported to present the Company's 1997 unaudited results using the same
calendar periods for both the Company and Unidata. This combining
methodology records Unidata's operating results for the six months ended
December 31, 1996, a net loss of $549,000, as an increase in accumulated
deficit as of December 31, 1996.
The Company is also restating previously reported financial statements as of
June 30, 1998 to adjust the in-process research and development ("IPRD")
charge recorded in December 1997 related to the acquisition by Unidata of O2
Technologies ("O2"). The Securities and Exchange Commission ("SEC") issued
new guidance in September 1998 on its views regarding the methodologies used
to determine the value of acquired IPRD and intangible assets in a purchase
business combination. Generally accepted accounting principles require that
amounts allocated to IPRD be expensed upon consummation of an acquisition
accounted for as a purchase. As a result of this new guidance, the Company
has modified the methods used to value IPRD and other intangibles acquired
related to O2. The revised valuation is based on management's estimates of
the net cash flows associated with expected operations of O2 and gives
explicit consideration to the SEC's views on acquired IPRD as set forth in
its September 1998 letter to the American Institute of Certified Public
Accountants. As a result of the revised valuation study, the amount of
purchase price allocated to IPRD decreased from $9,669,000 to $3,040,000,
and the amount allocated to other intangible assets, including goodwill,
increased from $1,800,000 to $8,429,000.
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EFFECTS OF RESTATEMENTS
The effects of these changes on the statements of operations are as follows,
for the three and six months ended June 29, 1997:
<TABLE>
<CAPTION>
Three Months Ended June 29, Six Months Ended June 29,
1997 1997
----------------------------- --------------------------------
As Previously As Restated As Previously
Reported Reported As Restated
<S> <C> <C> <C> <C>
Total revenue $27,712 $29,108 $51,506 $55,128
Total costs and expenses 25,742 27,525 49,615 52,224
Income (loss) from operations 1,970 1,583 1,891 2,904
Net income (loss) $943 $481 $408 $945
Basic income (loss) per share $.07 $.04 $.03 $.07
Diluted income (loss) per share $.07 $.03 $.03 $.07
Shares for basic computation 13,570 13,570 13,713 13,558
Shares for diluted computation 14,251 14,213 14,211 14,159
</TABLE>
A summary of the effects of this change on consolidated financial position
are as follows, as of the date indicated:
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1998
----------------------------- --------------------------------
As Previously As Restated As Previously
Reported Reported As Restated
<S> <C> <C> <C> <C>
Intangible assets - net $10,616 $17,245 $ 9,866 $16,495
Total assets 87,414 94,043 74,731 81,360
Stockholders' equity 25,453 32,082 23,106 29,735
</TABLE>
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
ARDENT SOFTWARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
INTRODUCTION
RECOMBINATION OF 1997
Following the merger with Unidata in February 1998, as described in Note 1, the
Company initially combined the two companies' results of operations for the
three and six months ended June 29, 1997 for the Company with the three and six
months ended December 31, 1996 for Unidata. Subsequent to the issuance of the
Company's quarterly report on Form 10-Q for the quarterly period ended June 30,
1998, the Company's management determined that the results for 1997 are more
appropriately presented including both companies' results on a calendar year
basis. As a result, the accompanying statement of operations for the three and
six months ended June 29, 1997 have been restated from amounts previously
reported to present the Company's 1997 unaudited results using the same calendar
periods for both the Company and Unidata.
The Company is also restating previously reported financial statements as of
June 30, 1998 to adjust the in-process research and development ("IPRD") charge
recorded in December 1997 related to the acquisition by Unidata of O2
Technologies ("O2"). The Securities and Exchange Commission ("SEC") issued new
guidance in September 1998 on its views regarding the methodologies used to
determine the value of acquired IPRD and intangible assets in a purchase
business combination. Generally accepted accounting principles require that
amounts allocated to IPRD be expensed upon consummation of an acquisition
accounted for as a purchase. As a result of this new guidance, the Company has
modified the methods used to value IPRD and other intangibles acquired related
to O2. The revised valuation is based on management's estimates of the net cash
flows associated with expected operations of O2 and gives explicit consideration
to the SEC's views on acquired IPRD as set forth in its September 1998 letter to
the American Institute of Certified Public Accountants.
The discussion which follows analyzes the combined results of operations for the
three and six months ended June 30, 1998 and the comparable fiscal periods in
1997.
RESULTS OF OPERATIONS
The following table sets forth certain data as a percentage of total revenue for
the three and six months ended June 30, 1998 and the comparable fiscal periods
in 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- --------------------------
June 30, June 29, June 30, June 29,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Software 59.7% 59.2% 58.7% 58.4%
Services and other 40.3 40.8 41.3 41.6
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs and expenses:
Costs of software 6.5 7.6 6.5 7.8
Costs of services and other 19.1 23.7 19.9 24.1
Selling and marketing 34.0 34.6 35.0 35.1
Product development 15.5 16.1 16.0 15.7
General and administrative 8.8 10.5 9.5 10.9
Loss on disposal of subsidiary -- 2.1 -- 1.1
Merger costs -- -- 27.1 --
----- ----- ----- -----
Total costs and expenses 83.9 94.6 114.0 94.7
----- ----- ----- -----
Income (loss) from operations 16.1% 5.4% (14.0)% 5.3%
===== ===== ===== =====
</TABLE>
11
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REVENUE
The Company's total revenue increased 1% to $29,237,000 in the second quarter of
1998 from $29,108,000 in the second quarter of 1997 and was relatively flat at
$54,947,000 for the first six months of 1998 compared to $55,128,000 for the
first six months of 1997.
Software revenue for the second quarter and first six months of 1998 increased
by 1% from the comparable periods in 1997. This increase is due principally to
the increase in DataStage revenue which represented approximately 16% and 15%
for the three and six months ended June 30, 1998 compared to 5% and 4% for the
three and six months ended June 29, 1997. The increase in the object database
product, O2 System, also contributed to the increase in software revenue. The
object database product was acquired through the acquisition of O2 Technology on
December 31, 1997, and therefore was not included in the 1997 results of
operations.
Software revenue increased to 60% and 59% of total revenue in the second quarter
and first six months of 1998 compared to 59% and 58% for the same fiscal periods
in 1997.
Services and other revenue, consisting of consulting, training, and software
maintenance decreased slightly for the quarter and six months ended June 30,
1998, as compared to the quarter and six months ended June 30, 1997. Services
revenue associated with the DataStage and O2 System products increased during
the period and the combined service revenue attributable to these two products
represented 9% and 8% for the three and six months ended June 30, 1998, compared
to less than 1% for the comparable periods in the prior year.
Services and other revenue decreased to 40% and 41% of total revenue in the
three months and six months ended June 30, 1998, compared to 41% and 42% for the
same fiscal periods in 1997.
COSTS OF SOFTWARE
Costs of software, which consists of amortization of technology licenses and
capitalized software, product royalties, product documentation, packaging, media
and production costs, decreased by 15% to $1,884,000 for the second quarter of
1998 as compared to $2,215,000 for the comparable period in the prior year, and
decreased 18% to $3,555,000 for the six months ended June 30, 1998 from
$4,315,000 for the six months ended June 29, 1997. Cost of software as a
percentage of license revenue slightly decreased to 11% for the three and six
months ended June 30, 1998, from 13% for the three and six months ended June 30,
1997. These relatively flat levels of expense year over year are due to the
fixed nature of these costs and the minimal change in the mix of product revenue
with associated royalties.
COSTS OF SERVICES AND OTHER
Costs of services and other, which consist of consulting, training, and other
customer support service costs decreased 19% to $5,597,000 for the second
quarter and decreased 17% to $10,952,000 for the first six months of 1998 as
compared to the same periods of the prior year. The profit margin associated
with services and other revenue increased to 52% from 42% for the first six
months of 1998 as compared to the first six months of 1997 and increased to 52%
for the second quarter of 1998 from 42% for the second quarter of 1997. This
decrease in costs, and the resulting increase in profit margins, is due to a
higher percentage of services and other revenue in 1998 being comprised of
customer maintenance support revenue which typically has a higher profit margin
than training and consulting services revenue. Maintenance represented
approximately 70% of services and other revenue in the six months ended June 30,
1998 compared to 60% in the six months ended June 29, 1997.
SELLING AND MARKETING
Selling and marketing expenses, which consist primarily of sales organization
costs and marketing programs, decreased to 34% and 35% of total revenue or
$9,924,000 and $19,213,000 in the quarter and six months ended June 30, 1998 as
compared to 35% of total revenue or $10,067,000 and $19,354,000 in the
comparable periods of the prior year. The relatively flat levels of spending
year over year is due to the increase in the investment in the DataStage product
offset by the decrease in selling and marketing programs for the relational
database technology and tools products. The selling and marketing resources have
been reallocated to the new technology, which represented 51% of spending for
selling and marketing in 1998 as compared to 5% in 1997.
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PRODUCT DEVELOPMENT
Product development expenses, which consist primarily of salaries and related
benefits of development personnel and facility costs, were relatively flat at
$4,543,000 in the second quarter of 1998 and increased 1% to $8,783,000 in the
first six months of 1998, as compared to the same fiscal periods of the prior
year. Product development expenses as a percentage of revenue were 16% for the
first quarter and the first six months of 1998, as compared to 16% for the same
fiscal periods in 1997. The increase in spending is due primarily to the
development efforts dedicated to the DataStage and O2 System products. The
Company allocated 57% of its research and development funds into these new
technologies in the first six months of 1998 compared to 6% in the first six
months of 1997. Relational database technology and tools development represented
43% of research and development costs in the first six months on 1998 as
compared to 94% in 1997.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include the costs of finance, human
resources, legal, information systems, and administrative departments of the
Company. General and administrative expenses decreased 16% in the second quarter
of 1998 to $2,578,000 from $3,060,000 in the comparable period of 1997. General
and administrative expenses decreased 13% to $5,206,000 in the first six months
of 1998 from $6,016,000 for the six months ended June 29, 1997. This decrease is
due to the elimination of duplicate positions and facilities in conjunction with
the merger of the Company and Unidata.
LOSS ON DISPOSAL OF SUBSIDIARY
In the second quarter of 1997, the Company sold the stock of its subsidiary in
Spain and wrote off its investment in its joint venture in India, and recorded
non-recurring charges of $602,000 related to the transactions. Since these
charges are of a capital loss nature, for income tax purposes they are
deductible only to the extent that they can be offset against capital gains. As
no capital gains were realized were realized in 1997 or are anticipated in the
foreseeable future, no tax benefit has been recorded for this loss.
MERGER COSTS
The Company recorded a one time charge of $14,895,000 associated with the merger
with Unidata in the quarter ended March 31, 1998. This amount included
$3,910,000 for financial advisor, legal, and accounting fees related to the
merger and $10,985,000 for costs associated with combining the operations of the
two companies including expenditures of $6,209,000 for severance, benefits and
other, $2,170,000 for closure of facilities and $2,606,000 for the write-off of
redundant assets. As of June 30, 1998, $3,183,000 remains unpaid comprised
principally of severance and facility costs.
INCOME TAXES
The Company recorded a provision for income taxes of $1,667,000 for the second
quarter of 1998 and a benefit of $1,190,000 for the first six months of 1998
compared to provisions of $560,000 and $853,000 for the same periods in 1997.
The effective tax rate recorded in the quarter ended June 30, 1998 was 36% which
is consistent with the statutory rate. The benefit for the six months ended June
30, 1998 represents an effective tax rate of 16%. This effective tax rate is
substantially less than the statutory rate due to certain non-deductible merger
charges incurred in the first quarter of 1998.
FOREIGN CURRENCY TRANSLATION
The Company hedges its exposure to foreign currency fluctuations through foreign
exchange forward contracts. As of December 31, 1997, the Company had foreign
exchange forward contracts outstanding used to hedge foreign exchange exposure
on intercompany balances of certain of its international subsidiaries. These
contracts are comprised of contracts to sell foreign currency aggregating
$5,236,000 of notional amount (principally British pounds and French francs).
These contracts are short-term in duration (typically 90 days) and have limited
market risk, since decreases or increases in the unrealized gain or loss on any
position is generally fully offset by corresponding increases or decreases in
gains and losses on the intercompany balances being hedged. Credit risk is
limited to the risk that counterparties to these contracts fail to deliver at
maturity. The Company deals only with reputable financial institutions in
entering into these contracts and therefore believes that credit risk is
insignificant. Currency forward contracts are used only to hedge identified
foreign currency commitments and are never held for speculative purposes. The
gains and losses associated with currency rate changes on these contracts, net
of the corresponding gains and losses on the hedged intercompany accounts, are
recorded as a component of other income/expense in the period the change occurs.
Foreign exchange gains or losses were not material in any period presented.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through sales of equity
securities and positive cash flow from operations. At June 30, 1998 the Company
had $19,434,000 in cash and cash equivalents and $3,487,000 ($20,409,000
excluding deferred revenue, the satisfaction of which will have no significant
cash impact) in working capital. The Company has a working capital line of
credit with a bank under which the Company may borrow, on a secured basis, up to
the lesser of $12,500,000 or 80% of eligible domestic accounts receivable and
70-80% of eligible foreign accounts receivable, conditioned upon meeting certain
financial covenants, including maintaining specified levels of quarterly
earnings, tangible net worth and liquidity. The line of credit also limits the
Company's ability to pay dividends. At June 30, 1998, there was $6,720,000
outstanding under the Company's line of credit which has been classified under
long-term liabilities as the line of credit expires in March 2000. There was
approximately $1,500,000 available for borrowing under the line of credit at
June 30, 1998.
The Company believes that its available cash, anticipated cash generated from
operations based upon its operating plan and future amounts available under its
credit facility, if any, will be sufficient to finance the Company's operations
and meet its foreseeable cash requirements at least for the next twelve months.
During the quarter, the Company transferred its rights to certain accounts
receivable to a finance company in exchange for cash payments from the finance
company. Total cash received by the Company in the quarter ended June 30, 1998
under these arrangements totaled approximately $3,000,000.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board (FASB) released Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," and SFAS 131, "Disclosure About Segments of an Enterprise and Related
Information," both of which were adopted by the Company in the first quarter of
1998. SFAS 130 requires the Company to provide a prominent display of the
components of items of other comprehensive income. SFAS 131 requires the Company
to provide information about segments of its business based upon discrete
components of its businesses; such information will be provided in the Company's
Annual Report on Form 10-K.
In June 1998, the FASB released SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which the Company will be required to adopt
effective January 1, 2000. SFAS No. 133 establishes standards for reporting and
accounting for derivatives instruments, and conforms the requirements for
treatment of hedging activities across the different types of exposures hedged.
The Company has not yet completed its evaluation of SFAS No. 133, but does not
expect it to significantly affect the accounting and reporting of its current
hedging program.
EUROPEAN UNION CURRENCY CONVERSION
On January 1, 1999, eleven of the fifteen member countries are scheduled to
establish fixed conversion rates between their existing sovereign currencies and
the euro. The participating countries have agreed to adopt the euro as their
common legal currency on that date.
The Company has begun to assess the potential impact to the Company that may
result from the euro conversion. In addition to tax and accounting
considerations, the Company is assessing the potential impact from the euro
conversion in a number of areas, including the technological challenges to adapt
information technology, the competitive impact of cross-border price
transparency, the impact on currency exchange costs and currency exchange rate
risk, and the impact on existing contracts. At this early stage of its
assessment, the Company can not yet predict the anticipated impact of the euro
conversion on the Company.
YEAR 2000
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and/or
software used by many companies and governmental agencies may need to be
upgraded to comply with such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
State of Readiness - Ardent has made preliminary assessments of their respective
Year 2000 readiness of their information technology ("IT") systems, including
the software solutions that the Company provides to their customers, and their
non-IT systems. These assessments include (i) quality assurance testing of the
Company's internally developed proprietary software; (ii) contacting
14
<PAGE> 15
third-party vendors and licensors of material hardware, software and services
that are both directly and indirectly related to Ardent's business; (iii)
contacting vendors of material non-IT systems; (iv) assessment and
implementation of repair or replacement requirements; and (v) creation of
contingency plans in the event of Year 2000 failures. The Company has been
informed by many of their vendors of material hardware and software components
of their respective IT systems that the products of these vendors they use are
currently Year 2000 compliant. Ardent is not aware of any Year 2000 compliance
problems relating to their proprietary products or their respective IT or non-IT
systems that would, despite efforts to avoid or fix such problems, have a
material adverse effect on the Company's business, results of operations and
financial condition.
Costs - To date, the Company has not incurred material expenditures in
connection with identifying or evaluating Year 2000 compliance issues. Most of
the expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters. At this time, Ardent does not possess
the information necessary to estimate the potential costs of the replacement of
third-party software, hardware or services that are determined not to be Year
2000 compliant. Although the Company does not anticipate that such expenses will
be material, such expenses, if higher than anticipated, could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Risks - There can be no assurance that the Company will not discover Year 2000
compliance problems in its proprietary products that will require substantial
revisions. In addition, there can be no assurance that third-party software,
hardware or services incorporated into its material IT or non-IT systems will
not need to be revised or replaced, all of which could be time consuming and
expensive. The failure of the Company to fix its proprietary products, if
necessary, or to fix or replace third-party software, hardware or services on a
timely basis could result in lost revenues, increased operating costs, the loss
of customers and other business interruptions, any of which could have a
material adverse effect on the Company's business, results of operations and
financial condition. Moreover, failure to adequately address Year 2000
compliance issues in its products and its internal IT and non-IT systems could
result in claims of mismanagement, misrepresentation or breach of contract and
related litigation, which could be costly and time-consuming to defend.
CAUTIONARY STATEMENT
When used anywhere in this Form 10-Q and in future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases and in
oral statements made with the approval of an authorized executive officer of the
Company, the words or phrases "will likely result", "are expected to", "will
continue", "is anticipated", "estimated", "project", "outlook" or similar
expressions (including confirmations by an authorized executive officer of the
Company of any such expressions made by a third party with respect to the
Company) are intended to identify "forward-looking statements," which speak only
as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Certain of
such risks and uncertainties are set forth below and in Part II of the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. The Company
specifically declines any obligation to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
FACTORS AFFECTING FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a number of
risks, many of which are beyond the Company's control. The following discussion
highlights some of these risks.
The Company's future operating results may vary substantially from period to
period. The timing and amount of the Company's license fee revenues are subject
to a number of factors that make estimation of revenues and operating results
prior to the end of the quarter extremely uncertain. Quarterly fluctuations may
be caused by several factors including but not limited to timing of customer
orders, adjustments of delivery schedules to accommodate customer or regulatory
requirements, timing and level of international sales, mix of products sold, and
timing of level of expenditures for sales, marketing and new product
development. The Company generally ships its products upon receipt of orders and
maintains no significant backlog. The company has experienced a pattern of
recording 60 percent to 80 percent of its quarterly revenues in the third month
of the quarter, with a concentration of such revenues in the last two weeks of
that third month. The Company's operating expenses are based on projected annual
and quarterly revenue levels and a substantial portion of the Company's costs
and expenses, including costs of personnel and facilities, cannot be easily
reduced. As a result, if projected revenues are not achieved in the expected
time frame, the Company's results of operations for that quarter would be
adversely affected. Accordingly, the results of any one period may not be
indicative of the operating results for future periods.
15
<PAGE> 16
The market price of the Company's common stock is highly volatile. Failure to
achieve revenue, earnings, and other operating and financial results as
forecasted or anticipated by analysts could result in an immediate adverse
effect on the market price of the Company's stock.
The Company currently derives a substantial portion of its total revenue from
its core database product, UniVerse and Unidata. The Company's future results
will depend, to a significant extent, on continued market acceptance of this
product as well as market acceptance of new products, such as DataStage and O2
System. Any factor adversely affecting the market for these products would have
a material adverse effect of the Company's business and financial results.
The market for the Company's products is characterized by ongoing technological
developments and changes in customer requirements and industry standards. If the
Company is unable to develop and introduce new products or enhancements in a
timely manner in response to changing market conditions or customer requirements
or if errors are found in products after commercial shipments, the Company's
business and results of operations will be adversely affected.
Approximately 36% of the Company's total revenue in the quarter ended June 30,
1998 was attributable to international sales made through international
subsidiaries. Because a substantial portion of the Company's total revenue is
derived from such international operations, which are conducted in foreign
currencies, changes in the value of those currencies relative to the United
States dollar may affect the Company's results of operations and financial
position. If, for any reason, exchange or price controls or other restrictions
on the conversion of foreign currencies were imposed, the Company's business
could be adversely affected. Other potential risks inherent in the Company's
international business generally include longer payment cycles, greater
difficulties in accounts receivable collection and the burdens of complying with
a wide variety of foreign laws and regulations.
The market for application development software is intensely competitive. The
Company competes with many companies offering alternative solutions to the needs
addressed by the Company's products. Many of these competitors may have greater
financial, marketing, or technical resources than the Company and may be able to
adapt more quickly to new or emerging technologies and standards or changes in
customer requirements or to devote greater resources to the promotion and sale
of their products than the Company.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was a defendant, together with certain of its officers, in two
actions initially filed in October 1995 in the U.S. District Court in the
District of Massachusetts. The plaintiffs alleged in the Complaint that the
Company and certain of its officers, during July through October 1995, made
certain untrue statements and failed to disclose certain information regarding
the Company's prospective financial performance in violation of Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and that such
statements and omissions artificially inflated the market prices of the
Company's stock. The Company denied the allegations. Following completion of
discovery, the defendants and their insurance carrier reached, in September
1998, an agreement to settle the action. The Company recorded its contribution
to the agreed settlement in the third quarter of 1998 which was not material to
financial position or the results of operations.
The Company is a defendant in two actions filed against Unidata prior to its
merger into the Company, one in May 1996 in the U.S. District Court for the
Western District of Washington and one in September 1996 in the U.S. District
Court for the District of Colorado. The plaintiff, a company controlled by a
former stockholder of Unidata and a distributor of its products in certain parts
of Asia, alleges in both suits the improper distribution of certain Unidata
products in the plaintiff's exclusive territory and asserts damages of
approximately $30,000,000 under claims for fraud, breach of contract, unfair
competition, RICO violations, and trademark and copyright infringement, among
other relief. Unidata denied the allegations against it in its answers to the
complaints and the proceedings are currently in their early stages. Management
of the Company believes that the actions against it are without merit and plans
to oppose them vigorously.
The Company is a defendant in an action filed in July 1998 in the U.S. District
Court for the Southern District of Ohio. The plaintiff, with whom the Company
entered into a joint venture in 1996 to develop the Object Studio product,
alleges in its complaint that the Company is obligated to support the joint
venture in amounts up to $1,400,000 per year for an aggregate present value
liability of up to $8,000,000. The Company believes the allegations are without
merit and has denied its alleged liability and filed certain counterclaims
against the plaintiff seeking an amount in excess of $9,000,000.
ITEMS 2 - 3 NONE
16
<PAGE> 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of stockholders of the Company was held on April 30, 1998. Of
the 14,468,119 shares eligible to vote, 12,777,224 were represented at the
meeting. The following matters were approved at the meeting:
1) The re-election to the Board of Directors of James T. Dresher and Robert M.
Morrill, each for a term of three years expiring in 2000. Dresher received
favorable votes of 12,713,983 shares and Morrill received favorable votes
of 12,733,856.
ITEM 5. NONE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule - 1998
27.2 Financial Data Schedule - 1997
(b) The Company did not file a report on Form 8-K during
the quarter ended June 30, 1998.
17
<PAGE> 18
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.
Ardent Software, Inc.
(Registrant)
Dated: March 31, 1999 /s/ Peter Gyenes
------------------------------------------
Peter Gyenes
President and Chief Executive Officer
(principal executive officer)
Dated: March 31, 1999 /s/ Charles F. Kane
------------------------------------------
Charles F. Kane
Vice President, Finance
and Chief Financial Officer
(principal finance and accounting officer)
18
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