<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 SEPTEMBER 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 01581-1021
WESTBORO, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
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
September 30, 1998 Common stock, $.01 par value 15,124,014
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ARDENT SOFTWARE, INC.
FORM 10-Q/A
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NUMBERING IN
SEQUENTIAL NUMBERING SYSTEM
---------------------------
<S> <C>
PART I FINANCIAL INFORMATION
Introduction 3
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 (Restated) 4
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 1998
and September 28, 1997 (Restated) 5
Condensed Consolidated Statement of Comprehensive Income (Loss)
for the three and nine months ended September 30, 1998 and
September 28, 1997 (Restated) 6
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and September 28, 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 17
</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 nine months ended September 28, 1997 included in the Company's
10-Q report filed on November 14, 1998 reflected the combination, for pooling
purposes, of the Company's accounts for the nine months ended September 28, 1997
(its third fiscal quarter of 1997) with Unidata's accounts for the nine months
ended March 31, 1997 (Unidata's third 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 8). 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 September 30, 1998 included in the Company's 10-Q report filed on
November 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 8).
These changes do not impact results for the three and nine months ended
September 30, 1998 as previously reported.
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PART I FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
ARDENT SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (RESTATED, SEE NOTE 8)
(In thousands)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $22,218 $24,155
Accounts receivable - net 20,424 21,161
Prepaid expenses and other current assets 4,014 6,101
Deferred income taxes 4,206 1,885
------- -------
Total current assets 50,862 53,302
------- -------
Property and equipment - net 6,520 15,916
------- -------
Long-term assets:
Intangible assets - net 15,987 17,245
Other long-term assets 4,814 2,743
Deferred income taxes 5,619 4,837
------- -------
Total long-term assets 26,420 24,825
------- -------
Total assets $83,802 $94,043
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ -- $ 7,357
Accounts payable 4,971 4,995
Accrued expenses and other current liabilities 19,423 14,103
Accrued merger and restructuring costs 3,037 1,068
Deferred revenue 16,095 13,248
------- -------
Total current liabilities 43,526 40,771
------- -------
Long-term liabilities:
Non-current debt and other long-term liabilities 4,900 21,190
------- -------
Stockholders' equity 38,332 35,038
Cost of treasury stock (2,956) (2,956)
------- -------
Total stockholders' equity 35,376 32,082
------- -------
Total liabilities and stockholders' equity $83,802 $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 NINE MONTHS ENDED
SEPT. 30, 1998 SEPT. 28, 1997 SEPT. 30, 1998 SEPT. 28, 1997
-------------- -------------- -------------- --------------
(RESTATED, SEE (RESTATED, SEE
NOTE 8) NOTE 8)
<S> <C> <C> <C> <C>
Revenue:
Software $17,127 $12,620 $49,379 $44,813
Services and other 12,607 10,960 35,302 33,895
------- ------- ------- -------
Total revenue 29,734 23,580 84,681 78,708
------- ------- ------- -------
Costs and expenses:
Cost of software 1,762 1,946 5,317 6,261
Cost of services and other 5,724 6,137 16,676 19,400
Selling and marketing 10,516 8,898 29,729 28,252
Product development 4,311 4,064 13,094 12,738
General and administrative 2,353 3,130 7,559 9,146
Loss on disposal of subsidiary -- -- -- 602
Merger costs -- -- 14,895 --
------- ------- ------- -------
Total costs and expenses 24,666 24,175 87,270 76,399
------- ------- ------- -------
Income (loss) from operations 5,068 (595) (2,589) 2,309
Other income (expense) - net 42 (413) 120 (1,519)
------- ------- ------- -------
Income (loss) before provision for income taxes 5,110 (1,008) (2,469) 790
Provision (benefit) for income taxes 1,789 (255) 599 598
------- ------- ------- -------
Net income (loss) $ 3,321 $ (753) $(3,068) $ 192
======= ======= ======= =======
Basic income (loss) per common share $ 0.22 $ (0.05) $ (0.21) $ 0.01
======= ======= ======= =======
Basic shares used in calculation 14,987 13,810 14,604 13,462
======= ======= ======= =======
Diluted income (loss) per common share $ 0.20 $ (0.05) $ (0.21) $ 0.01
======= ======= ======= =======
Diluted shares used in calculation 16,875 13,810 14,604 14,142
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
5
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ARDENT SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, 1998 SEPT. 28, 1997 SEPT. 30, 1998 SEPT. 28, 1997
-------------- -------------- -------------- --------------
(RESTATED, SEE (RESTATED, SEE
NOTE 8) NOTE 8)
<S> <C> <C> <C> <C>
Net income (loss) $3,321 $ (753) $(3,068) $ 192
Change in translation adjustment (332) (478) (178) (529)
------ ------- ------- -----
Comprehensive net income (loss) $2,989 $(1,231) $(3,246) $(337)
====== ======= ======= =====
</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>
NINE MONTHS ENDED
------------------------------
SEPT. 30, SEPT. 28,
1998 1997
--------- ---------
(RESTATED, SEE
NOTE 8)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (3,068) $ 192
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 5,137 7,053
Amortization of restricted stock awards 21 21
Loss on disposal of assets 1,093 251
Deferred income taxes (3,103) (621)
Increase (decrease)in cash from:
Current assets 2,191 9,987
Current liabilities 10,578 (2,339)
-------- -------
Cash provided by operating activities 12,849 15,238
-------- -------
Cash Flows From Investing Activities:
Unidata activity for the period July 1 to December 31, 1996 -- (1,737)
Expenditures for property and equipment-net (1,987) (1,732)
Expenditures for capitalized software costs (2,242) (1,139)
Increase in cash surrender value of officers' life
insurance and deposits and other (2,121) (2,139)
-------- -------
Cash used in investing activities (6,350) (6,747)
-------- -------
Cash flows from financing activities:
Unidata activity for the period July 1 to December 31, 1996 -- 7
Borrowings under line-of-credit arrangements 12,620 400
Repayments under line-of-credit arrangements (15,077) (3,162)
Sale of common stock 6,516 1,193
Repayments under capital lease and other obligations (12,352) (411)
-------- -------
Cash used in financing activities (8,293) (1,973)
-------- -------
Effect of exchange rate changes on cash (143) (199)
-------- -------
Increase (decrease) in cash and equivalents (1,937) 6,319
Cash and equivalents, beginning of period 24,155 15,545
-------- -------
Cash and equivalents, end of period $ 22,218 $21,864
======== =======
</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, 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 is a defendant in a proceeding in the U.S. District Court in the
District of Massachusetts. The plaintiffs allege 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
all discovery, the defendants and their insurance carrier reached, in
September 1998, an agreement in principle with the plaintiffs to settle the
action subject to final approval by the court. The Company has recorded its
contribution to the agreed settlement which was not material to the
financial position or results of operations of the Company for the three and
nine months ended September 30, 1998.
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 actions 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 the Company are without merit and plans to continue 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.
8
<PAGE> 9
5. Merger Costs
In connection with the merger with Unidata, the Company recorded a one-time
charge for merger costs of $14,895,000 in the quarter ended 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
September 30, 1998, $2,193,000 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 September 30, 1998 and December 31, 1997
the cumulative translation adjustment was ($333,000) and ($155,000),
respectively.
7. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) released
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure
About Segments of an Enterprise and Related Information," which was adopted
by the Company in the first quarter of 1998. 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 Financial Accounting Standards Board (FASB) released
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (SFAS 133), which the
Company will be required to adopt effective January 1, 2000. SFAS No. 133
establishes standards for reporting and accounting for derivative
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.
8. 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 nine months ended September 28, 1997 for the Company with the
three and nine months ended March 31, 1997 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 September 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 statements of operations for the three and
nine months ended September 28, 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. 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 information as
of September 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 statement of operations are as follows,
for the three and nine months ended September 28, 1997:
<TABLE>
<CAPTION>
Three Months Ended September 28, Nine Months Ended September 28,
1997 1997
---------------------------------- ---------------------------------
As Previously As Previously
Reported As Restated Reported As Restated
<S> <C> <C> <C> <C>
Total revenue $26,069 $23,580 $77,575 $78,708
Total costs and expenses 23,962 24,175 73,577 76,399
Income (loss) from operations 2,107 (595) 3,998 2,309
Net income (loss) $ 1,023 $ (753) $ 1,431 $ 192
Basic income (loss) per share $ .08 $ (.05) $ .11 $ .01
Diluted income (loss) per share $ .07 $ (.05) $ .10 $ .01
Shares for basic computation 13,640 13,810 13,580 13,642
Shares for diluted computation 14,594 13,810 14,310 14,142
</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 September 30, 1998
---------------------------------- ---------------------------------
As Previously As Previously
Reported As Restated Reported As Restated
<S> <C> <C> <C> <C>
Intangible assets - net $10,616 $17,245 $ 9,358 $15,897
Total assets 87,414 94,043 77,173 83,802
Stockholders' equity 25,453 32,082 28,747 35,376
</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 OPERATIONS
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 nine months ended September 28, 1997 for the Company with the three
and nine months ended March 31, 1997 for Unidata. Subsequent to the issuance of
the Company's quarterly report on Form 10-Q for the quarterly period ended March
31, 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
nine months ended September 28, 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 information as of
September 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 nine months ended September 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 nine months ended September 30, 1998 and the comparable fiscal
periods in 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ------------------------
Sept. 30, Sept. 28, Sept. 30, Sept. 28,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Software 57.6% 53.5% 58.3% 56.9%
Services and other 42.4 46.5 41.7 43.1
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs and expenses:
Costs of software 5.9 8.3 6.3 8.0
Costs of services and other 19.3 26.0 19.7 24.6
Selling and marketing 35.4 37.7 35.1 35.9
Product development 14.5 17.2 15.5 16.2
General and administrative 7.9 13.3 8.9 11.6
Loss on disposal of subsidiary -- -- -- .8
Merger costs -- -- 17.6 --
----- ----- ----- -----
Total costs and expenses 83.0 (102.5) 103.1 97.1
----- ----- ----- -----
Income (loss) from operations 17.0% (2.5)% (3.1)% 2.9%
===== ===== ===== =====
</TABLE>
11
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REVENUE
The Company's total revenue increased 26% to $29,734,000 in the third quarter of
1998 from $23,580,000 in the third quarter of 1997 and increased 8% to
$84,681,000 for the first nine months of 1998 from $78,708,000 for the first
nine months of 1997. This increase in revenue is primarily due to the increase
in sales of the Company's data warehouse products and embedded database
licenses. This increase was offset by the decline in revenues associated with
the migration of legacy systems to client server UNIX and NT environments.
Software revenue for the third quarter and first nine months of 1998 increased
by 36% and 10%, respectively, from the comparable periods in 1997. This increase
is due principally to the increase in DataStage revenue which represented
approximately 22% and 17% of license revenue for the three and nine months ended
September 30, 1998, compared to 7% and 5% for the three and nine months ended
September 28, 1997. Revenue from relational database products also contributed
to the increase in software revenue. The increase in sales of the Company's
object database product, O2 Systems, 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 58% of total revenue for both the third quarter
and first nine months of 1998 compared to 54% and 57% for the same fiscal
periods in 1997.
Services and other revenue, consisting of consulting, training, and software
maintenance increased 15% and 4% for the quarter and nine months ended September
30, 1998, as compared to the quarter and nine months ended September 28, 1997.
This increase is due primarily to the services revenue associated with the
DataStage and O2 System products. The combined service revenue attributable to
these two products represented 11% and 10% for the three and nine months ended
September 30, 1998, respectively, compared to 3% and 2% for the comparable
periods in the prior year.
Services and other revenue decreased to 42% of total revenue for both the three
and nine months ended September 30, 1998, compared to 47% and 43% for the same
fiscal periods in 1997.
COSTS OF SOFTWARE
Costs of software, which consist of amortization of technology licenses and
capitalized software, product royalties, product documentation, packaging, media
and production costs, decreased 9% to $1,762,000 for the third quarter of 1998
as compared to $1,946,000 for the comparable period in the prior year, and
decreased 15% to $5,317,000 for the nine months ended September 30, 1998 from
$6,261,000 for the nine months ended September 28, 1997. This decrease in cost
of software is due to a reduction in amortization costs related to software and
other capitalized costs that have been fully amortized. Cost of software as a
percentage of total revenue decreased for the quarter and nine months ended to
6% from 8% for the same periods in 1997.
COSTS OF SERVICES AND OTHER
Costs of services and other, which consist of consulting, training, and other
customer support service costs decreased 7% to $5,724,000 for the third quarter
1998 and decreased 14% to $16,676,000 for the nine months ended September 30,
1998 as compared to the same periods of the prior year. The profit margin
associated with services and other revenue increased to 53% from 43% for the
first nine months of 1998 as compared to the first nine months of 1997 and
increased to 55% for the third quarter of 1998 from 44% for the third quarter of
1997. The decrease in costs, and the resulting increase to profit margins, is
due to a higher percentage of customer maintenance support revenue in 1998 which
typically has a higher profit margin than training and consulting services
revenue. Maintenance represented approximately 67% of services and other revenue
in the nine months ended September 30, 1998 compared to 60% in the nine months
ended September 28, 1997.
SELLING AND MARKETING
Selling and marketing expenses, which consist primarily of sales operating costs
and marketing programs, represented 35% of total revenue or $10,516,000 and
$29,729,000 in the quarter and nine months ended September 30, 1998,
respectively, as compared to 38% and 36% of total revenue or $8,898,000 and
$28,252,000 in the comparable periods of the prior year. The increase in
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 this new technology, which represented 54% of
spending for selling and marketing in the first nine months of 1998 as compared
to 8% for the same comparable period 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, increased 6% to $4,311,000
in the third quarter of 1998 and increased 3% to $13,094,000 in the first nine
months of 1998, as compared to the same fiscal periods of the prior year.
Product development expenses as a percentage of revenue were 15% and 16% for the
third quarter and the first nine months of 1998, respectively, as compared to
17% and 16% for the same fiscal periods in 1997, respectively. The increase in
spending is due primarily to the development efforts dedicated to the DataStage
and O2 System products. The Company allocated 58% of its research and
development funds into these new technologies in the first nine months of 1998
compared to 9% in the first nine months of 1997. Relational database technology
and tools development represented 42% of research and development costs in the
first nine months on 1998 as compared to 91% 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 25% in the third quarter
of 1998 to $2,353,000 from $3,130,000 in the comparable period of 1997. General
and administrative expenses decreased 17% to $7,559,000 in the first nine months
of 1998 from $9,146,000 for the nine months ended September 28, 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 September 30, 1998, $2,193,000 remains unpaid comprised
principally of severance and facility costs.
INCOME TAXES
The Company recorded a provision for income taxes of $1,789,000 and $599,000 for
the third quarter and the first nine months of 1998, respectively. This
represents an annual effective income tax rate of 36%, excluding the impact of
non-deductible merger charges. The 1997 annual effective income tax rate of 76%
was substantially higher than 1998 due to an increase in the valuation allowance
during 1997 attributed to foreign loss carryforwards.
COMMITMENTS
In the quarter ended March 1998, the Company renegotiated the lease of its
principal operating facility. The lease had been classified as a capital lease.
As a result of this renegotiation, the term of the lease was modified and
reduced from 20 years to 14 years. As a result of this modification, the lease
no longer qualifies as a capital lease and has been reclassified as operating.
In connection with this reclassification, the Company removed the asset and
liability from the balance sheet and recorded a net gain of approximately
$600,000 in the quarter ended March 31, 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
13
<PAGE> 14
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. As of September 30, 1998 the Company had foreign
exchange contracts outstanding aggregating $8,690,000 of notional amount
(principally British pounds and French francs).
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 September 30, 1998 the
Company had $22,218,000 in cash and cash equivalents and $7,336,000 ($23,431,000
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 70-80% of eligible domestic and 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 September 30, 1998, there was $4,900,000 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 $3,768,000
available for borrowing under the line of credit at September 30, 1998.
The Company believes that its available cash, anticipated cash generated from
operations based upon its operating plan and future amounts available, if any,
under its credit facility 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 finance companies in exchange for cash payments from the finance
companies. Total cash received by the Company in the quarter ended September 30,
1998 under these arrangements totaled approximately $3,211,000.
RECENT ACCOUNTING PRONOUNCEMENTS
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, certain member nations of the European Economic and Monetary
Union ("EMU") will adopt a common currency, the Euro. For a three-year
transition period, both the Euro and the individual participants' currencies
will remain in circulation. After June 30, 2002, the Euro will be the sole legal
tender for EMU countries. The adoption of the Euro will affect a multitude of
financial systems and business applications as the commerce of these nations
will be transacted in the Euro and the existing national currency during the
transition period. Of the eleven of the fifteen member countries currently
admitted into the EMU, the Company has subsidiary operations in two of these
countries and distributor relationships in the remaining nine.
The Company has begun to assess the potential impact 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 cannot 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 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)
14
<PAGE> 15
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.
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 products, 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.
15
<PAGE> 16
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 for the nine months ended
September 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,
disruptions caused by the conversion of the Euro, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ARDENT SOFTWARE, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. In
addition, the Company's working capital line of credit agreement provides for
borrowings which bear interest at a variable rate based on a prime rate. As of
September 30, 1998 the Company had $4,900,000 outstanding pursuant to the credit
agreement. The Company believes that the effect, if any, of reasonably possible
near-term changes in interest rates on the Company's financial position, results
of operations and cash flows should not be material.
The Company is exposed to changes in foreign currency exchange primarily in its
cash and foreign currency transactions. The Company holds forward foreign
currency contracts. Derivative instruments used by the Company in its hedging
activities are viewed as risk management tools and are not used for trading or
speculative purposes. Analytic techniques are used to manage and monitor foreign
exchange risk and include market valuation. The Company believes that it is
managing the foreign exchange exposure through its cash management and hedging
policies. This exposure is not considered material to the Company's financial
position, results of operations and cash flows.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in a proceeding in the U.S. District Court in the
District of Massachusetts. The plaintiffs allege 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 all discovery, the defendants
and their insurance carrier reached, in September 1998, an agreement in
principle with the plaintiffs to settle the action subject to final approval by
the court. The Company has recorded its contribution to the agreed settlement
which was not material to the financial position or results of operations of the
Company for the three and nine months ended September 30, 1998.
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 actions 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 the Company are without merit
and plans to continue to oppose them vigorously.
16
<PAGE> 17
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 - 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 September 30, 1998.
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
Chairman of the Board, 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)
17
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