Ascential DataStage TX, acquired through the acquisition of Mercator Software, Inc. ("Mercator"(“Mercator”) on September 12, 2003, extends the transformation capabilities of the Ascential Enterprise Integration Suite to
We offer a variety of consulting services to our customers directly and through third-party systems integrators. Consulting services include implementation assistance, project planning and deployment, optimization services and systems configuration.mentoring. Our advanced consulting groupAdvanced Consulting Group is focused on helpingassisting customers implementin implementing new technologies and product releases.enterprise-wide solutions. We complement our professional service offerings by working with leading international and regional third-party consulting and systems integration firms to provide customers with a fullwide range of service options.
We distribute products through four main channels: direct sales end-user licensing, value-added resellers, systems integrators and embedded resellers. We also regularly receive customer referrals from enterprise application and business intelligence vendors whose customers can benefit from the data integration functionality of our products. We use a multiple channel distribution strategy to maintain broad market coverage and competitiveness. Discount policies and reseller licensing programs are intended to support each distribution channel with a minimum of channel conflict and are focused on maximizing our market reach and meeting evolving customer purchasing requirements. The principal geographic markets for our products are North America, Europe and the Asia/Pacific region. Our revenues for 2004, 2003 2002 and 20012002 attributable to operations within the United States were $127.9 million, $99.8 million and $60.8 million, and $242.4 million, or 54%47%, 54% and 50%54% of total revenues, respectively, while revenues attributable to international operations during the same periods were $144.0 million, $85.8 million and $52.2 million, and $238.9 million, or 46%53%, 46% and 50%46% of total revenues, respectively. Revenues in 2001 include amounts attributable to Informix Software, the assets of which were sold to IBM in July 2001. See Note 9 to Notes tothe Consolidated Financial Statements attached to this report for summary information regarding revenues derived from our geographic regions. See also "Management's“Management’s Discussion and Analysis of Financial
The table below provides information about our foreign currency forward exchange contracts. The information is provided in U.S. dollar equivalents and presents the notional amount (contract amount) and the weighted average contractual foreign currencycontract forward exchange rates. Since these contracts were entered into on the last day of 20032004 the contract forward rate and the market forward rate are the same. All contracts mature within three months. In addition to the contracts listed below, at December 31, 2003,2004, we had accrued, as a component of accrued liabilitiesother current assets on our consolidated balance sheet, a gain of $3.2$1.4 million related to the fair market value of forward currency contracts that had closed as of December 31, 20032004 but were not settled until January 4 and January 5, 2004.2005.
Forward ContractsAt December 31, 2003
| | Contract
Amount
| | Contract
Rate
|
|---|
| | (In thousands)
| |
|
|---|
| Forward currency to be sold under contract: | | | | | |
| | Swiss Franc | | $ | 3,603 | | 1.2423 |
| | Singapore Dollar | | | 2,059 | | 1.6987 |
| | Korean Won | | | 2,052 | | 1,206.20 |
| | Norwegian Krona | | | 1,697 | | 6.6603 |
| | Brazilian Pesos | | | 1,662 | | 3.0225 |
| | Australian Dollar | | | 1,412 | | 1.3519 |
| | Slovak, Koruna | | | 1,244 | | 32.9490 |
| | Other (individually less than $1 million) | | | 2,101 | | |
| | |
| | |
| Total | | | 15,830 | | |
| Forward currency to be purchased under contract: | | | | | |
| | British Pound | | | 44,056 | | 0.5617 |
| | Euro dollar | | | 1,740 | | 0.7987 |
| | Other (individually less than $1 million) | | | 2,571 | | |
| | |
| | |
| Total | | | 48,367 | | |
| | |
| | |
| Grand Total | | $ | 64,197 | | |
| | |
| | |
| | | | | | | | | | |
| | | Contract | | | Contract | |
| At December 31, 2004 | | Amount | | | Rate | |
| | | | | | | |
| | | (In thousands) | |
| Forward currency to be sold under contract: | | | | | | | | |
| | Swiss Franc | | $ | 4,374 | | | | 1.1284 | |
| | Singapore Dollar | | | 1,651 | | | | 1.6328 | |
| | Korean Won | | | 2,107 | | | | 1039.00 | |
| | Norwegian Krone | | | 1,984 | | | | 6.0228 | |
| | Brazilian Real | | | 1,399 | | | | 2.7950 | |
| | Euro | | | 3,874 | | | | 1.363 | |
| | Czech Koruna | | | 1,984 | | | | 22.352 | |
| | | | | | | |
| Total | | | 17,373 | | | | | |
| Forward currency to be purchased under contract: | | | | | | | | |
| | British Pound | | | 20,141 | | | | 1.91991 | |
| | British Pound | | | 19,111 | | | | 1.91100 | |
| | Other (individually less than $1 million) | | | 1,814 | | | | | |
| | | | | | | |
| Total | | | 41,066 | | | | | |
| | | | | | | |
| Grand Total | | $ | 58,439 | | | | | |
| | | | | | | |
Recent Accounting Pronouncements See Note 1
of Notes to
the Consolidated Financial Statements
for a description of recent accounting pronouncements.
Subsequent Event
On March 13, 2005, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with IBM and Ironbridge Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of IBM (“Sub”) pursuant to which IBM will acquire all the Company’s outstanding equity interests. In accordance with the Merger Agreement, the Company will merge (the “Merger”) with and into Sub, with the Company continuing as the surviving corporation. The merger consideration will consist of $18.50 in cash per share of the Company’s Common Stock, par value $0.01 per share, issued and outstanding immediately prior to the Effective Time (other than shares held by the Company or IBM which will be canceled and retired, Appraisal Shares and Restricted Shares, each as defined in the Merger Agreement).
The transaction has been approved by the Company’s board of directors and is subject to stockholder approval, regulatory approvals and other customary closing conditions. Following the merger, the Company will delist from the Nasdaq National Market and deregister, and no longer file reports, under the Securities Exchange Act of 1934, as amended. The Company expects the transaction to close in the second quarter of 2005.
Factors That May Affect Future ResultsIf we do not make effective use
| |
| Changes in stock option accounting rules may have a significant adverse affect on our operating results. |
We have a history of using broad based employee stock option programs to hire, provide incentives to and retain our workforce in a competitive marketplace. Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” allows companies the choice of either using a fair value method of accounting for options that would result in expense recognition for all options granted, or using an intrinsic value method, as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) with a pro forma disclosure of the proceedsimpact on net income (loss) of our substantial cash resources, our financial results could sufferusing the fair
38
value option expense recognition method. We have elected to apply APB 25 and accordingly we generally have not recognized any expense with respect to employee stock options as long as such options are granted at exercise prices equal to the fair value of our common stock on the date of grant.
In December 2004, the Financial Accounting Standards Board published “Share-Based Payment” (“Statement 123(R)”). Statement 123(R) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity instruments issued. In determining the fair value of options and other equity-based awards, companies are required, under Statement 123(R), to use one of two valuation models that may involve extensive and complex analysis. Statement 123(R) will be effective for us beginning on July 1, 2005, which is the first day of the third quarter of our 2005 fiscal year. We are in the process of reviewing Statement 123(R) to determine which model is more appropriate for us. While we continue to evaluate the effect that the adoption of Statement 123(R) will have on our financial position and results of operations, we currently expect that our adoption of Statement 123(R) will adversely affect our operating results in future periods. For example, if Statement 123(R) had applied to our operating results for 2004, we would have recognized additional expense of approximately $33.7 million, which would have decreased our diluted net earnings (loss) per common share for 2004 from $0.25 to $(0.18).
| |
| Failure to maintain effective internal controls could have a material adverse effect on our business, operating results and stock price. |
We must continue to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our Independent Auditors addressing these assessments. During the course of our documentation and testing we may identify deficiencies that we may not be able to remediate in time to meet the deadlines imposed by the Sarbanes-Oxley Act for continuing compliance with the requirements of Section 404. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we and/or our independent registered public accounting firm may not be able to conclude at each fiscal year-end that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. In addition, we may incur increased costs in order to address the requirements of Section 404 and other provisions of the Sarbanes-Oxley Act, as well as other newly proposed or enacted rules of the Securities and Exchange Commission and the NASDAQ stock market. The extent and timing of incurrence of any such costs is difficult to predict. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If, in any year, we and/or our independent auditors cannot attest that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act, our business and operating results could
decline.be harmed and result in a negative market reaction.
| |
| If we do not make effective use of the proceeds of our substantial cash resources, our financial results could suffer and the value of our common stock could decline. |
Our ability to increase stockholder value is dependent, in part, on our effective use of the cash proceeds from the sale of our database business assets to
IBM, including the $100 million IBM Holdback, plus interest, released to us in January 2003. At December 31, 2003, as a result of the IBM Transaction and our continuing operations, we held $516.2 million in cash, cash equivalents and short-term investments.IBM. We intend to use
the proceedsthese funds to continue to operate our business, repurchase shares of our common stock and to finance any strategic acquisitions. We cannot ensure that these measures will improve our financial results or increase stockholder value.
If we are unable to increase revenue from, and expand the market share of, our products, our financial results will be materially adversely affected.
| |
| If we are unable to increase revenue from, and expand the market share of, our products, our financial results will be materially adversely affected. |
If we do not increase sales of our enterprise data integration products, our financial results will be materially adversely affected. Our revenue is currently derived almost entirely from our Enterprise Data Integration Suite. In order to increase revenues and grow our business, we must be able to increase sales of these products and our share of the enterprise data integration market. We cannot ensure that our current
39
customers will continue to purchase our data integration product offerings and related services and that new customers will choose our solutions over our
competitors'competitors’ product offerings.
51
If the enterprise data integration market declines or does not grow, we may sell fewer products and services and our business may be unable to sustain its current level of operations.
| |
| If the enterprise data integration market declines or does not grow, we may sell fewer products and services and our business may be unable to sustain its current level of operations. |
If the growth rates for the enterprise data integration market decline for any reason, there will be a decrease in demand for our products and services, which would have a material adverse effect on our financial results. We have invested substantial resources in developing data integration products and services to compete in this market. The market for these products and services is evolving, and its growth depends upon an increasing need to store and manage complex data and upon broader market acceptance of our products as a solution for this need. Declining demand for our products and services could threaten our ability to sustain our present level of operations and meet our expectations for future growth.
Intense competition could adversely affect There can be no assurance that our abilityinvestments in research and development to sell our products and services.
address changing market requirements will yield the desired results.
| |
| Intense competition could adversely affect our ability to sell our products and services. |
We may not be able to compete successfully against current and future competitors which could impair our ability to sell our products. The market for our products and services is highly competitive, diverse and subject to rapid change. In particular, we expect that the technology underlying our products and services will continue to change rapidly. It is possible that our products and solutions will be rendered obsolete by technological advances achieved by our competitors.
We currently face intense competition from a number of sources, including several large
The enterprise integration software market is extremely competitive and subject to rapid technological change with frequent new product introductions and enhancements. Our primary competitors in the market include in-house hand-coded solutions, vendors that develop and market
applications, development tools, decision support products, consulting services and/or complete database-driven solutions forcertain aspects of the
Internet.data integration requirement such as Informatica and Pervasive Software and certain business intelligence vendors who have embedded limited data transformation and loading capabilities into their offerings such as SAS (DataFlux) and Business Objects. Other vendors that offer ETL functionality include, among others,
Informatica, SAS, Business Objects, OracleMicrosoft and
Cognos.Oracle. We also face competition from private companies such as ETI, as well as various enterprise software vendors who have embedded ETL capabilities
and companies' own internal development resources. Principal competitors relative to our Ascential DataStage offering include vendors such as
Informatica, as well as enterprise software vendors who have embedded ETL capabilities,SAP, and
companies'companies’ own internal development resources. Competitors for Ascential ProfileStage, our data profiling offering, include
AvellinoTrillium, which was purchased by Harte-Hanks, CSI, which recently purchased Evoke, and
Evoke.SAS, which has built profiling capabilities around their DataFlux product line, among others. Competitors for Ascential QualityStage, our data quality offering, include Firstlogic, Group One,
SAS DataFlux and
Trillium.Trillium, among others. We believe that there is no single competitor that competes across the full range of our enterprise data integration platform at present. We believe that we are a strong competitor in the market with each of our data integration component products, and a recognized leader in providing end-to-end enterprise data integration. On occasion we also compete with combinations of vendors, as they seek to match the scope of the Ascential Enterprise Integration Suite. These competitors may be able to respond more quickly than we can to new or emerging technologies, evolving markets and changes in customer requirements. In addition, market consolidations could create more formidable competitors.
Competition may affect the pricing of our products or services and changes in product mix may occur, either of which may reduce our profit margins.
| |
| Competition may affect the pricing of our products or services and changes in product mix may occur, either of which may reduce our profit margins. |
Existing and future competition or changes in our product or service offerings or pricing could result in an immediate reduction in the prices of our products or services. In addition, a significant change in the mix of software products and services that we sell, including the mix between higher margin software and maintenance products and lower margin consulting and education, could materially adversely affect our operating results for future periods. Services margin could be negatively impacted by a reduction in the availability of appropriately skilled lower cost external resources. In addition, the pricing strategies of competitors in the software industry have historically been characterized by aggressive price discounting to
40
encourage volume purchasing by customers. We may not be able to compete effectively against competitors who continue to aggressively discount the prices of their products.
Our current strategy contemplates possible future acquisitions, which will require us to incur substantial costs for which we may never realize the anticipated benefits.
| |
| Our current strategy contemplates possible future acquisitions, which will require us to incur substantial costs for which we may never realize the anticipated benefits. |
On November 28, 2001 we completed the acquisition of Torrent, on April 3, 2002 we completed the acquisition of Vality, and on September 12, 2003 we completed the acquisition of Mercator.
In addition, we acquired certain technology from Metagenix Inc. on March 31, 2002, and on October 1, 2004, we acquired the assets of iNuCom (India) Limited and its affiliate iNuCom.com, Inc. We consummated each transaction with the expectation that it would result in mutual benefits including, among other things, expanded and complementary product offerings, increased market opportunity,
52
new technology and the addition of strategic personnel. Our business strategy contemplates the possibility of future acquisitions of complementary companies or technologies. Any potential acquisition may result in significant transaction expenses, increased interest and amortization expense, increased depreciation expense and increased operating expense, any of which could have a material adverse effect on our operating results. In addition, if we were to make a cash acquisition of substantial scale, it could reduce our cash reserves and affect our liquidity and capital resources.
Achieving the benefits of any acquisition will depend in part on our ability to integrate an acquired business with our business in a timely and efficient manner. Our consolidation of operations following any acquisition may require significant attention from our management. The diversion of management attention and any difficulties encountered in the transition and integration process could have a material adverse effect on our ability to achieve expected net sales, operating expenses and operating results for any acquired business. We cannot ensure that we will realize any of the anticipated benefits of any acquisition, and if we fail to realize these anticipated benefits, our operating performance could suffer.
Our financial results are subject to fluctuations caused by many factors that could result in our failing to achieve anticipated financial results.
| |
| Our financial results are subject to fluctuations caused by many factors that could result in our failing to achieve anticipated financial results. |
Our quarterly and annual financial results have varied significantly in the past and are likely to continue to vary in the future due to a number of factors, many of which are beyond our control. In particular, if a large number of the orders that are typically booked at the end of a quarter are not booked, our net income for that quarter could be substantially below expectations. In addition, the failure to meet market expectations could cause a sharp drop in our stock price. These and any one or more of the factors listed below or other factors could cause us not to achieve our revenue or profitability expectations. These factors include:
•Changes in demand for our products and services, including changes in growth rates in the software industry as a whole and in the enterprise data integration market,
•The size, timing and contractual terms of large orders for our software products and services,
•Possible delays in or inability to recognize revenue as the result of revenue recognition rules,
•The budgeting cycles of our customers and potential customers,
•Any downturn in our customers' businesses, in the domestic economy or in international economies where our customers do substantial business,
•Changes in our pricing policies resulting from competitive pressures, such as aggressive price discounting by our competitors, or other factors,
•Our ability to develop and introduce on a timely basis new or enhanced versions of our products and services,
•Unexpected needs for capital expenditures or other unanticipated expenses,
•Changes in the mix of revenues attributable to domestic and international sales, and
•Seasonal fluctuations in buying patterns.
Our recognition of deferred revenue is subject to future performance obligations and may not be representative of revenues for succeeding periods.
| | |
| • | Changes in demand for our products and services, including changes in growth rates in the software industry as a whole and in the enterprise data integration market, |
|
| • | The size, timing and contractual terms of large orders for our software products and services, |
|
| • | Possible delays in or inability to recognize revenue as the result of revenue recognition rules, |
|
| • | The budgeting cycles of our customers and potential customers, |
|
| • | Any downturn in our customers’ businesses, in the domestic economy or in international economies where our customers do substantial business, |
|
| • | Changes in our pricing policies resulting from competitive pressures, such as aggressive price discounting by our competitors, or other factors, |
|
| • | Our ability to develop and introduce on a timely basis new or enhanced versions of our products and services, |
|
| • | Unexpected needs for capital expenditures or other unanticipated expenses, |
|
| • | Changes in the mix of revenues attributable to domestic and international sales, and |
|
| • | Seasonal fluctuations in buying patterns. |
41
| |
| Our recognition of deferred revenue is subject to future performance obligations and may not be representative of revenues for succeeding periods. |
The timing and ultimate recognition of our deferred revenue depends on our performance of various service obligations. Because of the possibility of customer changes in development schedules, delays in implementation and development efforts and the need to satisfactorily perform product
53
support services, deferred revenue at any particular date may not be representative of actual revenue for any succeeding period.
Our common stock has been and likely will continue to be subject to substantial price and volume fluctuations that may prevent stockholders from reselling their shares at or above the prices at which they purchased their shares.
| |
| Our common stock has been and likely will continue to be subject to substantial price and volume fluctuations that may prevent stockholders from reselling their shares at or above the prices at which they purchased their shares. |
Fluctuations in the price and trading volume of our common stock may prevent stockholders from selling their shares at or above the prices at which they purchased their shares. Stock prices and trading volumes for many software companies fluctuate widely for a number of reasons, including some reasons that may be unrelated to the
companies'companies’ businesses or financial results. This market volatility, as well as general domestic or international economic, market and political conditions, including threats of terrorism, could materially adversely affect the market price of our common stock without regard to our operating performance. In addition, our operating results may be below the expectations of public market analysts and investors, which could cause a drop in the market price of our common stock. The market price of our common stock has fluctuated significantly in the past and may continue to fluctuate significantly for a number of reasons, including:
•Market uncertainty about our business prospects or the prospects for the enterprise data integration market,
•Revenues or results of operations that do not meet or exceed analysts' and investors' expectations,
•The introduction of new products or product enhancements by us or our competitors,
•Any challenges integrating people, operations or products associated with recent acquisitions,
•General business conditions in the software industry, the technology sector, or in the domestic or international economies, and
•Uncertainty and economic instability resulting from terrorist acts and other acts of violence or war.
Our financial success depends upon our ability to maintain and leverage relationships with strategic partners.
| | |
| • | Market uncertainty about our business prospects or the prospects for the enterprise data integration market, |
|
| • | Revenues or results of operations that do not meet or exceed analysts’ and investors’ expectations, |
|
| • | The introduction of new products or product enhancements by us or our competitors, |
|
| • | Any challenges integrating people, operations or products associated with recent acquisitions, |
|
| • | General business conditions in the software industry, the technology sector, or in the domestic or international economies, and |
|
| • | Uncertainty and economic instability resulting from terrorist acts and other acts of violence or war. |
| |
| Our financial success depends upon our ability to maintain and leverage relationships with strategic partners. |
We may not be able to maintain our strategic relationships or attract sufficient additional strategic partners who are able to market our products and services effectively. Our ability to increase the sales of our products and our future success depends in part upon maintaining and increasingexpanding relationships with strategic partners. In addition to our direct sales force, we rely on relationships with a variety of strategic partners, including systems integrators, resellers and distributors in the United States and abroad. Further, we have become more reliant upon resellers in international areas in which we do not have a direct sales team. Our strategic partners may offer products of several different companies, including, in some cases, products that compete with our products. In addition, our strategic partners may acquire businesses or product lines that compete with our products. We have limited control, if any, as to whether these strategic partners devote adequate resources to promoting, selling and implementing our products. If our strategic partners do not devote adequate resources for implementation of our products and services, we willcould incur substantial additional costs associated with hiring and training additional qualified technical personnel to implement solutions for our customers. In addition, our relationships with our strategic partners may not generate enough revenue to offset the cost of the significant resources used to develop and support these relationships.
54
42
We may not be able to retain our key personnel and attract and retain the new personnel necessary to grow our businesses, which could materially adversely affect our ability to develop and sell our products, support our business operations and grow our business.
| |
| We may not be able to retain our key personnel and attract and retain the new personnel necessary to grow our businesses, which could materially adversely affect our ability to develop and sell our products, support our business operations and grow our business. |
The competition for experienced, well-qualified personnel in the software industry is intense. Our future success depends on retaining the services of key personnel in all functional areas of our company, including engineering, sales, marketing, consulting and corporate services. For instance, we may be unable to continue to develop and support technologically advanced products and services if we fail to retain and attract highly qualified engineers, and to market and sell those products and services if we fail to retain and attract well-qualified marketing and sales professionals. We may be unable to retain key employees in all of these areas and we may not succeed in attracting new employees. In addition, from time to time we may acquire other companies. In order to achieve the anticipated benefits of any acquisition we may need transitional or permanent assistance from key employees of the acquired company. If we fail to retain, attract and motivate key employees, including those of companies that we acquire, we may be unable to develop, market and sell new products and services, which could materially adversely affect our operating and financial results.
Fluctuations in the value of foreign currencies could result in currency transaction losses.
| |
| Fluctuations in the value of foreign currencies could result in currency transaction losses. |
Despite efforts to manage foreign exchange risk, our hedging activities may not adequately protect us against the risks associated with foreign currency fluctuations, particularly in hyper-inflationary countries where hedging is not available or practical. As a consequence, we may incur losses in connection with fluctuations in foreign currency exchange rates. Most of our international revenue and expenses are denominated in local currencies. Due to the substantial volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations on our future operating results. Although we take into account changes in exchange rates in our pricing strategy, there would be a time lapse between any sudden or significant exchange rate movements and our implementation of a revised pricing structure.
Accordingly, we may have substantial pricing exposure as a result of foreign exchange volatility during the period between pricing reviews. In addition, as noted previously, the sales cycles for our products are relatively long. Foreign currency fluctuations could, therefore, result in substantial changes in the financial impact of a specific transaction between the time of initial customer contact and revenue recognition. We have a foreign exchange hedging program that is intended to hedge the value of intercompany accounts receivable or intercompany accounts payable denominated in foreign currencies against fluctuations in exchange rates until such receivables are collected or payables are disbursed.
If
| |
| A portion of our product development is outsourced offshore, which poses significant risks. |
Certain of our technical and product development initiatives are conducted using offshore consultants in India, Sri Lanka, and elsewhere, and using employees in India. We currently plan to increase the proportion of development performed offshore in order to take advantage of cost efficiencies and a broader talent pool. However, we domay not respond adequatelyachieve significant cost savings or other benefits that we anticipate from this program and we may not be able to our industry's evolving technology standards or do not continuelocate sufficient overseas staff with appropriate skill sets to meet our evolving needs. We have a heightened risk of exposure to changes in the sophisticated needseconomic, security and political conditions of India and other regions. Economic and political instability, military actions, and other unforeseen occurrences overseas could impair our ability to develop and introduce new software applications and functionality in a timely manner. Moreover, legislation may be adopted at the federal, state, or local level within the United States or elsewhere restricting acquisition of products or services with a significant offshore component, or customers revenues frommay individually adopt policies favoring technology developed using local labor forces. In such cases, our products and solutionscompetitive positioning may decline.be impaired. Further risks include:
| | |
| • | difficulties in managing, operating, and staffing offshore operations; |
|
| • | difficulties in obtaining or maintaining regulatory approvals or complying with foreign laws; |
|
| • | reduced or less certain protection for intellectual property rights; |
|
| • | differing technological advances, preferences or requirements; |
43
| | |
| • | trade restrictions; and |
|
| • | foreign currency fluctuations. |
| |
| If we do not respond adequately to our industry’s evolving technology standards or do not continue to meet the sophisticated needs of our customers, revenues from our products and solutions may decline. |
Our future success will depend on our ability to address the increasingly sophisticated needs of our customers by supporting existing and emerging hardware, software, database and networking platforms. We will have to develop and introduce commercially viable enhancements to our existing and acquired products and services on a timely basis to keep pace with technological developments, evolving industry standards and changing customer requirements. If we do not enhance our products and services to meet these evolving needs, we will not license or sell as many products and services and our position in existing, emerging or potential markets could be eroded rapidly by other product advances. In addition, commercial acceptance of our products and services also could be adversely affected by critical or negative statements or reports by brokerage firms, industry and financial analysts and the media about us or our products or business, or by the advertising or marketing efforts of competitors, or by other factors that could adversely affect consumer perception.
55
Our product development efforts will continue to require substantial financial and operational investment. We may not be able to internally develop new products and services quickly enough to respond to market forces. As a result, we may have to acquire technology or access to products or services through mergers and acquisitions, investments and partnering arrangements, any of which may require us to use significant financial resources. Alternatively, we may not be able to forge partnering arrangements or strategic alliances on satisfactory terms, or at all, with the companies of our choice.
Our future revenue and our ability to make investments in developing our products is substantially dependent upon our installed customer base continuing to license our products and renew our service agreements.
| |
| Our future revenue and our ability to make investments in developing our products is substantially dependent upon our installed customer base continuing to license our products and renew our service agreements. |
We depend on our installed customer base for future revenue from services and licenses of additional products. If our customers fail to renew their maintenance agreements, our revenue will decline. Our maintenance agreements are generally renewable annually at the option of the customers and there are no minimum payment obligations or obligations to license additional software. Therefore, current customers may not necessarily generate significant maintenance revenue in future periods. In addition, customers may not necessarily purchase or license additional products or services. Our services revenue and maintenance revenue also depends upon the continued use of these services by our installed customer base, including the customers of acquired companies. Any downturn in software license revenue could result in lower services revenue in current or future quarters.
Seasonal trends in sales of our software products could adversely affect our quarterly operating results, and our lengthy sales cycles for products makes our revenues susceptible to fluctuations.
| |
| Seasonal trends in sales of our software products could adversely affect our quarterly operating results, and our lengthy sales cycles for products makes our revenues susceptible to fluctuations. |
Our sales of software products and services have been affected by seasonal purchasing trends that materially affect our quarter-to-quarter operating results. We expect these seasonal trends to continue in the future. Revenue and operating results in our first quarter are typically lower relative to other quarters because many customers make purchase decisions for the fourth quarter based on their calendar year-end budgeting requirements, and as a new year begins start planning for, but not implementing, new information technology spending until later in the year. In addition, revenue and operating results in our third quarter may be adversely affected by scheduling conflicts due to vacations and holidays, particularly abroad.
Our sales cycles typically take many months to complete and vary depending on the product or service that is being sold. The length of the sales cycle may vary depending on a number of factors over which we have little or no control, including the size of a potential transaction and the level of competition that we encounter in our selling activities. The sales cycle can be further extended for sales made through resellers and third-party distributors.
The success of our international operations is dependent upon many factors that could adversely affect our ability to sell our products internationally and could affect our profitability.44
| |
| The success of our international operations is dependent upon many factors that could adversely affect our ability to sell our products internationally and could affect our profitability. |
International sales represent approximately
46%53% of our total
revenue.revenue for the year ended December 31, 2004. Our international operations are, and any expanded international operations will be, subject to a variety of risks associated with conducting business internationally that could adversely affect our ability to sell our products internationally and, therefore, our profitability, including the following:
•Difficulties in staffing and managing international operations,
•Problems in collecting accounts receivable,
•Longer payment cycles,
•Fluctuations in currency exchange rates,
56
•Seasonal reductions in business activity during the summer months in Europe and certain other parts of the world,
•Uncertainties relative to regional, political and economic circumstances,
•Recessionary environments in domestic or foreign economies and
•Increases in tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers imposed by countries, and other changes in applicable foreign laws.
If we fail to protect our intellectual property rights, competitors may be able to use our technology or trademarks which would weaken our competitive position, reduce our revenue and increase costs.
| | |
| • | Difficulties in staffing and managing international operations, |
|
| • | Problems in collecting accounts receivable, |
|
| • | Longer payment cycles, |
|
| • | Fluctuations in currency exchange rates, |
|
| • | Seasonal reductions in business activity during the summer months in Europe and certain other parts of the world, |
|
| • | Uncertainties relative to regional, political, economic and environmental circumstances, |
|
| • | Recessionary environments in domestic or foreign economies and |
|
| • | Increases in tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers imposed by countries, and other changes in applicable foreign laws. |
| |
| If we fail to protect our intellectual property rights, competitors may be able to use our technology or trademarks which would weaken our competitive position, reduce our revenue and increase costs. |
Our business success will continue to be heavily dependent upon proprietary technology. We rely primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. These means of protecting proprietary rights may not be adequate, and the inability to protect intellectual property rights may adversely affect our business and/or financial condition. We currently hold a number of United States patents and pending applications. There can be no assurance that any other patents covering our inventions will be issued or that any patent, if issued, will provide sufficiently broad protection or will prove enforceable in actions against alleged infringements. Our ability to sell or license our products and services and to prevent competitors from misappropriating our proprietary technology and trade names is dependent upon protecting our intellectual property. Our products are generally licensed to end users on a
"right-to-use"“right-to-use” basis under a license that restricts the use of the products for the
customer'scustomer’s internal business purposes.
Despite such precautions, it may be possible for unauthorized third parties to copy aspects of our current or future products or to obtain and use information that we regard as proprietary. In addition, we have licensed the source code of our products to certain customers under certain circumstances and for restricted uses. We also have entered into source code escrow agreements with a number of our customers that generally require release of our source code to the customer in the event of bankruptcy, insolvency, or discontinuation of our business or support of a product line, in each case where support and maintenance of the product line is not assumed by a third party. We may also be unable to protect our technology because:
•Competitors may independently develop similar or superior technology,
•Policing unauthorized use of software is difficult,
•The laws of some foreign countries do not protect proprietary rights in software to the same extent as do the laws of the United States,
•"Shrink-wrap" and/or "click-wrap" licenses may be wholly or partially unenforceable under the laws of certain jurisdictions, and
•Litigation to enforce intellectual property rights, to protect trade secrets, or to determine the validity and scope of the proprietary rights of others could result in substantial costs and diversion of resources.
Our software may have defects and errors, which may lead to a loss of revenue or product liability claims.
| | |
| • | Competitors may independently develop similar or superior technology, |
|
| • | Policing unauthorized use of software is difficult, |
|
| • | The laws of some foreign countries do not protect proprietary rights in software to the same extent as do the laws of the United States, |
|
| • | “Shrink-wrap” and/or “click-wrap” licenses may be wholly or partially unenforceable under the laws of certain jurisdictions, and |
|
| • | Litigation to enforce intellectual property rights, to protect trade secrets, or to determine the validity and scope of the proprietary rights of others could result in substantial costs and diversion of resources. |
45
| |
| Our software may have defects and errors, which may lead to a loss of revenue or product liability claims. |
Software products are internally complex and occasionally contain defects or errors, especially when first introduced or when new versions or enhancements are released. Despite extensive testing, we may not detect errors in our new products, platforms or product enhancements until after we have commenced commercial shipments. If defects and errors are discovered in our existing or acquired products, platforms or product enhancements after commercial release, then potential customers may
57
delay or forego purchases; our reputation in the marketplace may be damaged; we may incur additional service and warranty costs; and we may have to divert additional development resources to correct the defects and errors. If any or all of the foregoing occur, we may lose revenues or incur higher operating expenses and lose market share, any of which could severely harm our financial condition and operating results.
In the future, third parties could, for competitive or
| |
| Claims by others that we infringe their intellectual property rights could harm our business and financial condition. |
The software industry is characterized by an increasing prevalence of patents and litigation regarding patent and other
reasons, assertintellectual property rights. We cannot be certain that our products
do not and will not infringe
theirissued patents, patents that may issue in the future, or other intellectual property
rights. In the future,rights of third parties. From time to time we may face assertions by third parties could, for competitive or other reasons, assert that our products or technology infringe their patents or other intellectual property rights. Any such claimsclaim of infringement could be time consuming to defend, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or license agreements may not be available on acceptable terms or at all. We expect that software product developers will increasingly be subject to infringement claims asincur substantial costs defending against the number of productsclaim, even if the claim is invalid, and competitors incould distract the software industry segment grows and the functionality of products in different industry segments overlaps.
The lossattention of our management. If any of our products is found to violate third-party proprietary rights, we may be required to use software licensedpay substantial damages. In addition, we may be required to us byre-engineer our products or obtain licenses from third parties to continue to offer our products. There are no assurances that any efforts to re-engineer our products or obtain licenses on commercially reasonable terms would be successful and, if not, such circumstances could harmhave a material adverse effect on our business.
business, financial condition and results of operations.
| |
| The loss of our rights to use software licensed to us by third parties could harm our business. |
In order to provide a complete product suite, we occasionally license software from third parties, and sub-license this software to our customers. In addition, we license software programs from third parties and incorporate these programs into our own software products. By utilizing third party software in our business, we incur risks that are not associated with developing software in-house. For example, these third party providers may discontinue or alter their operations, terminate their relationship with us, impose license restrictions or generally become unable to fulfill their obligations to us. If any of these circumstances were to occur, we may be forced to seek alternative technology that may not be available on commercially reasonable terms. In the future, we may be forced to obtain additional third party software licenses to enhance our product offerings and compete more effectively. We may not be able to obtain and maintain licensing rights to needed technology on commercially reasonable terms, which would harm our business and operating results.
We have substantial real estate lease commitments for unoccupied space and restoration obligations, and if we are unable to sublet this space on acceptable terms our operating results and financial condition could be adversely affected.
| |
| We have substantial real estate lease commitments for unoccupied space and restoration obligations, and if we are unable to sublet this space on acceptable terms our operating results and financial condition could be adversely affected. |
We are party to real estate leases
worldwide for a total of approximately
583,000498,000 square feet. At December 31,
2003,2004, we actively utilized approximately
46%56% of this space, or
267,000278,000 square feet.
We retain unoccupied space as a result of the IBM Transaction and the Mercator acquisition. At December 31,
2003,2004 approximately
54%32%, or
316,000157,000 square feet
wasis currently
unoccupied. Approximately 12% or 63,000 square feet of this unoccupied
orspace is sublet to a third party.
Approximately 22% and 49% of the space occupied and unoccupied, respectively, is due to space acquired through the purchase of Mercator. Without taking into account any Mercator leases, Ascential is party to real estate leases for approximately 218,000 square feet that we actively utilize, and approximately 160,000 square feet that is currently unoccupied or sublet to a third party.
At December 31, 2003,2004, we havehad a restructuring reserve of $8.8$32.3 million associated with these leases comprised of $7.6$30.3 million for lease obligations and $1.2$2.0 million for restoration costs related to the disposition of this space as of December 31, 2003.2004. In establishing this reserve, we have assumed that we will be able to sublet
46
the available space and receive approximately
$4.6$24.7 million of sublease income relating to this space,
$2.3$3.7 million for properties already sublet and
$2.3$21.0 million from properties where a sublet is anticipated. We may not be able to sublet this space on the assumed terms and restoration costs may exceed our estimates. If we are unable to sublet this space on the assumed terms, or if restoration costs exceed our estimates, there may be an adverse effect on our operating results of up to
$2.2$19.9 million resulting from additional restructuring costs.
58
Additionally, as a result of the Mercator acquisition we have become party to additional real estate leases for approximately 49,000 square feet that will be actively utilized, and approximately 156,000 square feet that is currently unoccupied or sublet to a third party. At the date of the Mercator acquisition we assumed a liability of $10.5 million that Mercator previously established as a restructuring charge for facilities that they were partially occupying. Upon the consummation of the acquisition, we made a decision to vacate certain of these Mercator facilities entirely and, accordingly, recorded an additional reserve in purchase accounting of $17.4 million. The $17.4 million is primarily comprised of the lease obligations for these facilities through the year 2012. At December 31, 2003, we have a restructuring reserve of $28.4 million, primarily for future lease and lease-related obligations. In establishing these reserves, we have assumed that we will be able to sublet the available space and receive approximately $26.4 million of sublease income relating to this space, $2.8 million for properties already sublet and $23.6 million from properties where a sublet is anticipated. We may not be able to sublet this space on the assumed terms and restoration costs may exceed our estimates. If we are unable to sublet this space on the assumed terms, or if restoration costs exceed our estimates, there may be an adverse effect on our operating results of up to $20.7 million resulting from additional restructuring costs.
Our inability to rely on the statutory "safe harbor" for certain prior periods as a result of the settlement of the Securities and Exchange Commission investigation could harm our business.
Effective January 11, 2000, Informix entered into a settlement with the SEC as a result of an investigation. Pursuant to the settlement, Informix consented to the entry by the SEC of an Order Instituting Public Administrative Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease and Desist Order. Pursuant to the order, Informix neither admitted nor denied the findings, except as to jurisdiction, contained in the order.
The order prohibits us from violating and causing any violation of the anti-fraud provisions of the federal securities laws, for example by making materially false and misleading statements concerning our financial performance. The order also prohibits us from violating or causing any violation of the provisions of the federal securities laws requiring us to: (1) file accurate quarterly and annual reports with the SEC; (2) maintain accurate accounting books and records; and (3) maintain adequate internal accounting controls. Pursuant to the order, we are also required to cooperate in the SEC's continuing investigation of other entities and persons. In the event that we violate the order, we could be subject to substantial monetary penalties.
As a consequence of the issuance of the January 2000 order, we were not, for the three year period expiring on January 11, 2003, able to rely on the "safe harbor" for forward-looking statements contained in the federal securities laws. The "safe harbor," among other things, limits potential legal actions against us in the event a forward-looking statement concerning our anticipated performance turns out to be inaccurate, unless it can be proved that, at the time the statement was made, we actually knew that the statement was false. If we become a defendant in any private securities litigation brought under the federal securities laws pertaining to that three year period, our legal position in the litigation could be materially adversely affected by our inability to rely on the "safe harbor" provisions for forward-looking statements.
59
Provisions in our charter documents may discourage potential acquisition bids and prevent changes in our management that our stockholders may favor. This could adversely affect the market price for our common stock.
| |
| Provisions in our charter documents may discourage potential acquisition bids and prevent changes in our management that our stockholders may favor. This could adversely affect the market price for our common stock. |
Provisions in our charter documents could discourage potential acquisition proposals and could delay or prevent a change in control transaction that our stockholders may favor. The provisions include:
•Elimination of the right of stockholders to act without holding a meeting,
•Certain procedures for nominating directors and submitting proposals for consideration at stockholder meetings and
•A board of directors divided into three classes, with each class standing for election once every three years.
| | |
| • | Elimination of the right of stockholders to act without holding a meeting, |
|
| • | Certain procedures for nominating directors and submitting proposals for consideration at stockholder meetings and |
|
| • | A board of directors divided into three classes, with each class standing for election once every three years. |
These provisions are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and to discourage certain types of transactions involving an actual or threatened change of control. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal and, accordingly, could discourage potential acquisition proposals and could delay or prevent a change in control. Such provisions are also intended to discourage certain tactics that may be used in proxy fights but could, however, have the effect of discouraging others from making tender offers for shares of our common stock, and consequently, may also inhibit fluctuations in the market price of our common stock that could result from actual or rumored takeover attempts. These provisions may also have the effect of preventing changes in our management.
In addition, we have adopted a rights agreement, commonly referred to as a
"poison“poison pill,
"” that grants holders of our common stock preferential rights in the event of an unsolicited takeover attempt. These rights are denied to any stockholder involved in the takeover attempt which has the effect of requiring cooperation with our Board of Directors. This may also prevent an increase in the market price of our common stock resulting from actual or rumored takeover attempts. The rights agreement could also discourage potential acquirers from making unsolicited acquisition bids.
Provisions in our charter documents with respect to undesignated preferred stock may discourage potential acquisition bids.
| |
| Provisions in our charter documents with respect to undesignated preferred stock may discourage potential acquisition bids. |
Our Board of Directors is authorized to issue up to approximately four million shares of undesignated preferred stock in one or more series. Our Board of Directors can fix the price, rights, preferences, privileges and restrictions of such preferred stock without any further vote or action by our stockholders. However, the issuance of shares of preferred stock may delay or prevent a change in control transaction without further action by our stockholders. As a result, the market price of our common stock and the voting and other rights of the holders of our common stock may be adversely affected. The issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of our common stock, including the loss of voting controls to others.
Delaware law may inhibit potential acquisition bids, which may adversely affect the market price for our common stock and prevent changes in our management that our stockholders may favor.
| |
| Delaware law may inhibit potential acquisition bids, which may adversely affect the market price for our common stock and prevent changes in our management that our stockholders may favor. |
We are incorporated in Delaware and are subject to the anti-takeover provisions of the Delaware General Corporation Law, which regulates corporate acquisitions. Delaware law prevents certain Delaware corporations, including us, whose securities are listed for trading on the NASDAQ National Market, from engaging,
47
under certain circumstances, in a
"business combination"“business combination” with any
"interested stockholder"“interested stockholder” for three years following the date that the stockholder became an interested stockholder. For purposes of Delaware law, a
"business combination"“business combination” would include, among other things, a merger
60
or consolidation involving us and an interested stockholder and the sale of more than 10% of our assets. In general, Delaware law defines an "interested stockholder"“interested stockholder” as any entity or person beneficially owning 15% or more of the outstanding voting stock of a corporation and any entity or person affiliated with or controlling or controlled by such entity or person. Under Delaware law, a Delaware corporation may "opt out"“opt out” of the anti-takeover provisions. We have not and do not intend to "opt out"“opt out” of these anti-takeover provisions of Delaware law.
Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of violence or war, may affect the markets in which we operate, our operations and our profitability.
| |
| Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of violence or war, may affect the markets in which we operate, our operations and our profitability. |
Terrorist attacks may negatively disrupt and negatively impact our operations. We are unable to predict whether there will be future terrorist attacks against the United States or United States businesses, or against other countries or businesses located in those countries. These attacks may directly impact our physical facilities and those of our suppliers or customers. Furthermore, these attacks may make the travel of our employees more difficult and expensive and ultimately may affect our sales.
Also, as a result of terrorism or for other reasons, the United States may enter into an armed conflict that could have a further impact on our sales and our ability to deliver products to our customers. Political and economic instability in some regions of the world may also negatively impact our business generated in those regions. The consequences of any of these armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
| |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
The information required by this item is set forth in the section of
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations captioned
"Disclosures“Disclosures About Market Rate Risk.
"”
Item 8. Financial Statements and Supplementary Data
| |
| Item 8. | Financial Statements and Supplementary Data |
The information required by this item is set forth in our Financial Statements and Notes thereto beginning at page F-1 of this
report.report, as set forth in the index at Item 15(a)(1) below.
| |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
On March 31, 2003, the Audit Committee of our Board of Directors approved the dismissal of KPMG LLP ("KPMG") as our independent accountants.
The audit reports of KPMG on our consolidated financial statements for fiscal years ended December 31, 2002 and 2001 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles, except as follows:
KPMG's report on our consolidated financial statements as of and for the years ended December 31, 2002 and 2001 contained a separate paragraph stating "As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets."
During fiscal years 2002 and 2001 and the subsequent interim period through March 31, 2003, there were no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to KPMG's satisfaction, would have caused KPMG to make reference to the subject matter of such disagreement in connection with its reports on our financial statements. A letter from KPMG LLP is attached as Exhibit 16.1 to
61
the Company's Current Report on Form 8-K dated March 31, 2003 filed with the Securities and Exchange Commission on April 3, 2003 and is incorporated herein by reference.
On March 31, 2003, the Audit Committee of our Board of Directors approved the engagement of PricewaterhouseCoopers LLP ("PWC") as our independent accountants for the fiscal year ending December 31, 2003. On April 16, 2003, PWC commenced its engagement as our independent accountants for the fiscal year ending December 31, 2003. During fiscal years 2002 and 2001 and the subsequent interim period through the date of PWC's engagement, neither we nor anyone on our behalf consulted PWC regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on our financial statements, and neither a written report was provided to us nor oral advice was provided to us that PWC concluded was an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issue or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304(a) of Regulation S-K), or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).
| |
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Company'sProcedures. Our management, with the participation of the Company'sour chief executive officer and chief financial officer, evaluated the effectiveness of the Company'sour disclosure controls and procedures (asas of December 31, 2004. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2003. Based on this evaluation, the Company's chief executive officer and chief financial officer concluded that, as of December 31, 2003, the Company's disclosureAct, means controls and other procedures were (1)of a company that are designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company's chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Companyus in the reports that it fileswe file or submitssubmit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC'sSEC’s rules and forms.
No change Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the Company'sreports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2004,
48
our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s report on our internal controlcontrols over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred duringand the fiscalindependent registered public accounting firm’s related audit report are included in our Financial Statements and Notes thereto beginning at page F-2 and are incorporated herein by reference.
Changes in Internal Control over Financial Reporting. During the quarter ended December 31, 20032004 the following changes in internal control over financial reporting were made that materially affect, or are reasonably likely to materially affect, our internal control over financial reporting:
Internal controls surrounding the calculation of pro forma stock compensation expense in accordance with SFAS 123 were improved. The following procedures were implemented and operated effectively in the fourth quarter of 2004; as a result, certain adjustments to our previously reported pro forma stock compensation amounts were identified (See Note 1 to the Consolidated Financial Statements):
| | |
| • | Completed review of all cumulative vesting data included in the pro forma stock compensation calculations |
|
| • | Formalized policy with respect to the method utilized to calculate the after tax pro forma stock compensation |
|
| • | Expanded review and analysis of assumptions used in the calculation |
|
| • | Tested arithmetic accuracy of the calculations |
Internal controls surrounding accounting for international tax obligations were improved. The following procedures were implemented and operated effectively in the fourth quarter of 2004:
| | |
| • | Formalized tax payment reporting by foreign subsidiaries to the Corporate Tax Manager |
|
| • | Expanded tax reporting packages submitted by foreign subsidiaries to the US |
|
| • | Improved communication and reporting of differences between estimated tax provisions and actual tax obligations when tax returns are filed. |
Except as set forth above, there was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect,
the Company'sour internal control over financial reporting.
| |
| Item 9B. | Other Information |
None.
Certain information required by Part III of this Form 10-K is omitted because we will file a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K, and certain information to be included therein is incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant
| |
| Item 10. | Directors and Executive Officers of the Registrant |
Certain information regarding executive officers is included in Part I of this Form 10-K under the section captioned "Executive“Executive Officers."” The remaining information required by Item 10 of this Form 10-K is incorporated by reference to our definitive proxy statement.statement under the captions “Election of Directors”, “Board and Committee Meetings”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Code of Business Conduct and Ethics”.
49
Item 11. Executive Compensation
| |
| Item 11. | Executive Compensation |
The information required by Item 11 of this Form 10-K is incorporated herein by reference to our definitive proxy
statement.statement under the caption “Executive Compensation”. The information specified in Item 402(k) and (l) of Regulation S-K and set forth in our definitive proxy statement is not incorporated by reference.
62
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
| |
| Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table provides information about common stock authorized for issuance under our equity compensation plans as of December 31, 2003:
| |
| |
| | (c)
| |
|---|
| | (a)
| |
| |
|---|
| | (b)
| | Number of
securities
remaining available
for future issuance
under equity
Compensation plans
(excluding securities
reflected in column(a)((2)
| |
|---|
| | Number of
securities to be
issued upon
exercise of
Outstanding
options, warrants
and rights(1)
| |
|---|
Plan Category
| | Weighted-average
exercise price of
outstanding
options, warrants
and rights
| |
|---|
| | | | | | | | | | | Equity compensation plans approved by security holders | | 2,714,885 | | $ | 20.12 | | 4,794,699 | (3) | | Equity compensation plans not approved by security holders | | 3,554,015 | | $ | 15.53 | | 4,739,969 | | | | |
| | | | |
| | | | Total | | 6,268,900 | | $ | 17.52 | | 9,534,668 | | | | |
| | | | |
| |
|
The following table provides information about common stock authorized for issuance under our equity compensation plans as of December 31, 2004:
| | | | | | | | | | | | | |
| | | (a) | | | (b) | | | (c) | |
| | | | | | | | | | |
| | | | | | | Number of Securities | |
| | | Number of Securities | | | | | Remaining Available for | |
| | | to Be Issued Upon | | | Weighted Average | | | Future Issuance under | |
| | | Exercise of | | | Exercise Price of | | | Equity Compensation | |
| | | Outstanding Options, | | | Outstanding | | | Plans (Excluding | |
| | | Warrants and | | | Options, Warrants | | | Securities Reflected | |
| Plan Category | | Rights(1) | | | and Rights | | | in Column (a))(2) | |
| | | | | | | | | | |
| Equity compensation plans approved by security holders | | | 4,405,801 | | | $ | 22.04 | | | | 3,790,587 | (3) |
| Equity compensation plans not approved by security holders | | | 5,655,215 | | | $ | 16.51 | | | | 2,587,426 | |
| | | | | | | | | | |
| Total | | | 10,061,016 | | | $ | 18.93 | | | | 6,378,013 | |
| | | | | | | | | | |
| |
| (1) | This table excludes an aggregate of 2,028,4951,588,242 shares issuable upon exercise of outstanding options that were assumed in connection with various acquisition transactions. The weighted-average exercise price of the excluded options is $23.87.
- $23.45.
|
|
| (2) | In addition to being available for future issuance upon exercise of options that may be granted after December 31, 2003,2004, 1,650,000 shares under the 1994 Plan and 1,625,000 under the 1998 Plan may be used for the award of restricted stock.
|
|
| (3) | Includes 375,4161,169,854 shares issuable under our 1997 Employee Stock Purchase Plan as of December 31, 2003.Equity Compensation Plans Not Approved by Stockholders
Presently, the Company grants stock option awards under two equity compensation plans that are not approved by the stockholders—the 1997 Non-Statutory Stock Option Plan (as amended, the "1997 Plan") and the Amended and Restated 1998 Non-Statutory Stock Option and Award Plan (the "1998 Plan"). The following descriptions of the material terms of the plans are qualified in their entirety by reference to the 1997 Plan and the 1998 Plan.
1997 Non-Statutory Stock Option Plan
2004. |
Equity Compensation Plans Not Approved by Stockholders
Presently, the Company grants stock option awards under two equity compensation plans that are not approved by the stockholders — the 1997 Non-Statutory Stock Option Plan (as amended, the “1997 Plan”) and the Amended and Restated 1998 Non-Statutory Stock Option and Award Plan (the “1998 Plan”). The following descriptions of the material terms of the plans are qualified in their entirety by reference to the 1997 Plan and the 1998 Plan.
1997 Non-Statutory Stock Option Plan
| |
| General In July 1997, the Board of Directors adopted the 1997 Plan for the purposes of granting nonstatutory stock option awards to attract and retain the best available personnel for positions of substantial responsibility, providing additional incentives to employees and promoting the success of the Company's business. Under the 1997 Plan, we are currently authorized to grant nonstatutory stock options to purchase an aggregate of 425,000 shares of common stock.
The 1997 Plan is administered by a committee of the Board of Directors (the "1997 Committee"). The members of the 1997 Committee are appointed from time to time by, and serve at the pleasure of,
63
the Board of Directors. At present, the 1997 Committee is made up of the members of our Compensation Committee.
Subject to the terms of the 1997 Plan, the 1997 Committee has all discretion and authority necessary or appropriate to control and manage the operation and administration of the 1997 Plan. The 1997 Committee may, among other things, determine the per share exercise price of options granted, the term of the option and the vesting period and the acceptable form of payment upon exercise of an option. All determinations and interpretations of the 1997 Committee are final and binding on the holders of options granted under the 1997 Plan.
|
In July 1997, the Board of Directors adopted the 1997 Plan for the purposes of granting non-statutory stock option awards to attract and retain the best available personnel for positions of substantial responsibility, providing additional incentives to employees and promoting the success of the Company’s business. Under the 1997 Plan, we are currently authorized to grant non-statutory stock options to purchase an aggregate of 425,000 shares of common stock.
50
The 1997 Plan is administered by a committee of the Board of Directors (the “1997 Committee”). The members of the 1997 Committee are appointed from time to time by, and serve at the pleasure of, the Board of Directors. At present, the 1997 Committee is made up of the members of our Compensation Committee.
Subject to the terms of the 1997 Plan, the 1997 Committee has all discretion and authority necessary or appropriate to control and manage the operation and administration of the 1997 Plan. The 1997 Committee may, among other things, determine the per share exercise price of options granted, the term of the option and the vesting period and the acceptable form of payment upon exercise of an option. All determinations and interpretations of the 1997 Committee are final and binding on the holders of options granted under the 1997 Plan.
| |
| Eligibility The 1997 Plan provides that nonstatutory stock options may be granted to employees (including officers and directors who are also employees) and consultants (including advisors) of the Company and its subsidiaries; provided, however, that options may only be granted to officers and employee directors of the Company as an inducement essential to their entering into an employment contract with the Company.
|
The 1997 Plan provides that non-statutory stock options may be granted to employees (including officers and directors who are also employees) and consultants (including advisors) of the Company and its subsidiaries; provided, however, that options may only be granted to officers and employee directors of the Company as an inducement essential to their entering into an employment contract with the Company.
| |
| Amendment and Termination Subject to the relevant requirements of The Nasdaq Stock Market regarding shareholder approval, the Board of Directors may, in its discretion, amend, alter, suspend or terminate the 1997 Plan or any part of it; however, no such amendment, alteration, suspension or termination may impair the rights of any optionholder without the consent of the optionholder. The 1997 Plan is effective for a term of 10 years and will terminate on July 22, 2007, unless terminated earlier by the Board of Directors.
|
Subject to the relevant requirements of The Nasdaq Stock Market regarding shareholder approval, the Board of Directors may, in its discretion, amend, alter, suspend or terminate the 1997 Plan or any part of it; however, no such amendment, alteration, suspension or termination may impair the rights of any option holder without the consent of the option holder. The 1997 Plan is effective for a term of 10 years and will terminate on July 22, 2007, unless terminated earlier by the Board of Directors.
| |
| Changes in Capital Structure In the event of a stock dividend, stock split, reverse stock split, combination, reclassification or similar event, the number of shares authorized for issuance under the 1997 Plan, the outstanding options and the exercise price of such options will be proportionately adjusted.
In the event of a dissolution or liquidation, the 1997 Committee may accelerate the vesting of then-unvested options until 10 days prior to such transaction. In the event of any merger or asset sale, outstanding options shall be assumed or an equivalent option substituted by the successor corporation. In the event that the successor corporation refuses to assume the options, the options shall fully vest and become exercisable.
Amended and Restated 1998 Non-Statutory Stock Option and Award Plan
|
In the event of a stock dividend, stock split, reverse stock split, combination, reclassification or similar event, the number of shares authorized for issuance under the 1997 Plan, the outstanding options and the exercise price of such options will be proportionately adjusted.
In the event of a dissolution or liquidation, the 1997 Committee may accelerate the vesting of then-unvested options until 10 days prior to such transaction. In the event of any merger or asset sale, outstanding options shall be assumed or an equivalent option substituted by the successor corporation. In the event that the successor corporation refuses to assume the options, the options shall fully vest and become exercisable.
Amended and Restated 1998 Non-Statutory Stock Option and Award Plan
| |
| General In July 1998, the Board of Directors adopted the 1998 Plan for the purposes of granting nonstatutory stock option awards to attract and retain the best available personnel for positions of substantial responsibility, providing additional incentive to employees and consultants and promoting the success of the Company's business. In June 2003, the 1998 Plan was amended to provide for the issuance of restricted stock awards to employees and consultants of the Company. Under the 1998 Plan 8,125,000 shares of common stock are authorized for issuance.
The 1998 Plan is presently administered by a committee of the Board of Directors (the "1998 Committee"). The members of the 1998 Committee are appointed from time to time by, and serve at the pleasure of, the Board of Directors. At present, the Compensation Committee administers the 1998 Plan. The Compensation Committee has delegated authority to administer the 1998 Plan to a Stock Option Committee of which the Company's Chairman of the Board of Directors and Chief Executive Officer, Peter Gyenes, is the sole member. The Stock Option Committee has the authority to select the employees, other than officers (as defined) and directors, to whom options may be granted under the
64
1998 Plan. At each regularly scheduled meeting of the Board of Directors and of the Compensation Committee, all such option grants by the Stock Option Committee issued since the prior scheduled meeting are reviewed. In addition, the Company's current practice is to have the Compensation Committee and/or the Board of Directors determine, authorize and approve annual executive option grants.
Subject to the terms of the 1998 Plan, the 1998 Committee has all discretion and authority necessary or appropriate to control and manage the operation and administration of the 1998 Plan. The 1998 Committee may, among other things, determine the per share exercise price of options granted, the term of the option and the vesting period and the acceptable form of payment upon exercise of an option. All determinations and interpretations of the 1998 Committee are final and binding on the holders of options granted under the 1998 Plan.
|
In July 1998, the Board of Directors adopted the 1998 Plan for the purposes of granting non-statutory stock option awards to attract and retain the best available personnel for positions of substantial responsibility, providing additional incentive to employees and consultants and promoting the success of the Company’s business. In June 2003, the 1998 Plan was amended to provide for the issuance of restricted stock awards to employees and consultants of the Company. Under the 1998 Plan 8,125,000 shares of common stock are authorized for issuance.
The 1998 Plan is presently administered by a committee of the Board of Directors (the “1998 Committee”). The members of the 1998 Committee are appointed from time to time by, and serve at the pleasure of, the Board of Directors. At present, the Compensation Committee administers the 1998 Plan. The Compensation Committee has delegated authority to administer the 1998 Plan to a Stock Option Committee of which the Company’s Chairman of the Board of Directors and Chief Executive Officer, Peter Gyenes, is the sole member. The Stock Option Committee has the authority to select the employees, other than officers (as defined) and directors, to whom options may be granted under the 1998 Plan. At each regularly scheduled meeting of the Board of Directors and of the Compensation Committee, all such option grants by the Stock Option Committee issued since the prior scheduled meeting are reviewed. In addition, the Company’s current
51
practice is to have the Compensation Committee and/or the Board of Directors determine, authorize and approve annual executive option grants.
Subject to the terms of the 1998 Plan, the 1998 Committee has all discretion and authority necessary or appropriate to control and manage the operation and administration of the 1998 Plan. The 1998 Committee may, among other things, determine the per share exercise price of options granted, the term of the option and the vesting period and the acceptable form of payment upon exercise of an option. All determinations and interpretations of the 1998 Committee are final and binding on the holders of options granted under the 1998 Plan.
| |
| Eligibility The 1998 Plan provides that nonstatutory stock options and restricted stock may be granted to employees (including officers) and consultants (including advisors).
|
The 1998 Plan provides that non-statutory stock options and restricted stock may be granted to employees (including officers) and consultants (including advisors).
| |
| Amendment and Termination Subject to the relevant requirements of The Nasdaq Stock Market regarding shareholder approval, the Board of Directors may, in its discretion, amend, alter, suspend or terminate the 1998 Plan or any part it; however, no such amendment, alteration, suspension or termination shall impair the rights of any optionholder without the consent of the optionholder. The 1998 Plan is effective for a term of 10 years and will terminate on July 17, 2008, unless terminated earlier by the Board of Directors.
|
Subject to the relevant requirements of The Nasdaq Stock Market regarding shareholder approval, the Board of Directors may, in its discretion, amend, alter, suspend or terminate the 1998 Plan or any part it; however, no such amendment, alteration, suspension or termination shall impair the rights of any option holder without the consent of the option holder. The 1998 Plan is effective for a term of 10 years and will terminate on July 17, 2008, unless terminated earlier by the Board of Directors.
| |
| Changes in Capital Structure In the event of a stock dividend, stock split, reverse stock split, combination, reclassification or similar event, the number of shares authorized for issuance under the 1998 Plan, the outstanding options and awards and the exercise price of such options will be proportionately adjusted.
In the event of any merger, direct or indirect purchase, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company, all obligations of the Company under the 1998 Plan, with respect to the options granted under the 1998 Plan, shall be binding on any successor to the Company.
The remaining information required by Item 12 of this Form 10-K is incorporated herein by reference to our definitive proxy statement.
|
In the event of a stock dividend, stock split, reverse stock split, combination, reclassification or similar event, the number of shares authorized for issuance under the 1998 Plan, the outstanding options and awards and the exercise price of such options will be proportionately adjusted.
In the event of any merger, direct or indirect purchase, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company, all obligations of the Company under the 1998 Plan, with respect to the options granted under the 1998 Plan, shall be binding on any successor to the Company.
The remaining information required by Item 12 of this Form 10-K is incorporated herein by reference to our definitive proxy statement.
| |
| Item 13. | Certain Relationships and Related Transactions
The information required by Item 13 of Form 10-K is incorporated herein by reference to our definitive proxy statement under the section captioned "Certain Relationships and Related Transactions."
|
The information required by Item 13 of Form 10-K is incorporated herein by reference to our definitive proxy statement under the section captioned “Certain Relationships and Related Transactions.”
| |
| Item 14. | Principal Accountant Fees and Services
The information required by Item 14 of this Form 10-K is incorporated herein by reference to our definitive proxy statement.
65
PART IV
|
The information required by Item 14 of this Form 10-K is incorporated herein by reference to our definitive proxy statement under the captions “Audit Fees” and “Pre-Approval Policy and Procedures”.
52
PART IV
| |
| Item 15. | Exhibits, and Financial Statement Schedules and Reports on Form 8-K The following are filed as a part of this Annual Report and included in Item 8:
|
The following are filed as a part of this Annual Report and included in Item 8:
| |
| (a)(1) | Financial Statements
| | Page
|
|---|
Report of Independent Auditors — PricewaterhouseCoopers LLP |
| | F-2 | Report of Independent Auditors — KPMG LLP | | F-3 | Consolidated Balance Sheets | | F-4 | Consolidated Statements of Operations | | F-5 | Consolidated Statements of Cash Flows | | F-6 | Consolidated Statements of Stockholders' Equity | | F-7 | Consolidated Statements of Comprehensive Income (Loss) | | F-8 | Notes to Consolidated Financial Statements | | F-9 |
(a)(2) Financial Statements Schedules
All schedules are not submitted because they are not applicable, not required, or the information is included in our Consolidated Financial Statements and related Notes to Consolidated Financial Statements.
(a)(3) Exhibits
2.1(2) |
|
Agreement and Plan of Merger, dated as of August 2, 2003, by and among Ascential Software Corporation, Greek Acquisition Corporation and Mercator Software, Inc. |
2.2(14) |
|
Merger Agreement, dated as of March 12, 2002, among the Registrant, Venus Acquisition Corporation and Vality Technology Incorporated |
3.1(3) |
|
Restated Certificate of Incorporation, as amended |
3.2(4) |
|
Second Amended and Restated Bylaws of Ascential Software Corporation |
3.3(5) |
|
Certificate of Designation of Series B Convertible Preferred Stock |
4.1(6) |
|
First Amended and Restated Rights Agreement, dated as of August 12, 1997, between the Registrant and BankBoston N.A., including the form of Rights Certificate attached thereto as Exhibit A |
4.2(6) |
|
Amendment, dated as of November 17, 1997, to the First Amended and Restated Rights Agreement between the Registrant and BankBoston, N.A. |
4.3(7) |
|
Amendment No. 2 to the First Amended and Restated Rights Agreement, dated as of April 26, 2002, between the Registrant and EquiServe Trust Company, N.A. |
10.1(4)(†) |
|
Change in Control Agreement, dated as of April 22, 2003, between the Registrant and Peter Gyenes | | | | |
66
10.2(4)(†) | | | Page |
|
Change in Control Agreement, dated as of April 22, 2003, between the Registrant and Peter Fiore |
10.3(4)(†) |
|
Change in Control Agreement, dated as of April 22, 2003, between the Registrant and Scott N. Semel |
10.4(4)(†) |
|
Change in Control Agreement, dated as of April 22, 2003, between the Registrant and Robert C. McBride |
10.5(8)(†) |
|
Form of Indemnity Agreement to which the Registrant is a party with each of its directors and executive officers |
10.6(9)(†) |
|
Part-Time Employment and Transition Agreement between the Registrant and Peter Gyenes |
10.7(10)(†) |
|
Offer of Employment Letter, dated July 31, 2000, between the Registrant and Peter Gyenes |
10.8(11) |
|
Settlement Agreement, effective January 11, 2000, between the Registrant and the Securities and Exchange Commission |
10.9(12)(†) |
|
Offer of Employment Letter, dated June 13, 2001, between the Registrant and Robert C. McBride |
10.10(12)(†) |
|
Offer of Employment Letter, effective July 25, 2001, between the Registrant and Scott Semel |
10.11(12)(†) |
|
Form of Offer of Employment Letter for officers of the Registrant |
10.12(13) |
|
Master Purchase Agreement, dated as of April 24, 2001, among Informix Corporation, Informix Software, Inc. and International Business Machines Corporation |
10.13(12) |
|
Lease, dated May 3, 1994, between VMark Software, Inc. and 50 Washington Street Associates L.P. for office space at 50 Washington Street, Westborough, Massachusetts |
10.14(12) |
|
Amendment of Lease, dated March 27, 1998, between Ardent Software, Inc. (formerly VMark Software, Inc.) and Fifty Washington Street Limited Partnership for office space at 50 Washington Street, Westborough, Massachusetts |
10.15(12) |
|
Agreement, dated March 12, 2001, among the Registrant, Informix Software, Inc., Ascential Software, Inc. and Fifty Washington Street Limited Partnership regarding Lease for office space at 50 Washington Street, Westborough, Massachusetts |
10.16(15)(†) |
|
Second Restated 1994 Stock Option and Award Plan |
10.17(15)(†) |
|
Second Restated 1989 Outside Directors Stock Option Plan |
10.18(15)(†) |
|
Second Restated 1997 Employee Stock Purchase Plan |
10.19(15)(†) |
|
Amended and Restated 1998 Non-Statutory Stock Option and Award Plan |
10.20(18)(†) |
|
1997 Non-Statutory Stock Option Plan |
10.21(1)(†) |
|
Amendment to 1997 Non-Statutory Stock Option Plan |
10.22(17)(†) |
|
TSI International Software Inc. 1993 Stock Option Plan |
10.23(17)(†) |
|
1996 Novera Software Inc. Stock Option Plan |
10.24(17)(†) |
|
Mercator Software, Inc. 1997 Equity Incentive Plan |
16.1(19) |
|
Letter from KPMG LLP to the Commission dated April 2, 2003. | | | | | | | Managements Report on Internal Control Over Financial Reporting | | | F-2 | |
67
21.1(1) | | Report of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP | | | F-3 | | | Report of Independent Registered Public Accounting Firm — KPMG LLP | | | F-5 | | | Consolidated Balance Sheets | | | F-6 | | | Consolidated Statements of Operations | | | F-7 | | | Consolidated Statements of Cash Flows | | | F-8 | | | Consolidated Statements of Stockholders’ Equity | | | F-9 | | | Consolidated Statements of Comprehensive Income (Loss) | | | F-10 | | | Notes to Consolidated Financial Statements | | | F-11 | |
| | | (a)(2) | Financial Statements Schedules |
All schedules are not submitted because they are not applicable, not required, or the information is included in our Consolidated Financial Statements and related Notes to Consolidated Financial Statements. (a)(3) Exhibits | | | | | | | | 2 | .1(2) | | Agreement and Plan of Merger, dated as of August 2, 2003, by and among Ascential Software Corporation, Greek Acquisition Corporation and Mercator Software, Inc. | | | 2 | .2(14) | | Merger Agreement, dated as of March 12, 2002, among the Registrant, Venus Acquisition Corporation and Vality Technology Incorporated | | | 2 | .3(24) | | Agreement and Plan of Merger, dated as of March 13, 2005, among International Business Machines Corporation, Ironbridge Acquisition Corp., and Ascential Software Corporation | | | 3 | .1(3) | | Restated Certificate of Incorporation, as amended | | | 3 | .2(22) | | Certificate of Amendment to Restated Certificate of Incorporation, as amended | | | 3 | .3(4) | | Second Amended and Restated Bylaws of Ascential Software Corporation | | | 3 | .4(5) | | Certificate of Designation of Series B Convertible Preferred Stock | | | 4 | .1(6) | | First Amended and Restated Rights Agreement, dated as of August 12, 1997, between the Registrant and BankBoston N.A., including the form of Rights Certificate attached thereto as Exhibit A | | | 4 | .2(6) | | Amendment, dated as of November 17, 1997, to the First Amended and Restated Rights Agreement between the Registrant and BankBoston, N.A. | | | 4 | .3(7) | | Amendment No. 2 to the First Amended and Restated Rights Agreement, dated as of April 26, 2002, between the Registrant and EquiServe Trust Company, N.A. | | | 4 | .4(25) | | Amendment No. 3 to the First Amended and Restated Rights Agreement, dated March 13, 2005, between the Registrant and EquiServe Trust Company, N.A. | | | 10 | .1(4)(†) | | Change in Control Agreement, dated as of April 22, 2003, between the Registrant and Peter Gyenes | | | 10 | .2(4)(†) | | Change in Control Agreement, dated as of April 22, 2003, between the Registrant and Peter Fiore | | | 10 | .3(4)(†) | | Change in Control Agreement, dated as of April 22, 2003, between the Registrant and Scott N. Semel |
53
| | | | | | | | 10 | .4(4)(†) | | Change in Control Agreement, dated as of April 22, 2003, between the Registrant and Robert C. McBride | | | 10 | .5(8)(†) | | Form of Indemnity Agreement to which the Registrant is a party with each of its directors and executive officers | | | 10 | .6(9)(†) | | Part-Time Employment and Transition Agreement between the Registrant and Peter Gyenes | | | 10 | .7(10)(†) | | Offer of Employment Letter, dated July 31, 2000, between the Registrant and Peter Gyenes | | | 10 | .8(11) | | Settlement Agreement, effective January 11, 2000, between the Registrant and the Securities and Exchange Commission | | | 10 | .9(12)(†) | | Offer of Employment Letter, dated June 13, 2001, between the Registrant and Robert C. McBride | | | 10 | .10(12)(†) | | Offer of Employment Letter, effective July 25, 2001, between the Registrant and Scott Semel | | | 10 | .11(12)(†) | | Form of Offer of Employment Letter for officers of the Registrant | | | 10 | .12(13) | | Master Purchase Agreement, dated as of April 24, 2001, among Informix Corporation, Informix Software, Inc. and International Business Machines Corporation | | | 10 | .13(12) | | Lease, dated May 3, 1994, between VMark Software, Inc. and 50 Washington Street Associates L.P. for office space at 50 Washington Street, Westborough, Massachusetts | | | 10 | .14(12) | | Amendment of Lease, dated March 27, 1998, between Ardent Software, Inc. (formerly VMark Software, Inc.) and Fifty Washington Street Limited Partnership for office space at 50 Washington Street, Westborough, Massachusetts | | | 10 | .15(12) | | Agreement, dated March 12, 2001, among the Registrant, Informix Software, Inc., Ascential Software, Inc. and Fifty Washington Street Limited Partnership regarding Lease for office space at 50 Washington Street, Westborough, Massachusetts | | | 10 | .16(15)(†) | | Second Restated 1994 Stock Option and Award Plan | | | 10 | .17(15)(†) | | Second Restated 1989 Outside Directors Stock Option Plan | | | 10 | .18(15)(†) | | Second Restated 1997 Employee Stock Purchase Plan | | | 10 | .19(15)(†) | | Amended and Restated 1998 Non-Statutory Stock Option and Award Plan | | | 10 | .20(18)(†) | | 1997 Non-Statutory Stock Option Plan | | | 10 | .21(20)(†) | | Amendment to 1997 Non-Statutory Stock Option Plan | | | 10 | .22(17)(†) | | TSI International Software Inc. 1993 Stock Option Plan | | | 10 | .23(17)(†) | | 1996 Novera Software Inc. Stock Option Plan | | | 10 | .24(17)(†) | | Mercator Software, Inc. 1997 Equity Incentive Plan | | | 10 | .25(21)(†) | | Amended and Restated Change of Control and Severance Agreement, dated as of May 1, 2002, between the Registrant and Peter Gyenes | | | 10 | .26(21)(†) | | Amended and Restated Change of Control and Severance Agreement, dated as of May 1, 2002, between the Registrant and Peter Fiore | | | 10 | .27(21)(†) | | Amended and Restated Change of Control and Severance Agreement, dated as of March 8, 2002, between the Registrant and Robert C. McBride | | | 10 | .28(23)(†) | | Form of Stock Option Agreement pursuant to Second Restated 1994 Stock Option and Award Plan | | | 10 | .29(23)(†) | | Form of Nonqualified Stock Option Agreement pursuant to Second Restated 1989 Outside Directors Stock Option Plan | | | 10 | .30(23)(†) | | Form of Stock Option Agreement pursuant to Amended and Restated 1998 Non-Statutory Stock Option and Award Plan | | | 10 | .31(1)(†) | | Form of Notice of Restricted Stock Grant | | | 21 | .1(1) | | Subsidiaries of the Registrant | | | 23 | .1(1) | | Consent of PricewaterhouseCoopers LLP | | | 23 | .2(1) | | Consent of KPMG LLP | | | 24 | .1 | | Power of Attorney (set forth on signature page) |
54
| | | | | | | | 31 | .1(1) | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended | | | 31 | .2(1) | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended | | | 32 | .1(1) | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | 32 | .2(1) | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | 99 | .1(16) | | Stock Tender Agreement, dated as of August 2, 2003, by and among Ascential Software Corporation, Greek Acquisition Corporation and certain directors and executive and other officers of Mercator Software, Inc. set forth therein | | | 99 | .2(16) | | Common Stock Option Agreement, dated as of August 2, 2003, by and among Ascential Software Corporation, Greek Acquisition Corporation and Mercator Software, Inc. |
| | | | (1) | Filed herewith. | | | (2) |
|
Subsidiaries of the Registrant |
23.1(1) |
|
Consent of KPMG LLP |
23.2(1) |
|
Consent of PricewaterhouseCoopers LLP |
24.1 |
|
Power of Attorney (set forth on signature page) |
31.1(1) |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended |
31.2(1) |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended |
32.1(1) |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2(1) |
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
99.1(16) |
|
Stock Tender Agreement, dated as of August 2, 2003, by and among Ascential Software Corporation, Greek Acquisition Corporation and certain directors and executive and other officers of Mercator Software, Inc. set forth therein |
99.2(16) |
|
Common Stock Option Agreement, dated as of August 2, 2003, by and among Ascential Software Corporation, Greek Acquisition Corporation and Mercator Software, Inc. |
(1)Filed herewith
(2)- Incorporated by reference to exhibit filed with the
Registrant'sRegistrant’s current report on Form 8-K filed with the Securities and Exchange Commission (the “Commission”) on August 5, 2003 (File No. 000-15325)
|
|
| (3) | Incorporated by reference to exhibit filed with the Registrant'sRegistrant’s quarterly report on Form 10-Q filed with the Commission on August 14, 2003 (File No. 000-15325)
|
|
| (4) | Incorporated by reference to exhibit filed with the Registrant'sRegistrant’s quarterly report on Form 10-Q filed with the Commission on May 15, 2003 (File No. 000-15325)
|
|
| (5) | Incorporated by reference to exhibit filed with the Registrant'sRegistrant’s current report on Form 8-K filed with the Commission on December 4, 1997 (File No. 000-15325)
|
|
| (6) | Incorporated by reference to exhibit filed with the amendment to the Registrant'sRegistrant’s registration statement on Form 8-A/A filed with the Commission on September 3, 1997 (File No. 000-15325)
|
|
| (7) | Incorporated by reference to exhibit filed with Amendment No. 5 to the Registrant'sRegistrant’s registration statement on Form 8-A/A filed with the Commission on May 1, 2002 (File No. 000-15325)
|
|
| (8) | Incorporated by reference to exhibit filed with the Registrant'sRegistrant’s annual report on Form 10-K filed with the Commission on March 27, 2003 (File No. 000-15325)
|
|
| (9) | Incorporated by reference to exhibit filed with the Registrant'sRegistrant’s quarterly report on Form 10-Q filed with the Commission on May 15, 2000 (File No. 000-15325)
|
| |
| (10) | Incorporated by reference to exhibit filed with the Registrant'sRegistrant’s quarterly report on Form 10-Q filed with the Commission on November 14, 2000 (File No. 000-15325)
|
|
| (11) | Incorporated by reference to exhibit filed with the Registrant'sRegistrant’s current report on Form 8-K filed with the Commission on January 19, 2000 (File No. 000-15325)
|
|
| (12) | Incorporated by reference to exhibit filed with the Registrant'sRegistrant’s annual report on Form 10-K filed with the Commission on April 1, 2002 (File No. 000-15325)68
|
|
| (13) | Incorporated by reference to Annex A to the Registrant'sRegistrant’s Definitive Proxy Statement on Schedule 14A filed with the Commission on May 10, 2001 (File No. 000-15325)
|
|
| (14) | Incorporated by reference to exhibit filed with the Registrant'sRegistrant’s quarterly report on Form 10-Q filed with the Commission on May 15, 2002 (File No. 000-15325)
|
|
| (15) | Incorporated by reference to exhibit filed with the Registrant'sRegistrant’s registration statement on Form S-8 filed with the Commission on December 5, 2003 (File No. 333-110970)
|
|
| (16) | Incorporated by reference to exhibit filed with the Registrant'sRegistrant’s current report on Form 8-K filed with the Commission on August 5, 2003 (File No. 000-15325)
|
|
| (17) | Incorporated by reference to exhibit filed with the Registrant'sRegistrant’s Registration Statement on Form S-8 filed with the Commission on September 12, 2003 (File No. 333-108782)
|
55
| |
| (18) | Incorporated by reference to exhibit filed with the Registrant'sRegistrant’s annual report on Form 10-K filed with the Commission on March 31, 1998 (File No. 000-15325)
|
|
| (19) | Incorporated by reference to exhibit filed with the Registrant'sRegistrant’s current report on Form 8-K filed with the Commission on April 3, 2003 (File No. 000-15325)
|
|
| (20) | Incorporated by reference to exhibit filed with the Registrant’s annual report on Form 10-K filed with the Commission on March 16, 2004 (File No. 000-15325) |
|
| (21) | Incorporated by reference to exhibit filed with the Registrant’s quarterly report on Form 10-Q filed with the Commission on August 14, 2002 (File No. 000-15325) |
|
| (22) | Incorporated by reference to exhibit filed with the Company’s quarterly report on Form 10-Q filed with the Commission on August 9, 2004 (File No. 000-15325) |
|
| (23) | Incorporated by reference to exhibit filed with the Company’s quarterly report on Form 10-Q filed with the Commission on November 9, 2004 (File No. 000-15325) |
|
| (24) | Incorporated by reference to exhibit filed with the Registrant’s current report on Form 8-K filed with the Commission on March 14, 2005 (File No. 000-15325) |
|
| (25) | Incorporated by reference to exhibit filed with Amendment No. 6 to the Registrant’s registration statement on Form 8-A/A filed with the Commission on March 14, 2005 (File No. 000-15325) |
| | |
| (†) | | Management contract or compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K (b) Reports on Form 8-K
On October 30, 2003,
|
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| |
| Ascential Software Corporation |
| |
| |
| Peter Gyenes |
| Chief Executive Officer and |
| Chairman of the Company furnished a CurrentBoard of Directors |
Date: March 16, 2005
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Peter Gyenes and Robert McBride and each one of them, acting individually and without the other, as his attorney-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed on behalf of the Registrant and in the capacities and on the dates indicated.
| | | | | | |
| Signature | | Title | | Date |
| | | | |
|
/s/ Peter Gyenes
Peter Gyenes | | Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) | | March 16, 2005 |
|
/s/ Robert C. McBride
Robert C. McBride | | Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | | March 16, 2005 |
|
/s/ Robert M. Morrill
Robert M. Morrill | | Director | | March 16, 2005 |
|
/s/ John J. Gavin, Jr.
John J. Gavin, Jr. | | Director | | March 16, 2005 |
|
/s/ David J. Ellenberger
David J. Ellenberger | | Director | | March 16, 2005 |
|
/s/ William J. Weyand
William J. Weyand | | Director | | March 16, 2005 |
57
ASCENTIAL SOFTWARE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | |
| | Page | |
| | | |
| | | F-2 | |
| | | F-3 | |
| | | F-5 | |
| | | F-6 | |
Consolidated Statements of December 31, 2002Mercator Software, Inc. Consolidated Statement of Operations for the year ended December 31, 2002
Mercator Software, Inc. Consolidated Statement of Stockholders' Equity and Comprehensive Loss for the year ended December 31, 2002
Mercator Software, Inc. Consolidated Statement of Cash Flows for the year ended December 31, 2002
Independent Auditors' Report as of and for the year ended December 31, 2002
Mercator Software, Inc. Unaudited Consolidated Balance Sheet as of June 30, 2003
Mercator Software, Inc. Unaudited Consolidated Statement of Operations and Comprehensive Income (Loss) for the six month period ended June 30, 2003
Mercator Software, Inc. Unaudited
| | | F-7 | |
| | | F-8 | |
SIGNATURES
Pursuant to the requirementsConsolidated Statements of Section 13 or 15(d) the Securities Exchange ActStockholders’ Equity
| | | F-9 | |
Consolidated Statements of 1934, as amended, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.Comprehensive Income (Loss)| | | F-10 | | ASCENTIAL SOFTWARE CORPORATION |
Date: March 15, 2004 |
|
By: |
/s/ PETER GYENES
Peter Gyenes
Chief Executive Officer and
Chairman of the Board of Directors |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Peter Gyenes and Robert McBride and each one of them, acting individually and without the other, as his attorney-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
| | Title
| | Date
|
|---|
|
|
|
|
| /s/ PETER GYENES
Peter Gyenes | | Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) | | March 15, 2004 |
/s/ ROBERT C. MCBRIDE
Robert C. McBride |
|
Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
|
March 15, 2004 |
/s/ ROBERT M. MORRILL
Robert M. Morrill |
|
Director |
|
March 15, 2004 |
/s/ JOHN J. GAVIN, JR.
John J. Gavin, Jr. |
|
Director |
|
March 15, 2004 |
/s/ DAVID J. ELLENBERGER
David J. Ellenberger |
|
Director |
|
March 15, 2004 |
/s/ WILLIAM J. WEYAND
William J. Weyand |
|
Director |
|
March 15, 2004 |
70
ASCENTIAL SOFTWARE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statements
| | Page
|
|---|
Report of Independent Auditors — PricewaterhouseCoopers LLP | | F-2 | Report of Independent Auditors — KPMG LLP | | F-3 | Consolidated Balance Sheets | | F-4 | Consolidated Statements of Operations | | F-5 | Consolidated Statements of Cash Flows | | F-6 | Consolidated Statements of Stockholders' Equity | | F-7 | Consolidated Statements of Comprehensive Income (Loss) | | F-8 | Notes to Consolidated Financial Statements | | F-9 |
F-1
Report of Independent Auditors
To the Board of Directors and Stockholders of Ascential Software Corporation:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Ascential Software Corporation and its subsidiaries at December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
January 29, 2004
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Ascential Software Corporation
We have audited the accompanying consolidated balance sheet of Ascential Software Corporation and subsidiaries as of December 31, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2002. The consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ascential Software Corporation and subsidiaries as of December 31, 2002 and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142,Goodwill and Other Intangible Assets.
/s/ KPMG LLP
Boston, Massachusetts
January 29, 2003
F-3
ASCENTIAL SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| | December 31,
| |
|---|
| | 2003
| | 2002
| |
|---|
| ASSETS | | | | | | | | | Current assets | | | | | | | | | | Cash and cash equivalents | | $ | 202,568 | | $ | 216,551 | | | | Short-term investments | | | 313,681 | | | 288,199 | | | | Accounts receivable, net | | | 42,034 | | | 27,112 | | | | Receivable from sale of the database business | | | — | | | 109,200 | | | | Recoverable income taxes | | | 1,276 | | | 17,448 | | | | Other current assets | | | 22,035 | | | 13,688 | | | | |
| |
| | | | | Total current assets | | | 581,594 | | | 672,198 | |
Property and equipment, net |
|
|
11,186 |
|
|
5,427 |
| | Software development costs, net | | | 14,794 | | | 14,124 | | | Long-term investments | | | 2,301 | | | 966 | | | Goodwill | | | 324,327 | | | 162,670 | | | Intangible assets, net | | | 19,863 | | | 11,070 | | | Deferred income taxes | | | 1,392 | | | 28,515 | | | Other assets | | | 10,622 | | | 11,280 | | | | |
| |
| | | | | Total assets | | $ | 966,079 | | $ | 906,250 | | | | |
| |
| | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | Current liabilities | | | | | | | | | | Accounts payable | | $ | 16,878 | | $ | 8,136 | | | | Accrued expenses | | | 14,433 | | | 23,137 | | | | Accrued employee compensation | | | 24,207 | | | 14,861 | | | | Income taxes payable | | | 62,327 | | | 98,916 | | | | Deferred revenue | | | 41,106 | | | 17,666 | | | | Accrued merger, realignment and other charges | | | 46,705 | | | 15,698 | | | | Deferred income taxes | | | 594 | | | 33,171 | | | | Other current liabilities | | | 1,585 | | | 479 | | | | |
| |
| | | | | Total current liabilities | | | 207,835 | | | 212,064 | | | | |
| |
| | | Lease obligations | | | 558 | | | — | | | | |
| |
| | | Commitments and contingencies (Note 8) | | | | | | | | | Stockholders' equity | | | | | | | | | | Preferred stock, par value $.01 per share — 5,000,000 shares authorized; no shares issued or outstanding at both December 31, 2003 and December 31, 2002 | | | — | | | — | | | | Common stock, par value $.01 per share — 115,000,000 shares authorized; 68,478,000 and 66,361,000 shares issued and 60,085,000 and 57,868,000 shares outstanding at December 31, 2003 and 2002, respectively | | | 685 | | | 664 | | | | Additional paid-in capital | | | 647,199 | | | 602,513 | | | | Treasury stock, 8,393,000 and 8,493,000 shares at December 31, 2003 and 2002, respectively, at cost | | | (98,454 | ) | | (99,626 | ) | | | Retained earnings | | | 218,048 | | | 202,243 | | | | Deferred compensation | | | (1,779 | ) | | (235 | ) | | | Accumulated other comprehensive loss | | | (8,013 | ) | | (11,373 | ) | | | |
| |
| | | | | Total stockholders' equity | | | 757,686 | | | 694,186 | | | | |
| |
| | | | | | Total liabilities and stockholders' equity | | $ | 966,079 | | $ | 906,250 | | | | |
| |
| |
See Notes to Consolidated Financial Statements.Statements
| | | F-11 | |
|
F-4
F-1
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control — Integrated Framework. Based on our assessment using those criteria, we concluded that our internal control over financial reporting was effective as of December 31, 2004.
Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on page F-3 of this Annual Report on Form 10-K.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Ascential Software Corporation:
We have completed an integrated audit of Ascential Software Corporation’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated Financial Statements
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Ascential Software Corporation and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Internal Control Over Financial Reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing on page F-2, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established inInternal Control — Integrated Frameworkissued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
F-3
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| |
| /s/ PRICEWATERHOUSECOOPERS LLP |
Boston, Massachusetts
March 16, 2005
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Ascential Software Corporation
We have audited the consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2002. The consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Ascential Software Corporation for the year ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142,Goodwill and Other Intangible Assets.
| |
| /s/KPMG LLP
ASCENTIAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| | Years Ended December 31,
| |
|---|
| | 2003
| | 2002
| | 2001
| |
|---|
| Net revenues | | | | | | | | | | | | | | Licenses | | $ | 92,550 | | $ | 59,611 | | $ | 211,736 | | | | | Services | | | 93,036 | | | 53,407 | | | 269,596 | | | | |
| |
| |
| | | | | | 185,586 | | | 113,018 | | | 481,332 | | | | |
| |
| |
| | | Costs and expenses | | | | | | | | | | | | | | Cost of licenses | | | 15,291 | | | 18,350 | | | 34,271 | | | | | Cost of services | | | 40,050 | | | 33,089 | | | 107,537 | | | | | Sales and marketing | | | 79,950 | | | 73,080 | | | 207,259 | | | | | Research and development | | | 27,515 | | | 24,044 | | | 87,005 | | | | | General and administrative | | | 30,838 | | | 41,054 | | | 81,561 | | | | | Write-off of acquired in-process research and development | | | 2,000 | | | 1,170 | | | 5,500 | | | | | Merger, realignment and other charges | | | 3,857 | | | 23,669 | | | 54,359 | | | | |
| |
| |
| | | | | | 199,501 | | | 214,456 | | | 577,492 | | | | |
| |
| |
| | | | Operating loss | | | (13,915 | ) | | (101,438 | ) | | (96,160 | ) | | Other income (expense) | | | | | | | | | | | | | | Interest income | | | 11,129 | | | 20,194 | | | 24,119 | | | | | Interest expense | | | (207 | ) | | (84 | ) | | (172 | ) | | | | Gain on sale of database business | | | — | | | 3,040 | | | 865,675 | | | | | Impairment of long-term investments | | | — | | | (2,187 | ) | | (10,190 | ) | | | | Other, net | | | 2,502 | | | (929 | ) | | (972 | ) | | | |
| |
| |
| | | | Income (loss) before income taxes | | | (491 | ) | | (81,404 | ) | | 782,300 | | | | | Income tax expense (benefit) | | | (16,296 | ) | | (17,831 | ) | | 157,352 | | | | |
| |
| |
| | | | Net income (loss) | | $ | 15,805 | | $ | (63,573 | ) | $ | 624,948 | | | | |
| |
| |
| | | Net income (loss) per common share | | | | | | | | | | | | | | Basic | | $ | 0.27 | | $ | (1.03 | ) | $ | 9.01 | | | | |
| |
| |
| | | | | Diluted | | $ | 0.26 | | $ | (1.03 | ) | $ | 8.79 | | | | |
| |
| |
| | | Shares used in per share calculations | | | | | | | | | | | | | | Basic | | | 58,409 | | | 61,931 | | | 69,373 | | | | |
| |
| |
| | | | | Diluted | | | 59,703 | | | 61,931 | | | 71,084 | | | | |
| |
| |
| |
See Notes to Consolidated Financial Statements.
F-5
ASCENTIAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | Years Ended December 31,
| |
|---|
| | 2003
| | 2002
| | 2001
| |
|---|
| Cash flows from operating activities | | | | | | | | | | | | Net income (loss) | | $ | 15,805 | | $ | (63,573 | ) | $ | 624,948 | | | Adjustments to reconcile net income (loss) to cash and cash equivalents provided by (used in) operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 10,008 | | | 10,013 | | | 25,730 | | | | Amortization of capitalized software development costs | | | 7,109 | | | 6,557 | | | 14,561 | | | | Write-off of long-term investments | | | — | | | 2,188 | | | 10,190 | | | | Write-off of capitalized software development costs | | | — | | | 5,200 | | | — | | | | Write-off of acquired in process research and development | | | 2,000 | | | 1,170 | | | 5,500 | | | | Foreign currency transaction (gains) losses | | | (1,242 | ) | | 1,561 | | | 4,332 | | | | Gain on sales of available for sale securities | | | (1,884 | ) | | — | | | (439 | ) | | | Loss on disposal of property and equipment | | | 49 | | | 800 | | | 162 | | | | Provisions for losses on accounts receivable | | | 971 | | | 2,426 | | | 12,039 | | | | Merger, realignment and other charges | | | 3,857 | | | 23,669 | | | 54,359 | | | | Gain on sale of database business | | | — | | | (3,040 | ) | | (865,675 | ) | | | Stock-based employee compensation | | | 1,045 | | | 245 | | | 498 | | | | Class action settlement payment | | | — | | | — | | | (26,200 | ) | | Changes in operating assets and liabilities, net of impact of acquisitions and disposals: | | | | | | | | | | | | | Accounts receivable | | | (2,370 | ) | | 396 | | | 37,650 | | | | Other assets | | | 3,282 | | | 7,513 | | | (40,063 | ) | | | Accounts payable, accrued expenses and other liabilities | | | (51,236 | ) | | (81,025 | ) | | (15,780 | ) | | | Deferred income taxes | | | (4,283 | ) | | (6,252 | ) | | 6,847 | | | | Deferred revenue | | | 2,121 | | | 1,662 | | | 2,203 | | | | |
| |
| |
| | | | | Net cash and cash equivalents used in operating activities | | | (14,768 | ) | | (90,490 | ) | | (149,138 | ) | | | |
| |
| |
| | | Cash flows from investing activities | | | | | | | | | | | | Investments of excess cash: | | | | | | | | | | | | | Purchases of available-for-sale securities | | | (873,866 | ) | | (552,994 | ) | | (407,853 | ) | | | Maturities of available-for-sale securities | | | 561,314 | | | 341,364 | | | 137,700 | | | | Sales of available-for-sale securities | | | 286,688 | | | 195,965 | | | 88,893 | | | Purchases of strategic investments | | | (1,375 | ) | | — | | | — | | | Proceeds from sales of equity securities | | | — | | | — | | | 1,439 | | | Purchases of property and equipment | | | (3,549 | ) | | (2,950 | ) | | (17,716 | ) | | Proceeds from disposal of property and equipment | | | — | | | — | | | 310 | | | Proceeds from sale of database business | | | 109,328 | | | 11,000 | | | 888,400 | | | Additions to software development costs | | | (7,779 | ) | | (10,962 | ) | | (11,395 | ) | | Business combinations, net of cash acquired | | | (94,947 | ) | | (100,473 | ) | | (37,768 | ) | | Other, net | | | — | | | — | | | (1,362 | ) | | | |
| |
| |
| | | | | Net cash and cash equivalents provided by (used in) investing activities | | | (24,186 | ) | | (119,050 | ) | | 640,648 | | | | |
| |
| |
| | | Cash flows from financing activities | | | | | | | | | | | | Advances from customers | | | — | | | — | | | 3,418 | | | Proceeds from issuance of common stock, net | | | 27,737 | | | 2,638 | | | 13,307 | | | Acquisition of common stock | | | — | | | (74,162 | ) | | (143,023 | ) | | Extinguishment of debt | | | (9,081 | ) | | — | | | — | | | Fees paid to execute one-for-four reverse stock split | | | (203 | ) | | — | | | — | | | Principal payments on capital leases | | | (389 | ) | | — | | | (49 | ) | | | |
| |
| |
| | | | | Net cash and cash equivalents provided by (used in) financing activities | | | 18,064 | | | (71,524 | ) | | (126,347 | ) | | | |
| |
| |
| | | Effect of exchange rate changes on cash and cash equivalents | | | 6,907 | | | 8,308 | | | (4,276 | ) | | | |
| |
| |
| | | Increase (decrease) in cash and cash equivalents | | | 13,983 | | | (272,756 | ) | | 360,887 | | | Cash and cash equivalents at beginning of year | | | 216,551 | | | 489,307 | | | 128,420 | | | | |
| |
| |
| | | Cash and cash equivalents at end of year | | $ | 202,568 | | $ | 216,551 | | $ | 489,307 | | | | |
| |
| |
| |
See Notes to Consolidated Financial Statements.
See supplemental cash flow data in Note 1 to Consolidated Financial Statements.
F-6
ASCENTIAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
| |
| |
| | Shares to be
Issued
for Litigation
Settlement
| |
| |
| |
| |
| |
| |
| |
| |
|---|
| | Common Stock
| |
| | Treasury Stock
| | Retained
Earnings
(Accumulated
Deficit)
| |
| | Other
Comprehensive
Income
(Loss)
| |
| |
|---|
| | Additional
Paid-In
Capital
| | Deferred
Compensation
| |
| |
|---|
| | Shares
| | Amount
| | Shares
| | Amount
| | Shares
| | Amount
| | Totals
| |
|---|
| Balance at December 31, 2000 | | 70,091 | | $ | 701 | | — | | $ | 61,228 | | $ | 634,969 | | — | | $ | — | | $ | (359,132 | ) | $ | — | | $ | (19,645 | ) | $ | 318,121 | | | Net income | | | | | | | | | | | | | | | | | | | | | 624,948 | | | | | | | | | 624,948 | | | Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 672 | | | 672 | | | Exercise of stock options | | 629 | | | 6 | | | | | | | | 8,792 | | | | | | | | | | | | | | | | | 8,798 | | | Common stock issued under employee stock purchase plan | | 357 | | | 4 | | | | | | | | 4,505 | | | | | | | | | | | | | | | | | 4,509 | | | Tax benefit from issuances under employee stock benefit plans | | | | | | | | | | | | | 26,928 | | | | | | | | | | | | | | | | | 26,928 | | | Stock-based compensation expense resulting from stock options | | | | | | | | | | | | | 4,944 | | | | | | | | | | | | | | | | | 4,944 | | | Repurchase of common stock | | | | | | | | | | | | | | | (8,500 | ) | | (143,023 | ) | | | | | | | | | | | (143,023 | ) | | Retirement of common stock | | (6,640 | ) | | (67 | ) | | | | | | | (117,492 | ) | 6,640 | | | 117,559 | | | | | | | | | | | | — | | | Repurchase and retirement of unvested Cloudscape options and founder's stock | | (3 | ) | | — | | | | | | | | (3 | ) | | | | | | | | | | | | | | | | (3 | ) | | Cash payment for Litigation Settlement | | | | | | | | | | | | | (26,200 | ) | | | | | | | | | | | | | | | | (26,200 | ) | | Shares issued in Litigation Settlement | | 1,514 | | | 15 | | | | | (61,228 | ) | | 61,213 | | | | | | | | | | | | | | | | | — | | | Deferred compensation as a result of the Torrent acquisition | | | | | | | | | | | | | | | | | | | | | | | | (549 | ) | | | | | (549 | ) | | Fair value of stock options exchanged in Torrent acquisition | | | | | | | | | | | | | 651 | | | | | | | | | | | | | | | | | 651 | | | | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | | Balance at December 31, 2001 | | 65,948 | | $ | 659 | | — | | $ | — | | $ | 598,307 | | (1,860 | ) | $ | (25,464 | ) | $ | 265,816 | | $ | (549 | ) | $ | (18,973 | ) | $ | 819,796 | | | Net loss | | | | | | | | | | | | | | | | | | | | | (63,573 | ) | | | | | | | | (63,573 | ) | | Amortization of deferred compensation | | | | | | | | | | | | | | | | | | | | | | | | 314 | | | | | | 314 | | | Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 7,600 | | | 7,600 | | | Exercise of stock options | | 148 | | | 2 | | | | | | | | 1,247 | | | | | | | | | | | | | | | | | 1,249 | | | Common stock issued under employee stock purchase plan | | 190 | | | 2 | | | | | | | | 1,384 | | | | | | | | | | | | | | | | | 1,386 | | | Tax benefit from issuances under employee stock benefit plans | | | | | | | | | | | | | 586 | | | | | | | | | | | | | | | | | 586 | | | Stock issued to former Vality Chief Executive Officer under restricted stock agreement | | 75 | | | 1 | | | | | | | | 989 | | | | | | | | | | | | | | | | | 990 | | | Repurchase of common stock | | | | | | | | | | | | | | | (6,633 | ) | | (74,162 | ) | | | | | | | | | | | (74,162 | ) | | | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | | Balance at December 31, 2002 | | 66,361 | | $ | 664 | | — | | $ | — | | $ | 602,513 | | (8,493 | ) | $ | (99,626 | ) | $ | 202,243 | | $ | (235 | ) | $ | (11,373 | ) | $ | 694,186 | | | Net income | | | | | | | | | | | | | | | | | | | | | 15,805 | | | | | | | | | 15,805 | | | Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,360 | | | 3,360 | | | Exercise of stock options | | 2,054 | | | 20 | | | | | | | | 25,869 | | | | | | | | | | | | | | | | | 25,889 | | | Common stock issued under employee stock purchase plan | | 164 | | | 2 | | | | | | | | 1,846 | | | | | | | | | | | | | | | | | 1,848 | | | Stock based compensation | | | | | | | | | | | | | 690 | | | | | | | | | | | | | | | | | 690 | | | Tax benefit from issuances under employee stock benefit plans | | | | | | | | | | | | | 1,952 | | | | | | | | | | | | | | | | | 1,952 | | | Adjustment associated with one-for-four reverse stock split, cost of execution, and repurchase of fractional shares | | (1 | ) | | | | | | | | | | (203 | ) | | | | | | | | | | | | | | | | (203 | ) | | Deferred compensation as a result of the Mercator acquisition | | | | | | | | | | | | | | | | | | | | | | | | (2,421 | ) | | | | | (2,421 | ) | | Fair value of stock options exchanged in Mercator acquisition | | | | | | | | | | | | | 15,703 | | | | | | | | | | | | | | | | | 15,703 | | | Amortization of deferred compensation | | | | | | | | | | | | | | | | | | | | | | | | 827 | | | | | | 827 | | | Adjustment to deferred compensation as a result of employee terminations | | | | | | | | | | | | | | | | | | | | | | | | 50 | | | | | | 50 | | | Retirement of treasury stock at average cost | | (100 | ) | | (1 | ) | | | | | | | (1,171 | ) | 100 | | | 1,172 | | | | | | | | | | | | — | | | | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | | Balance at December 31, 2003 | | 68,478 | | $ | 685 | | — | | $ | — | | $ | 647,199 | | (8,393 | ) | $ | (98,454 | ) | $ | 218,048 | | $ | (1,779 | ) | $ | (8,013 | ) | $ | 757,686 | | | | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
See Notes to Consolidated Financial Statements.
F-7
ASCENTIAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
| | Years Ended December 31,
| |
|---|
| | 2003
| | 2002
| | 2001
| |
|---|
| Net income (loss) | | $ | 15,805 | | $ | (63,573 | ) | $ | 624,948 | | | | |
| |
| |
| | | Other comprehensive income (loss): | | | | | | | | | | | | Unrealized gains (losses) on available-for-sale securities, net of tax benefit of $169, tax expense of $1,119 and taxes of $0 for the years ended December 31, 2003, 2002 and 2001, respectively. | | | (253 | ) | | 1,366 | | | (1,831 | ) | | Reclassification adjustment for realized (gains) losses included in net loss, net of tax expense of $753, tax benefit of $641 and taxes of $0 for the years ended December 31, 2003, 2002 and 2001, respectively | | | (1,131 | ) | | 1,602 | | | 3,369 | | | Change in cumulative foreign currency exchange translation adjustment | | | 4,744 | | | 4,632 | | | (866 | ) | | | |
| |
| |
| | | Other comprehensive income | | | 3,360 | | | 7,600 | | | 672 | | | | |
| |
| |
| | | Comprehensive income (loss) | | $ | 19,165 | | $ | (57,973 | ) | $ | 625,620 | | | | |
| |
| |
| |
See Notes to Consolidated Financial Statements.
F-8
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Boston, Massachusetts
January 29, 2003
F-5
ASCENTIAL SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | |
| | | December 31, | |
| | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| | | (In thousands, except | |
| | | share and per share data) | |
| ASSETS |
| Current assets | | | | | | | | |
| | Cash and cash equivalents | | $ | 166,355 | | | $ | 198,668 | |
| | Short-term investments | | | 314,351 | | | | 317,581 | |
| | Accounts receivable, net | | | 56,607 | | | | 42,034 | |
| | Recoverable income taxes | | | 3,642 | | | | 1,276 | |
| | Deferred income taxes | | | 732 | | | | — | |
| | Other current assets | | | 16,035 | | | | 22,035 | |
| | | | | | | |
| | | Total current assets | | | 557,722 | | | | 581,594 | |
| Property and equipment, net | | | 10,009 | | | | 11,186 | |
| Software development costs, net | | | 16,542 | | | | 14,794 | |
| Long-term investments | | | 3,314 | | | | 2,301 | |
| Goodwill | | | 325,457 | | | | 324,327 | |
| Intangible assets, net | | | 11,453 | | | | 19,863 | |
| Deferred income taxes | | | — | | | | 1,392 | |
| Other assets | | | 10,576 | | | | 10,622 | |
| | | | | | | |
| | | Total assets | | $ | 935,073 | | | $ | 966,079 | |
| | | | | | | |
| |
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
| Current liabilities | | | | | | | | |
| | Accounts payable | | $ | 10,715 | | | $ | 16,878 | |
| | Accrued expenses | | | 22,474 | | | | 14,433 | |
| | Accrued employee compensation | | | 21,322 | | | | 24,207 | |
| | Income taxes payable | | | 48,405 | | | | 62,327 | |
| | Deferred revenue | | | 45,295 | | | | 41,106 | |
| | Accrued merger, realignment and other charges | | | 32,856 | | | | 46,705 | |
| | Deferred income taxes | | | — | | | | 594 | |
| | Other current liabilities | | | 2,224 | | | | 1,585 | |
| | | | | | | |
| | | Total current liabilities | | | 183,291 | | | | 207,835 | |
| Other long term liabilities | | | 709 | | | | 558 | |
| | | | | | | |
| | | Total liabilities | | | 184,000 | | | | 208,393 | |
| | | | | | | |
| Commitments and contingencies (Note 8) | | | | | | | | |
| Stockholders’ equity | | | | | | | | |
| | Preferred stock, par value $.01 per share — 5,000,000 shares authorized; no shares issued or outstanding at both December 31, 2004 and December 31, 2003 | | | — | | | | — | |
| | Common stock, par value $.01 per share — 125,000,000 shares authorized; 69,078,000 and 68,478,000 shares issued and 58,820,000 and 60,085,000 shares outstanding at December 31, 2004 and 2003, respectively | | | 691 | | | | 685 | |
| | Additional paid-in capital | | | 655,764 | | | | 647,199 | |
| | Treasury stock, 10,258,000 and 8,393,000 shares at December 31, 2004 and 2003, respectively, at cost | | | (130,069 | ) | | | (98,454 | ) |
| | Retained earnings | | | 232,999 | | | | 218,048 | |
| | Deferred compensation | | | (361 | ) | | | (1,779 | ) |
| | Accumulated other comprehensive loss | | | (7,951 | ) | | | (8,013 | ) |
| | | | | | | |
| | | Total stockholders’ equity | | | 751,073 | | | | 757,686 | |
| | | | | | | |
| | | | Total liabilities and stockholders’ equity | | $ | 935,073 | | | $ | 966,079 | |
| | | | | | | |
See Notes to Consolidated Financial Statements.
F-6
ASCENTIAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| | | (In thousands, except per share data) | |
| Net revenues | | | | | | | | | | | | |
| | | Licenses | | $ | 110,241 | | | $ | 92,550 | | | $ | 59,611 | |
| | | Services | | | 161,638 | | | | 93,036 | | | | 53,407 | |
| | | | | | | | | | |
| | | | 271,879 | | | | 185,586 | | | | 113,018 | |
| | | | | | | | | | |
| Costs and expenses | | | | | | | | | | | | |
| | | Cost of licenses | | | 16,833 | | | | 15,291 | | | | 18,350 | |
| | | Cost of services | | | 70,098 | | | | 40,050 | | | | 33,089 | |
| | | Sales and marketing | | | 110,646 | | | | 79,950 | | | | 73,080 | |
| | | Research and development | | | 39,259 | | | | 27,515 | | | | 24,044 | |
| | | General and administrative | | | 28,168 | | | | 30,838 | | | | 41,054 | |
| | | Write-off of acquired in-process research and development | | | — | | | | 2,000 | | | | 1,170 | |
| | | Merger, realignment and other charges | | | 823 | | | | 3,857 | | | | 23,669 | |
| | | | | | | | | | |
| | | | 265,827 | | | | 199,501 | | | | 214,456 | |
| | | | | | | | | | |
| | Operating income (loss) | | | 6,052 | | | | (13,915 | ) | | | (101,438 | ) |
| Other income (expense) | | | | | | | | | | | | |
| | | Interest income | | | 9,124 | | | | 11,129 | | | | 20,194 | |
| | | Interest expense | | | (169 | ) | | | (207 | ) | | | (84 | ) |
| | | Gain on sale of database business | | | — | | | | — | | | | 3,040 | |
| | | Impairment of long-term investments | | | — | | | | — | | | | (2,187 | ) |
| | | Other, net | | | 1,514 | | | | 2,502 | | | | (929 | ) |
| | | | | | | | | | |
| | Income (loss) before income taxes | | | 16,521 | | | | (491 | ) | | | (81,404 | ) |
| | | Income tax expense (benefit) | | | 1,570 | | | | (16,296 | ) | | | (17,831 | ) |
| | | | | | | | | | |
| | Net income (loss) | | $ | 14,951 | | | $ | 15,805 | | | $ | (63,573 | ) |
| | | | | | | | | | |
| Net income (loss) per common share | | | | | | | | | | | | |
| | | Basic | | $ | 0.25 | | | $ | 0.27 | | | $ | (1.03 | ) |
| | | | | | | | | | |
| | | Diluted | | $ | 0.25 | | | $ | 0.26 | | | $ | (1.03 | ) |
| | | | | | | | | | |
| Shares used in per share calculations | | | | | | | | | | | | |
| | | Basic | | | 59,208 | | | | 58,409 | | | | 61,931 | |
| | | | | | | | | | |
| | | Diluted | | | 60,633 | | | | 59,703 | | | | 61,931 | |
| | | | | | | | | | |
See Notes to Consolidated Financial Statements.
F-7
ASCENTIAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| | | (In thousands) | |
Cash flows from operating activities | | | | | | | | | | | | |
| Net income (loss) | | $ | 14,951 | | | $ | 15,805 | | | $ | (63,573 | ) |
| Adjustments to reconcile net income (loss) to cash and cash equivalents provided by (used in) operating activities: | | | | | | | | | | | | |
| | Depreciation and amortization | | | 14,327 | | | | 10,008 | | | | 10,013 | |
| | Amortization of capitalized software development costs | | | 7,815 | | | | 7,109 | | | | 6,557 | |
| | Write-off of long-term investments | | | — | | | | — | | | | 2,188 | |
| | Write-off of capitalized software development costs | | | — | | | | — | | | | 5,200 | |
| | Write-off of acquired in process research and development | | | — | | | | 2,000 | | | | 1,170 | |
| | Foreign currency transaction (gains) losses | | | 2,940 | | | | (1,242 | ) | | | 1,561 | |
| | Gain on sales of available for sale securities | | | (387 | ) | | | (1,884 | ) | | | — | |
| | (Gain) loss on disposal of property and equipment | | | (8 | ) | | | 49 | | | | 800 | |
| | Provisions (recoveries) for losses on accounts receivable | | | (364 | ) | | | 971 | | | | 2,426 | |
| | Merger, realignment and other charges | | | 823 | | | | 3,857 | | | | 23,669 | |
| | Gain on sale of database business | | | — | | | | — | | | | (3,040 | ) |
| | Stock-based employee compensation | | | 907 | | | | 1,045 | | | | 245 | |
| Changes in operating assets and liabilities, net of impact of acquisitions and disposals: | | | | | | | | | | | | |
| | Accounts receivable | | | (12,140 | ) | | | (2,370 | ) | | | 396 | |
| | Other assets | | | (512 | ) | | | 3,282 | | | | 7,513 | |
| | Accounts payable, accrued expenses and other liabilities | | | (31,069 | ) | | | (51,236 | ) | | | (81,025 | ) |
| | Deferred income taxes | | | (2,192 | ) | | | (4,283 | ) | | | (6,252 | ) |
| | Deferred revenue | | | 2,392 | | | | 2,121 | | | | 1,662 | |
| | | | | | | | | | |
| | | Net cash and cash equivalents used in operating activities | | | (2,517 | ) | | | (14,768 | ) | | | (90,490 | ) |
| | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | |
| Investments of excess cash: | | | | | | | | | | | | |
| | Purchases of available-for-sale securities | | | (718,151 | ) | | | (958,091 | ) | | | (552,994 | ) |
| | Maturities of available-for-sale securities | | | 463,856 | | | | 571,314 | | | | 341,364 | |
| | Sales of available-for-sale securities | | | 255,621 | | | | 357,013 | | | | 195,965 | |
| Purchases of long term investments | | | (1,125 | ) | | | (1,375 | ) | | | — | |
| Purchases of property and equipment | | | (4,639 | ) | | | (3,549 | ) | | | (2,950 | ) |
| Proceeds from sale of a product line and the database business | | | 6,800 | | | | 109,328 | | | | 11,000 | |
| Additions to software development costs | | | (9,563 | ) | | | (7,779 | ) | | | (10,962 | ) |
| Business combinations, net of cash acquired | | | (478 | ) | | | (94,947 | ) | | | (100,473 | ) |
| | | | | | | | | | |
| | | Net cash and cash equivalents used in investing activities | | | (7,679 | ) | | | (28,086 | ) | | | (119,050 | ) |
| | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | |
| Proceeds from issuance of common stock, net | | | 6,550 | | | | 27,737 | | | | 2,638 | |
| Acquisition of common stock | | | (31,615 | ) | | | — | | | | (74,162 | ) |
| Extinguishment of debt | | | — | | | | (9,081 | ) | | | — | |
| Fees paid to execute one-for-four reverse stock split | | | — | | | | (203 | ) | | | — | |
| Principal payments on capital leases | | | (593 | ) | | | (389 | ) | | | — | |
| | | | | | | | | | |
| | | Net cash and cash equivalents provided by (used in) financing activities | | | (25,658 | ) | | | 18,064 | | | | (71,524 | ) |
| | | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | | 3,541 | | | | 6,907 | | | | 8,308 | |
| | | | | | | | | | |
| Decrease in cash and cash equivalents | | | (32,313 | ) | | | (17,883 | ) | | | (272,756 | ) |
| Cash and cash equivalents at beginning of year | | | 198,668 | | | | 216,551 | | | | 489,307 | |
| | | | | | | | | | |
| Cash and cash equivalents at end of year | | $ | 166,355 | | | $ | 198,668 | | | $ | 216,551 | |
| | | | | | | | | | |
See Notes to Consolidated Financial Statements.
See supplemental cash flow data in Note 1 to Consolidated Financial Statements.
F-8
ASCENTIAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Retained | | | | | Other | | | |
| | | Common Stock | | | Additional | | | Treasury Stock | | | Earnings | | | | | Comprehensive | | | |
| | | | | | Paid-In | | | | | | (Accumulated | | | Deferred | | | Income | | | |
| | | Shares | | | Amount | | | Capital | | | Shares | | | Amount | | | Deficit) | | | Compensation | | | (Loss) | | | Totals | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (In thousands) | |
| Balance at December 31, 2001 | | | 65,948 | | | $ | 659 | | | $ | 598,307 | | | | (1,860 | ) | | $ | (25,464 | ) | | $ | 265,816 | | | $ | (549 | ) | | $ | (18,973 | ) | | $ | 819,796 | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | (63,573 | ) | | | | | | | | | | | (63,573 | ) |
| Amortization of deferred compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | 314 | | | | | | | | 314 | |
| Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 7,600 | | | | 7,600 | |
| Exercise of stock options | | | 148 | | | | 2 | | | | 1,247 | | | | | | | | | | | | | | | | | | | | | | | | 1,249 | |
| Common stock issued under employee stock purchase plan | | | 190 | | | | 2 | | | | 1,384 | | | | | | | | | | | | | | | | | | | | | | | | 1,386 | |
| Tax benefit from issuances under employee stock benefit plans | | | | | | | | | | | 586 | | | | | | | | | | | | | | | | | | | | | | | | 586 | |
| Stock issued to former Vality Chief Executive Officer under restricted stock agreement | | | 75 | | | | 1 | | | | 989 | | | | | | | | | | | | | | | | | | | | | | | | 990 | |
| Repurchase of common stock | | | | | | | | | | | | | | | (6,633 | ) | | | (74,162 | ) | | | | | | | | | | | | | | | (74,162 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2002 | | | 66,361 | | | $ | 664 | | | $ | 602,513 | | | | (8,493 | ) | | $ | (99,626 | ) | | $ | 202,243 | | | $ | (235 | ) | | $ | (11,373 | ) | | $ | 694,186 | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | 15,805 | | | | | | | | | | | | 15,805 | |
| Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,360 | | | | 3,360 | |
| Exercise of stock options | | | 2,054 | | | | 20 | | | | 25,869 | | | | | | | | | | | | | | | | | | | | | | | | 25,889 | |
| Common stock issued under employee stock purchase plan | | | 164 | | | | 2 | | | | 1,846 | | | | | | | | | | | | | | | | | | | | | | | | 1,848 | |
| Stock based compensation | | | | | | | | | | | 690 | | | | | | | | | | | | | | | | | | | | | | | | 690 | |
| Tax benefit from issuances under employee stock benefit plans | | | | | | | | | | | 1,952 | | | | | | | | | | | | | | | | | | | | | | | | 1,952 | |
| Adjustment associated with one-for-four reverse stock split, cost of execution, and repurchase of fractional shares | | | (1 | ) | | | | | | | (203 | ) | | | | | | | | | | | | | | | | | | | | | | | (203 | ) |
| Deferred compensation as a result of the Mercator acquisition | | | | | | | | | | | | | | | | | | | | | | | | | | | (2,421 | ) | | | | | | | (2,421 | ) |
| Fair value of stock options exchanged in Mercator acquisition | | | | | | | | | | | 15,703 | | | | | | | | | | | | | | | | | | | | | | | | 15,703 | |
| Amortization of deferred compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | 827 | | | | | | | | 827 | |
| Adjustment to deferred compensation as a result of employee terminations | | | | | | | | | | | | | | | | | | | | | | | | | | | 50 | | | | | | | | 50 | |
| Retirement of treasury stock at average cost | | | (100 | ) | | | (1 | ) | | | (1,171 | ) | | | 100 | | | | 1,172 | | | | | | | | | | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2003 | | | 68,478 | | | $ | 685 | | | $ | 647,199 | | | | (8,393 | ) | | $ | (98,454 | ) | | $ | 218,048 | | | $ | (1,779 | ) | | $ | (8,013 | ) | | $ | 757,686 | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | 14,951 | | | | | | | | | | | | 14,951 | |
| Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 62 | | | | 62 | |
| Exercise of stock options | | | 394 | | | | 4 | | | | 3,712 | | | | | | | | | | | | | | | | | | | | | | | | 3,716 | |
| Common stock issued under employee stock purchase plan | | | 206 | | | | 2 | | | | 2,832 | | | | | | | | | | | | | | | | | | | | | | | | 2,834 | |
| Tax benefit from issuances under employee stock benefit plans | | | | | | | | | | | 2,242 | | | | | | | | | | | | | | | | | | | | | | | | 2,242 | |
| Amortization of deferred compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | 907 | | | | | | | | 907 | |
| Adjustment to deferred compensation as a result of employee terminations | | | | | | | | | | | (221 | ) | | | | | | | | | | | | | | | 511 | | | | | | | | 290 | |
| Repurchase of common stock | | | | | | | | | | | | | | | (1,865 | ) | | | (31,615 | ) | | | | | | | | | | | | | | | (31,615 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2004 | | | 69,078 | | | $ | 691 | | | $ | 655,764 | | | | (10,258 | ) | | $ | (130,069 | ) | | $ | 232,999 | | | $ | (361 | ) | | $ | (7,951 | ) | | $ | 751,073 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements
F-9
ASCENTIAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| | | (In thousands) | |
| Net income (loss) | | $ | 14,951 | | | $ | 15,805 | | | $ | (63,573 | ) |
| | | | | | | | | | |
| Other comprehensive income (loss): | | | | | | | | | | | | |
| Unrealized gains (losses) on available-for-sale securities, net of tax benefit of $197, tax benefit of $169, and tax expense of $1,119 for the years ended December 31, 2004, 2003 and 2002, respectively | | | (1,819 | ) | | | (253 | ) | | | 1,366 | |
| Reclassification adjustment for realized (gains) losses included in net income (loss), net of tax expense of $122, tax expense of $753 and tax benefit of $641 for the years ended December 31, 2004, 2003 and 2002, respectively | | | (387 | ) | | | (1,131 | ) | | | 1,602 | |
| Change in cumulative foreign currency exchange translation adjustment | | | 2,268 | | | | 4,744 | | | | 4,632 | |
| | | | | | | | | | |
| Other comprehensive income | | | 62 | | | | 3,360 | | | | 7,600 | |
| | | | | | | | | | |
| Comprehensive income (loss) | | $ | 15,013 | | | $ | 19,165 | | | $ | (55,973 | ) |
| | | | | | | | | | |
See Notes to Consolidated Financial Statements.
F-10
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| Note 1 — | Background of Business and Summary of Significant Accounting Policies |
| |
| Organization and Operations. Ascential Software Corporation ("Ascential" or the "Company") was incorporated in Delaware in 1986 and, until the third quarter of 2001, operated under the name "Informix Corporation." During the third quarter of 2001, the Company sold to International Business Machines Corporation ("IBM") substantially all of the assets relating to its database management systems business, including the name "Informix," for a purchase price of $1.0 billion in cash (the "IBM Transaction" — see Note 14 of Notes to Consolidated Financial Statements). In connection with the sale to IBM, the Company changed its name to Ascential Software Corporation. Ascential is a global provider of enterprise integration software and services. Ascential designs, develops, markets and supports enterprise data integration software products and solutions to allow its worldwide customers, mid-sized and large organizations and governmental institutions, to turn vast amounts of disparate, unrefined data into reliable, reusable information assets. The Company also offers to its customers a variety of services such as consulting, including implementation assistance and project planning and deployment, support, and education.
The principal geographic markets for the Company's products are North America, Europe, and Asia/Pacific. Customers include businesses ranging from medium-sized corporations to Global 2000 companies, principally in the insurance, financial services, healthcare, life sciences, manufacturing, consumer goods, retail, telecommunications and government services sectors.
|
Ascential Software Corporation (“Ascential” or the “Company”) was incorporated in Delaware in 1986 and, until the third quarter of 2001, operated under the name “Informix Corporation.” During the third quarter of 2001, the Company sold to International Business Machines Corporation (“IBM”) substantially all of the assets relating to its database management systems business, including the name “Informix,” for a purchase price of $1.0 billion in cash (the “IBM Transaction” — see Note 13). In connection with the IBM Transaction, the Company changed its name to Ascential Software Corporation.
Ascential is a global provider of enterprise integration software and services. Ascential designs, develops, markets and supports enterprise data integration software products and solutions to allow its worldwide customers, mid-sized and large organizations and governmental institutions, to turn vast amounts of disparate, unrefined data into reliable, reusable information assets. The Company also offers to its customers a variety of services such as consulting, including implementation assistance and project planning and deployment, support, and education.
The principal geographic markets for the Company’s products are North America, Europe, and Asia/Pacific. Customers include businesses ranging from medium-sized corporations to Global 2000 companies, principally in the financial services and banking, insurance, healthcare, retail, manufacturing, consumer packaged goods, telecommunications and government sectors.
| |
| Basis of Presentation. Reverse Stock Split. On June 17, 2003, the Company effected a one-for-four reverse stock split of its common stock. Accordingly, all share and earnings per share figures of the Company have been restated as though the reverse split had been in effect for all periods presented.
Use of Estimates. The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that the Company make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, provision for doubtful accounts and returns, fair value of investments, fair value of goodwill, fair value and useful lives of intangible assets, net realizable value and useful lives of capitalized software costs, property and equipment, in-process research and development costs, income taxes, and contingencies and litigation, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities, and the recognition of revenue and expenses, that are not readily apparent from other sources. Actual results could differ from the estimates made by management with respect to these items and other items that require management's estimates.
Principles of Consolidation. The consolidated financial statements include the accounts of Ascential Software Corporation and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
Foreign Currency Translation. For foreign operations with the local currency as the functional currency, assets and liabilities are translated at year-end exchange rates, and statements of operations are translated at the average exchange rates during the year. Exchange gains or losses arising from translation of such foreign entity financial statements are included in other comprehensive income (loss), a separate component of stockholders' equity.
F-9
For foreign operations with the U.S. dollar as the functional currency, monetary assets and liabilities are remeasured at the year-end exchange rates as appropriate and non-monetary assets and liabilities are remeasured at historical exchange rates. Statements of operations are remeasured at the average exchange rates during the year. Foreign currency transaction gains and losses are included in other income (expense), net. The Company recorded net foreign currency transaction losses of $0.9 million, $4.0 million and $4.5 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Derivative Financial Instruments. The Company enters into foreign currency forward exchange contracts to reduce its exposure to foreign currency risk due to fluctuations in exchange rates underlying the value of intercompany accounts receivable and payable denominated in foreign currencies until such receivables are collected and payables are disbursed. A foreign currency forward exchange contract obligates the Company to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such exchange. These foreign currency forward exchange contracts are denominated in the same currency in which the underlying foreign currency receivables or payables are denominated and bear a contract value and maturity date which approximate the value and expected settlement date of the underlying transactions. As the Company's contracts are not designated as hedges as defined in Statement of Financial Accounting Standard ("SFAS"
|
Reverse Stock Split. On June 17, 2003, the Company effected a one-for-four reverse stock split of its common stock. Accordingly, all share and earnings per share figures of the Company have been restated as though the reverse split had been in effect for all periods presented.
Auction Rate Securities. In connection with preparation of the accompanying financial statements, the company concluded that it was appropriate to classify its investments in auction rate securities as marketable securities. Previously, such investments were classified as cash and cash equivalents. Accordingly, the company has revised the classification to exclude from cash and cash equivalents $3.9 million at December 31, 2003 and to include such amounts as marketable securities. In addition, the company has made corresponding adjustments to the accompanying statement of cash flows to reflect the gross purchases and sales of these securities as investing activities. As a result, cash used in investing activities increased by $3.9 million in 2003. This change in classification does not affect previously reported cash flows from operations or from financing activities and did not impact the financial statements as of and for the year ended December 31, 2002.
Use of Estimates. The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that the Company make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, provision for doubtful accounts and returns, fair value of investments, fair value of goodwill, fair value and useful lives of intangible assets, net realizable value and useful lives of capitalized software costs, property and equipment, in-process research and development costs, income taxes, and contingencies and litigation, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities, and the recognition of revenue and expenses, that are not readily apparent from other sources. Actual results could differ from the estimates made by management with respect to these items and other items that require management’s estimates.
F-11
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Principles of Consolidation. The consolidated financial statements include the accounts of Ascential Software Corporation and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
Foreign Currency Translation. For foreign operations with the local currency as the functional currency, assets and liabilities are translated at year-end exchange rates, and statements of operations are translated at the average exchange rates during the year. Exchange gains or losses arising from translation of such foreign entity financial statements are included in other comprehensive income (loss), a separate component of stockholders’ equity.
For foreign operations with the U.S. dollar as the functional currency, monetary assets and liabilities are re-measured at the year-end exchange rates as appropriate and non-monetary assets and liabilities are re-measured at historical exchange rates. Statements of operations are re-measured at the average exchange rates during the year. Foreign currency transaction gains and losses are included in other income (expense), net. The Company recorded net foreign currency transaction gains of $1.0 million for the year ended December 31, 2004, and foreign currency transaction losses of $0.9 million and $4.0 million for the years ended December 31, 2003 and 2002, respectively.
Derivative Financial Instruments. The Company enters into foreign currency forward exchange contracts to reduce its exposure to foreign currency risk due to fluctuations in exchange rates underlying the value of intercompany accounts receivable and payable denominated in foreign currencies until such receivables are collected and payables are disbursed. A foreign currency forward exchange contract obligates the Company to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such exchange. These foreign currency forward exchange contracts are denominated in the same currency in which the underlying foreign currency receivables or payables are denominated and bear a contract value and maturity date which approximate the value and expected settlement date of the underlying transactions. As the Company’s contracts are not designated as hedges as defined in Statement of Financial Accounting Standard (“SFAS”) No. 133,Accounting for Derivative Instruments and Hedging Activities, and are economic hedges in nature for financial reporting, discounts or premiums (the difference between the spot exchange rate and the forward exchange rate at inception of the contract) are recognized immediately in earnings as a component of other income (expense), net and changes in market value of the underlying contract are recorded in earnings as foreign exchange gains or losses. The Company operates in certain countries in Eastern Europe and Asia/Pacific, and is winding down operations in Latin America where there are limited forward currency exchange markets and thus the Company may have unhedged exposures in these currencies.
Most of the Company’s international revenue and expenses are denominated in local currencies. Due to the substantial volatility of currency exchange rates, among other factors, the Company cannot predict the effect of exchange rate fluctuations on the Company’s future operating results. Although the Company takes into account changes in exchange rates over time in its pricing strategy, there would be a time lapse between any sudden or significant exchange rate movements and implementation of a revised pricing structure. This results in substantial pricing exposure due to foreign exchange volatility during the period between pricing reviews. In addition, the sales cycle for the Company’s products is relatively long, depending on a number of factors including the level of competition and the size of the transaction. Notwithstanding the Company’s efforts to manage foreign exchange risk, there can be no assurances that the Company’s hedging activities will adequately protect the Company against the risks associated with foreign currency fluctuations.
Revenue Recognition. While the Company applies the guidance of Statement of Position (“SOP”) No. 97-2,Software Revenue Recognition, and SOP No. 98-9,Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions, both issued by the American Institute of Certified Public Accountants, as well as SEC Staff Accounting Bulletin 104,Revenue Recognition in Financial Statements, the application of these standards requires the Company to exercise judgment and use
F-12
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
estimates in connection with the determination of the amounts of software license and services revenues recognized in each accounting period.
The Company’s software license arrangements do not include significant modification or customization of the underlying software, and as a result, we recognize license revenue when: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred (generally, FOB origin or electronic distribution), (3) the fee is fixed or determinable, and (4) collection is probable.
The Company’s software is distributed primarily through its direct sales force; however, the Company’s indirect distribution channel continues to expand through alliances with resellers. Revenue arrangements with resellers are recognized when the above criteria are met and only when the Company receives evidence that the reseller has an order from an end-user customer. The Company typically does not offer contractual rights of return, stock balancing or price protection to its resellers, and actual product returns from them have been insignificant to date. As a result, the Company does not maintain reserves for product returns and related allowances.
At the time of each sale transaction, the Company makes an assessment of the collectibility of the amount due from the customer. Revenue is only recognized at that time if management deems that collection is probable. In making this assessment, the Company considers customer credit-worthiness and historical payment experience. At the same time, the Company assesses whether fees are fixed or determinable and free of contingencies or significant uncertainties. If the fee is not fixed or determinable, revenue is recognized only as payments become due from the customer, provided that all other revenue recognition criteria are met. In assessing whether the fee is fixed or determinable, the Company considers the payment terms of the transaction and its collection experience in similar transactions without making concessions, among other factors. The Company’s software license arrangements generally do not include customer acceptance provisions. However, if an arrangement includes an acceptance provision, the Company records revenue only upon the earliest of (1) receipt of a written acceptance, (2) expiration of the acceptance period or (3) final payment.
The Company’s software arrangements often include implementation and consulting services that are sold separately under consulting engagement contracts or as part of the software license arrangement. When the Company determines that such services are not essential to the functionality of the licensed software and qualify as “service transactions” under SOP 97-2, the Company records revenue separately for the license and service elements of these arrangements. Generally, the Company considers that a service is not essential to the functionality of the software when the services may be provided by independent third parties experienced in providing such consulting and implementation in coordination with dedicated customer personnel. In rare instances where an arrangement does not qualify for separate accounting of the license and service elements, then license revenue is recognized together with the consulting services using the percentage-of-completion method of contract accounting.
The Company uses the residual method as prescribed in SOP 98-9 to recognize revenues from arrangements that include one or more elements to be delivered at a future date, when evidence of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements (e.g., maintenance, consulting and education services) based on vendor-specific objective evidence (“VSOE”)
No. 133,Accounting for Derivative Instruments and Hedging Activities, and are economic hedges in nature for financial reporting, discounts or premiums (the difference between the spot exchange rate and the forward exchange rate at inception of the contract) are recognized immediately in earnings as a component of other income (expense), net and changes in market value of the underlying contract are recorded in earnings as foreign exchange gains or losses. The Company operates in certain countries in Eastern Europe, and Asia/Pacific and is winding down operations in Latin America where there are limited forward currency exchange markets and thus the Company may have unhedged exposures in these currencies. Most of the Company's international revenue and expenses are denominated in local currencies. Due to the substantial volatility of currency exchange rates, among other factors, the Company cannot predict the effect of exchange rate fluctuations on the Company's future operating results. Although the Company takes into account changes in exchange rates over time in its pricing strategy, there would be a time lapse between any sudden or significant exchange rate movements and our implementation of a revised pricing structure. This results in substantial pricing exposure due to foreign exchange volatility during the period between annual pricing reviews. In addition, the sales cycle for the Company's products is relatively long, depending on a number of factors including the level of competition and the size of the transaction. Notwithstanding the Company's efforts to manage foreign exchange risk, there can be no assurances that the Company's hedging activities will adequately protect the Company against the risks associated with foreign currency fluctuations.
Revenue Recognition. While the Company applies the guidance of Statement of Position (SOP) No. 97-2,Software Revenue Recognition, and Statement of Position No. 98-9,Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions, both issued by the American Institute of Certified Public Accountants, as well as SEC Staff Accounting Bulletin 101,Revenue Recognition in Financial Statements, in the application of these standards the Company exercises judgment and use estimates in connection with the determination of the amounts of software license and services revenues to be recognized in each accounting period.
Generally, the Company's software license arrangements do not include significant modification or customization of the underlying software, and as a result, we recognize license revenue when: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred (generally, FOB origin or electronic distribution), (3) the fee is fixed or determinable, and (4) collection is probable. Substantially all of our license revenues are recognized in this manner.
F-10
The Company's software is distributed primarily through its direct sales force; however, the Company's indirect distribution channel continues to expand through alliances with resellers. Revenue arrangements with resellers are recognized on a sell-through basis; that is, when the Company receives persuasive evidence that the reseller has sold the products to an end-user customer. The Company does not offer contractual rights of return, stock balancing or price protection to its resellers, and actual product returns from them have been insignificant to date. As a result, the Company does not maintain reserves for product returns and related allowances.
At the time of each sale transaction, the Company makes an assessment of the collectibility of the amount due from the customer. Revenue is only recognized at that time if management deems that collection is probable. In making this assessment, the Company considers customer credit-worthiness and historical payment experience. At the same time, the Company assesses whether fees are fixed or determinable and free of contingencies or significant uncertainties. If the fee is not fixed or determinable, revenue is recognized only as payments become due from the customer, provided that all other revenue recognition criteria are met. In assessing whether the fee is fixed or determinable, the Company considers the payment terms of the transaction and our collection experience in similar transactions without making concessions, among other factors. The Company's software license arrangements generally do not include customer acceptance provisions. However, if an arrangement includes an acceptance provision, the Company records revenue only upon the earlier of (1) receipt of a written acceptance, (2) expiration of the acceptance period or (3) payment.
The Company's software arrangements often include implementation and consulting services that are sold separately under consulting engagement contracts or as part of the software license arrangement. When the Company determines that such services are not essential to the functionality of the licensed software and qualify as "service transactions" under SOP 97-2, the Company records revenue separately for the license and service elements of these arrangements. Generally, the Company considers that a service is not essential to the functionality of the software when the services may be provided by independent third parties experienced in providing such consulting and implementation in coordination with dedicated customer personnel. If an arrangement does not qualify for separate accounting of the license and service elements, then license revenue is recognized together with the consulting services using either the percentage-of-completion or completed-contract method of contract accounting. Contract accounting is also applied to any software arrangements that include customer-specific acceptance criteria or where the license payment is tied to the performance of consulting services. Under the percentage-of-completion method, the Company estimates the stage of completion of contracts with fixed or "not to exceed" fees based on hours or costs incurred to date as compared with estimated total project hours or costs at completion. If the Company does not have a sufficient basis to measure progress towards completion, revenue is recognized upon completion of the contract. When total cost estimates exceed revenues, the Company accrues for the estimated losses immediately. The use of the percentage-of-completion method of accounting requires significant judgment relative to estimating total contract costs, including assumptions relative to the length of time to complete the project, the nature and complexity of the work to be performed, and anticipated changes in salaries and other costs. When adjustments in estimated contract costs are determined, such revisions may have the effect of adjusting in the current period the earnings applicable to performance in prior periods.
The Company generally uses the residual method as prescribed in SOP 98-9 to recognize revenues from arrangements that include one or more elements to be delivered at a future date, when evidence of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements (e.g., maintenance, consulting and education services) based on vendor-specific objective evidence (VSOE) is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements (i.e., software license). If evidence of the fair value of one or more of the undelivered services does not exist, all revenues are deferred and recognized when delivery of all of those services has occurred or when fair values can be established. The Company determines VSOE of the fair value of maintenance services based on a substantive maintenance renewal clause, if any, within a customer contract. Otherwise, the Company determines VSOE of the fair value of maintenance and services revenues based upon our recent pricing for those services when sold separately. The Company’s current pricing practices are influenced primarily by market conditions, product type, purchase volume, maintenance term and customer location. The Company
F-13
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
reviews services revenues sold separately and maintenance renewal rates on a periodic basis and updates, when appropriate, the Company’s VSOE of fair value for such services to ensure that it reflects our recent pricing experience. Significant incremental discounts offered in multiple-element arrangements that would be characterized as separate elements are infrequent and are allocated to software license revenues under the residual method.
Maintenance services include rights to unspecified upgrades (when and if available), telephone and internet-based support, updates and bug fixes. Maintenance revenue is recognized ratably over the term of the maintenance contract on a straight-line basis. It is uncommon for the Company to offer a specified upgrade to an existing product; however, in such instances, all revenue of the arrangement is deferred until the specified upgrade is delivered.
When consulting is sold separately or qualifies for separate accounting, consulting revenues under time and materials billing arrangements are recognized as the services are performed. Consulting revenues under fixed-priced contracts are generally recognized using the percentage-of-completion method. Under the percentage-of-completion method, the Company estimates the stage of completion of contracts with fixed or “not to exceed” fees based on hours or costs incurred to date as compared with estimated total project hours or costs at completion. If the Company does not have a sufficient basis to measure progress towards completion, revenue is recognized upon completion of the contract. When total cost estimates exceed revenues, the Company accrues for the estimated losses immediately. The use of the percentage-of-completion method of accounting requires significant judgment relative to estimating total contract costs, including assumptions relative to the length of time to complete the project, the nature and complexity of the work to be performed, and anticipated changes in salaries and other costs. When adjustments in estimated contract costs are determined, such revisions may have the effect of adjusting in the current period the earnings applicable to performance in prior periods. If there is a significant uncertainty about the project completion or receipt of payment for the consulting services, revenue is deferred until the uncertainty is sufficiently resolved. Reimbursements of out-of-pocket expenditures incurred in connection with providing consulting services are included in services revenue, with the offsetting expense recorded in cost of services revenue.
Education and training services include on-site training, classroom training, and computer-based training and assessment. Education and training revenues are recognized as the related training services are provided.
Deferred revenue and the corresponding accounts receivable on certain service agreements billed during the last month of the year are not recorded because they are attributable to future periods.
Allowance for Doubtful Accounts. The Company makes judgments as to its ability to collect outstanding receivables and provides allowances when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reserved, allowances for doubtful accounts are provided for based on historical collection experience.
Software Development Costs. The Company accounts for its software development costs in accordance with SFAS No. 86,Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. This statement requires that, once technological feasibility of a developing product has been established, all subsequent costs incurred in developing that product to a commercially acceptable level must be capitalized and amortized ratably over the expected economic life of the product. The Company typically uses the completion of a detailed program design as the milestone in determining technological feasibility. In accordance with SFAS 86, the Company achieves technological feasibility for each product upon completion of a detailed program in which (1) the Company has established that the necessary skills, hardware and software technology are available to the Company to produce the product, (2) the completeness of the detailed program design has been confirmed by documentation and tracing the design to product specifications, and (3) the detailed program design has been reviewed for high-risk development issues (for example, novel, unique, unproven function and features or technological innovations), and any uncertainties related to
F-14
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
identified high-risk development issues have been resolved through coding and testing. Capitalized software costs also include amounts paid for purchased software and outside development on products that have reached technological feasibility. All capitalized software development costs are amortized as cost of licenses on a straight-line basis, or on the basis of each product’s projected revenue, whichever results in greater amortization, over the remaining estimated economic life of the product, which is generally estimated to be three years. The Company recorded amortization of $7.8 million, $7.1 million and $6.6 million in 2004, 2003 and 2002, respectively, in cost of licenses. The Company assesses the recoverability of capitalized software costs by comparing the cost capitalized for all products to the net of estimated future gross revenues for all products less the estimated future cost of completing, maintaining, supporting and disposing of all products. No impairment charges were booked in 2004 or 2003 in conjunction with the Company’s recoverability assessments. During 2002, the Company terminated two products resulting in impairment charges totaling $5.2 million related to software development costs that were previously capitalized (see Note 14).
The Company accounts for the costs of computer software developed or obtained for internal use in accordance with the SOP 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This statement requires that certain costs incurred to develop software for internal use are capitalized. During the years ended December 31, 2004, 2003 and 2002, the Company capitalized $0.1 million, $0.6 million and $0.6 million, respectively, under SOP 98-1. Costs capitalized in 2004, 2003 and 2002 are amortized over the estimated useful life of the software developed, which is generally three years. The net book value of costs capitalized under SOP 98-1 was $0.3 million as of December 31, 2004.
Property and Equipment. Property and equipment are stated at cost less accumulated depreciation and amortization, which is calculated using the straight-line method over the estimated useful lives of the assets. Estimated useful lives of 36 to 48 months are used on computer equipment, and an estimated useful life of seven years is used for furniture and fixtures. Depreciation and amortization of leasehold improvements is computed using the shorter of the remaining lease term or the useful life of the improvements. Property under capital leases is amortized over the life of the respective lease or the estimated useful life of the assets, whichever is shorter. Maintenance and repairs are charged to expense when incurred and expenditures related to additions and improvements are capitalized as incurred. When an item is sold or retired, the related accumulated depreciation is relieved and the resulting gain or loss net of cash received, if any, is recognized in the income statement.
Businesses Acquired. The Company accounts for business combinations in accordance with SFAS No. 141,Business Combinations. The purchase price of businesses acquired, accounted for as purchase business combinations, is allocated to the tangible and identifiable intangible assets acquired based on their estimated fair values with any amount in excess of such allocations designated as goodwill. Intangible assets have typically included customer relationships and existing technology, which are amortized on a straight-line basis over their estimated useful lives of three to five years and covenants not to compete, which are amortized on a straight-line basis over the life of the covenant.
On September 12, 2003, the Company completed the acquisition of Mercator Software, Inc. (“Mercator”) pursuant to the Agreement and Plan of Merger dated as of August 2, 2003 (“Merger Agreement”). On April 3, 2002, the Company acquired Vality Technology Incorporated (“Vality”). These acquisitions are discussed further in Note 12. The acquisitions have been accounted for under the purchase method of accounting, and accordingly, the results of operations of Mercator and Vality have been included in the Company’s consolidated financial statements since the respective date of acquisition.
Impairment of Long-Lived Assets. The Company accounts for goodwill and intangible assets in accordance with SFAS No. 142,Goodwill and Other Intangible Assets. These assets are evaluated for impairment annually on December 1, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Factors we consider important which could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in
F-15
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period and a reduction of our market capitalization relative to net book value. To conduct these impairment tests of goodwill and indefinite-lived intangible assets, the fair value of the applicable reporting unit is compared to its carrying value. If the reporting unit’s carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value.
Long-lived assets primarily include property and equipment and intangible assets with finite lives (purchased software technology, capitalized software development costs, and customer relationships) and long term investments. In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, we periodically review certain long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis.
Income Taxes. The Company accounts for income taxes in accordance with SFAS No. 109,Accounting for Income Taxes. Significant management judgment is required in determining the provision for income taxes, deferred income taxes and liabilities and any valuation allowance recorded against net deferred tax assets. In preparing the consolidated financial statements, income taxes are estimated in each of the jurisdictions in which the Company operates. This process involves estimating the actual current tax liability, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. Reserves are maintained related to prior years’ income taxes for uncertainties in the tax treatment of certain items in various tax jurisdictions, particularly as they relate to disposed operations. These tax reserves are maintained until such time as the Company resolves the tax treatment of these items via the completion of tax audits, expiration of the statute of limitations for the assessment of tax, or additional factual development or discovery which results in a change in estimate.
Stock-Based Compensation. In December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based Compensation — Transition and Disclosure.
If evidence of the fair value of one or more of the undelivered services does not exist, all revenues are deferred and recognized when delivery of all of those services has occurred or when fair values can be established. The Company determines VSOE ofF-11
the fair value of maintenance and services revenues based upon our recent pricing for those services when sold separately. VSOE of the fair value of maintenance services may also be determined based on a substantive maintenance renewal clause, if any, within a customer contract. The Company's current pricing practices are influenced primarily by market conditions, product type, purchase volume, maintenance term and customer location. The Company reviews services revenues sold separately and maintenance renewal rates on a periodic basis and update, when appropriate, the Company's VSOE of fair value for such services to ensure that it reflects our recent pricing experience. Significant incremental discounts offered in multiple-element arrangements that would be characterized as separate elements are infrequent and are allocated to software license revenues under the residual method.
Maintenance services generally include rights to unspecified upgrades (when and if available), telephone and internet-based support, updates and bug fixes. Maintenance revenue is recognized ratably over the term of the maintenance contract on a straight-line basis. It is uncommon for the Company to offer a specified upgrade to an existing product; however, in such instances, all revenue of the arrangement is deferred until the future upgrade is delivered.
When consulting qualifies for separate accounting, consulting revenues under time and materials billing arrangements are recognized as the services are performed. Consulting revenues under fixed-priced contracts are generally recognized using the percentage-of-completion method. If there is a significant uncertainty about the project completion or receipt of payment for the consulting services, revenue is deferred until the uncertainty is sufficiently resolved. Reimbursements of out-of-pocket expenditures incurred in connection with providing consulting services are included in services revenue, with the offsetting expense recorded in cost of services revenue.
Education and training services include on-site training, classroom training, and computer-based training and assessment. Education and training revenues are recognized as the related training services are provided.
Deferred revenue and the corresponding accounts receivable for unpaid customer balances on certain service agreements billed during the last quarter of the year are reduced when revenue recognition on these agreements has not commenced because they are attributable to future periods.
Allowance for Doubtful Accounts. The Company makes judgments as to its ability to collect outstanding receivables and provides allowances when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, allowances for doubtful accounts are provided for based on historical collection experience. If the data the Company uses to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected.
Software Development Costs. The Company accounts for its software development costs in accordance with SFAS No. 86,Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. This statement requires that, once technological feasibility of a developing product has been established, all subsequent costs incurred in developing that product to a commercially acceptable level must be capitalized and amortized ratably over the expected economic life of the product. The Company uses the completion of a detailed program design as the milestone in determining technological feasibility. In accordance with SFAS No. 86 the Company achieves technological feasibility for each product upon completion of a detailed program in which (1) the Company has established that the necessary skills, hardware and software technology are available to the Company to produce the product, (2) the completeness of the detailed program design has been confirmed by documentation and tracing the design to product specifications, and (3) the detailed program design has been reviewed for high-risk development issues (for example, novel, unique, unproven function and features or technological innovations), and any uncertainties related to
F-12
identified high-risk development issues have been resolved through coding and testing. Software costs also include amounts paid for purchased software and outside development on products that have reached technological feasibility. All software development costs are amortized as cost of licenses on a straight-line basis over the remaining estimated economic life of the product, which is generally estimated to be three years. The Company recorded amortization of $7.1 million, $6.6 million and $14.6 million in 2003, 2002 and 2001, respectively, in cost of license. The Company assesses the recoverability of capitalized software costs by comparing the cost capitalized for all products to the net of estimated future gross revenues for all products less the estimated future cost of completing, maintaining, supporting and disposing of all products. No impairment charges were booked in 2003, 2002 or 2001 in conjunction with the Company's recoverability assessments. During 2002, the Company terminated two products resulting in impairment charges totaling $5.2 million related to software development costs that were previously capitalized (see Note 15 of Notes to Consolidated Financial Statements).
The Company accounts for the costs of computer software developed or obtained for internal use in accordance with the SOP 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which was effective for fiscal years beginning after December 15, 1998. This statement requires that certain costs incurred to develop software for internal use be capitalized. During the years ended December 31, 2003, 2002 and 2001, the Company capitalized $0.6 million, $0.6 million and $5.9 million, respectively, under SOP 98-1. Cost capitalized prior to July 1, 2001 were related to assets transferred to IBM as a result of the IBM Transaction. Costs capitalized in 2003 and 2002 are amortized over the estimated useful life of the software developed, which is generally three years. The net book value of costs capitalized under SOP 98-1 was $0.7 million as of December 31, 2003.
Property and Equipment. Property and equipment are stated at cost less accumulated depreciation and amortization, which is calculated using the straight-line method over the estimated useful lives of the assets. Estimated useful lives of 36 to 48 months are used on computer equipment, and an estimated useful life of seven years is used for furniture and fixtures. Depreciation and amortization of leasehold improvements is computed using the shorter of the remaining lease term or the useful life of the improvements. Property under capital leases is amortized over the life of the respective lease or the estimated useful life of the assets, whichever is shorter. Maintenance and repairs are charged to expense when incurred and expenditures related to additions and improvements are capitalized as incurred. When an item is sold or retired, the related accumulated depreciation is relieved and the resulting gain or loss net of cash received, if any, is recognized in the income statement.
Businesses Acquired. In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141,Business Combinations, which requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Effective July 1, 2001, the Company adopted certain provisions of SFAS No. 141 and adopted the remaining provisions of SFAS No. 141 effective January 1, 2002. The purchase price of businesses acquired, accounted for as purchase business combinations, is allocated to the tangible and identifiable intangible assets acquired based on their estimated fair values with any amount in excess of such allocations designated as goodwill. Intangible assets typically include customer lists and patented technology, which are generally amortized on a straight-line basis over their estimated useful lives of three to five years and covenants not to compete, which are amortized on a straight-line basis over the life of the covenant.
On September 12, 2003, the Company completed the acquisition of Mercator Software, Inc. ("Mercator") pursuant to the Agreement and Plan of Merger dated as of August 2, 2003 ("Merger Agreement") as discussed further in Note 12 to these Consolidated Financial Statements. The acquisition has been accounted for under the purchase method of accounting, and accordingly, the results of operations of Mercator have been included in the Company's consolidated financial statements since the date of acquisition.
F-13
Impairment of Long-Lived Assets. Effective January 1, 2002 with the adoption of SFAS No. 142,Goodwill and Other Intangible Assets, the Company ceased amortizing intangible assets with indefinite useful lives including goodwill, assembled workforce and trademarks. Instead, these assets are evaluated for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Factors we consider important which could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period and a reduction of our market capitalization relative to net book value. To conduct these tests of goodwill and indefinite-lived intangible assets, the fair value of the applicable reporting unit is compared to its carrying value. If the reporting unit's carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value. We estimate the fair values of our reporting units using discounted cash flow valuation models.
Long-lived assets primarily include property and equipment and intangible assets with finite lives (purchased software, capitalized software development costs, customer lists and long term investments). In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, we periodically review certain long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis
Stock-Based Compensation. In December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based Compensation — Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,Accounting for Stock-Based Compensationto provide alternative methods of transition for entities that elect to voluntarily change to the fair value based method of accounting for stock based employee compensation. SFAS No. 148 also requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company implemented the provisions of SFAS No. 148 effective December 31, 2002 and has elected to continue to account for stock-based awards to employees in accordance with the intrinsic value provisions of Accounting Principles Board Opinion (“APB”) No. 25,Accounting for Stock Issued to Employees, and related Interpretations ("APB No. 25").Interpretations. Under APB No. 25, the Company generally recognizes no compensation expense with respect to stock based awards granted to employees under the terms of the Company'sCompany’s various stock option plans and issued under the Company'sCompany’s Employee Stock Purchase Plan ("ESPP"(“ESPP”). All options granted under stock option plans were for a fixed number of shares and had an exercise price equal to the market value of the underlying common stock on the date of grant.
In December 2004, the FASB issued SFAS 123(R), which replaces SFAS 123, and supersedes APB 25. SFAS 123(R) requires compensation costs relating to share-based payment transactions be recognized in financial statements. The pro forma disclosure previously permitted under SFAS 123 will no longer be an acceptable alternative to recognition of expenses in the financial statements. SFAS 123(R) is effective as of the beginning of the first reporting period that begins after June 15, 2005, with early adoption encouraged. The Company will adopt SFAS 123(R) starting from the third quarter of 2005. The Company expects the adoption of SFAS 123(R) to have a material adverse impact on our net income and net income per share and
F-16
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
is currently in the process of evaluating the extent of such impact. However, the pro forma disclosure below approximates what would have been the impact of applying SFAS 123(R) to the historical periods presented.
Pro forma information regarding the net income (loss) and net income (loss) per share is required by SFAS
No. 148, as if the Company had accounted for its stock based awards to employees under the fair value method of SFAS
No. 123. The fair value of the
Company'sCompany’s stock-based awards to employees was estimated using a Black-Scholes option-pricing model.
The fair value of the Company'sCompany’s stock-based awards was estimated assuming no expected dividends and the following weighted-average assumptions:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Options | | | ESPP | |
| | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | | | | | | | | | | |
| Dividend rate | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Expected life (years) | | | 4.5 | | | | 4.5 | | | | 4.5 | | | | 0.25 | | | | 0.25 | | | | 0.25 | |
| Expected volatility | | | 78 | % | | | 81 | % | | | 85 | % | | | 57 | % | | | 82 | % | | | 85 | % |
| Risk-free interest rate | | | 3.4 | % | | | 3.0 | % | | | 3.5 | % | | | 1.4 | % | | | 1.0 | % | | | 1.4 | % |
| | Options
| | ESPP
| |
|---|
| | 2003
| | 2002
| | 2001
| | 2003
| | 2002
| | 2001
| |
|---|
| Dividend rate | | — | | — | | — | | — | | — | | — | |
| Expected life (years) | | 4.5 | | 4.5 | | 4.5 | | 0.25 | | 0.25 | | 0.25 | |
| Expected volatility | | 81 | % | 85 | % | 86 | % | 82 | % | 85 | % | 86 | % |
| Risk-free interest rate | | 3.0 | % | 3.5 | % | 4.3 | % | 1.0 | % | 1.4 | % | 4.2 | % |
F-14
For pro forma purposes, the estimated fair value of the Company'sCompany’s stock-based awards is amortized over the award'saward’s vesting period (for options) and the three-month purchase period (for stock purchases under the ESPP). The following table illustrates the effect on net income (loss) and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:
| | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| | | (In thousands except for per share | |
| | | information) | |
| Net income (loss) as reported | | $ | 14,951 | | | $ | 15,805 | | | $ | (63,573 | ) |
| Add: | | | | | | | | | | | | |
| | Stock based compensation recognized in net income (loss), net of related tax effect | | | 689 | | | | 732 | | | | 245 | |
| Deduct: | | | | | | | | | | | | |
| | | Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | (26,315 | ) | | | (22,303 | ) | | | (28,811 | ) |
| | | | | | | | | | |
| Pro forma net loss | | $ | (10,675 | ) | | $ | (5,766 | ) | | $ | (92,139 | ) |
| | | | | | | | | | |
| Net income (loss) per common share: | | | | | | | | | | | | |
| | Basic, as reported | | $ | 0.25 | | | $ | 0.27 | | | $ | (1.03 | ) |
| | Basic, pro forma | | $ | (0.18 | ) | | $ | (0.10 | ) | | $ | (1.49 | ) |
| | Diluted, as reported | | $ | 0.25 | | | $ | 0.26 | | | $ | (1.03 | ) |
| | Diluted, pro forma | | $ | (0.18 | ) | | $ | (0.10 | ) | | $ | (1.49 | ) |
The tax rate used to calculate the pro forma stock-based employee compensation expense, net of related tax effects above, was 24%, 30% and 22% in 2004, 2003 and 2002, respectively. The rates used represent the Company’s actual effective tax rate adjusted for infrequent tax items such as the impact of in-process research and development charges and significant tax accrual adjustments. The amount of pro forma net loss for the year ended December 31, 2003 presented above differs from the amount previously reported of $(2,340) as a result of a change in the estimated tax rate applied to the pro forma stock-based compensation to be consistent with the method applied in the other years presented.
F-17
| | Years Ended
December 31,
| |
|---|
| | 2003
| | 2002
| | 2001
| |
|---|
| | (In thousands except for per share information)
| |
|---|
| Net income (loss) applicable to common stockholders: | | | | | | | | | | |
| | As reported | | $ | 15,805 | | $ | (63,573 | ) | $ | 624,948 | |
| Add: | | | | | | | | | | |
| Stock based compensation recognized in net income (loss) | | | 1,045 | | | 245 | | | 498 | |
| Deduct: | | | | | | | | | | |
| | | Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | (19,190 | ) | | (28,811 | ) | | (34,023 | ) |
| | |
| |
| |
| |
| | Pro forma net income (loss) applicable to common stockholders | | $ | (2,340 | ) | $ | (92,139 | ) | $ | 591,423 | |
| | |
| |
| |
| |
| Net income (loss) per common share: | | | | | | | | | | |
| | Basic, as reported | | $ | 0.27 | | $ | (1.03 | ) | $ | 9.01 | |
| | |
| |
| |
| |
| | Basic, pro forma | | $ | (0.04 | ) | $ | (1.49 | ) | $ | 8.53 | |
| | |
| |
| |
| |
| | Diluted, as reported | | $ | 0.26 | | $ | (1.03 | ) | $ | 8.79 | |
| | |
| |
| |
| |
| | Diluted, pro forma | | $ | (0.04 | ) | $ | (1.49 | ) | $ | 8.32 | |
| | |
| |
| |
| |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted-average fair value of the options granted during
2004, 2003
and 2002
were $13.53, $10.59 and
2001 were $10.59, $7.33
and $12.36 per share, respectively. The weighted-average fair value of employee stock purchase rights granted under the 1997 ESPP during
2004, 2003
and 2002
were $5.12, $4.15 and
2001 were $4.15, $3.8 and $5.04$3.80 per share, respectively.
Concentration of Credit Risk. The Company designs, develops, manufactures, markets, and supports computer software systems to customers in diversified industries and in diversified geographic locations. The Company performs ongoing credit evaluations of its customers'customers’ financial condition and generally requires no collateral. No single customer accounted for 10% or more of the consolidated net revenues of the Company in 20032004 and 2001. For2003. In 2002, IBM was responsible for 11% of total revenues and no other single customer accounted for more than 10% of total revenues. Cash, Cash Equivalents, Short-Term Investments, and Long-Term Investments. The Company considers liquid investments purchased with an original remaining maturity of three months or less to be cash equivalents. Investments with an original remaining maturity of more than three months but less than twelve months or investments with maturity of more than twelve months that the Company intends to sell within one year to fund current operations or acquisitions are considered to be short-term investments. All other investments are considered long-term investments. Short-term and long-term investments are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses, net of tax, reported as a component of other comprehensive income (loss). The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities areF-15
included in other income (expense), net. The company’s investments in auction rate securities are recorded at cost, which approximates fair value due to their variable interest rates. The interest rates generally reset every 28 days. Despite the long-term nature of their stated contractual maturities, the company has the ability to quickly liquidate investments in auction rate securities. All income generated from these investments has been recorded as interest income. The cost of securities sold is based on the specific identification method. Interest on securities classified as available-for-sale is included in interest income. The Company also maintains investments in certain publicly traded marketable equity securities and also classifies these as available for sale. The Company realized net gains of approximately $1.9$0.4 million, $0.6$1.1 million and $0.4$0.6 million on the sale of available-for-sale short term investments during 2003, 2002 and 2001, respectively.
In2004, 2003 and 2001,2002, respectively.
In 2004 and 2003, the Company did not recognize any gains or losses
associated withrelated to other than temporary declines in the market value of its available-for-sale marketable equity securities. The Company did however realize pretax losses of $2.2 million related to other than temporary declines in the market value of its available-for-sale marketable equity securities during 2002. These losses had previously been recognized as a component of accumulated other comprehensive income.
The Company invests its excess cash in accordance with its current investment policy, which is approved by the board of directors. The policy authorizes the investment of excess cash in government securities, municipal bonds, time deposits, certificates of deposit with approved financial institutions, commercial paper rated A-1/P-1, and other specific money market instruments of similar liquidity and credit quality. The Company has not experienced any significant losses related to these investments.
The Company maintains investments in equity instruments of certain privately held, information technology companies for business and strategic purposes. These investments are included in long-term investments and are accounted for under the cost method when ownership is less than 20% and the Company does not otherwise have significant influence over the investee. For these non-marketable investments, the Company'sCompany’s policy is to periodically review for impairment based on market conditions, the industry sectors in which the investment entity operates, the viability and prospects of each entity and the continued strategic importance of the investment to the Company. When the Company determines that a decline in fair value
F-18
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
below the cost basis is other than temporary, the related investment is written down to fair value.
The Company recorded impairment losses on strategic investments of $10.2 million in 2001. No impairment losses were recorded in
2004, 2003 and 2002.
Fair Value of Financial Instruments. Fair values of cash, cash equivalents, short and long term investments and foreign currency forward contracts are based on quoted market prices. The carrying value of these financial instruments approximates fair value. Reclassifications. Certain prior period amounts have been reclassified to conform to the current period presentation. Supplemental Cash Flow Data. The Company paid income taxes in the net amount of $11.3 million and $4.5 million in 2004 and $67.6 million in 2003, and 2001, respectively, and received income tax refunds in the net amount of $23.3 million during 2002. The Company paid interest in the amount of $0.2 million, $0.2 million and $0.1 million during 2004, 2003 and $0.2 million during 2003, 2002, and 2001, respectively. The Company has recorded $0.5 million of non-cash charges forno additions to capital leases during the year ended December 31, 2003.2004. During 2003, $0.5 million of non-cash charges were recorded for additions to capital leases. Non-cash asset write-offs of $9.1 million and $14.4 million were recorded by the Company during the yearsyear ended December 31, 2002 and2002.
| |
| New Accounting Pronouncements. |
In December
31, 2001, respectively.New Accounting Pronouncements.
In January 2003, the FASB issued FIN No. 46,Consolidation of Variable Interest Entities. In general, a variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. Variable interest entities have been commonly referred to as special-purpose entities or
F-16
off-balance sheet structures. FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns, or both. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003. It applies in the first interim period ending after March 15, 2004, to pre-existing entities. The adoption of FIN No. 46 is not expected to have a material effect on our financial position or results of operations. For those arrangements entered into prior to January 31, 2003 and before December 31, 2003, FIN 46, as amended by FIN 46R, provisions are required to be adopted by the Company in the second quarter of fiscal 2004. The adoption of FIN 46R is not expected to have a material impact on the Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150,123(R), which replaces SFAS 123“Accounting for Certain Financial Instruments with Characteristics of Both LiabilitiesStock-Based Compensation”, and Equity.supersedes APB 25,“Accounting for Stock Issued to Employees.”The requirements set forth by SFAS No. 150 requires that certain123(R) and their financial instruments be classified as a liabilitystatement impact are discussed above in the balance sheet, that,Stock-Based Compensationsection of this Note 1.
In December 2004, FASB Staff Position No. FAS 109-2,“Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004”(“FSP FAS 109-2”) was issued, providing guidance under previous guidance, could have been accountedSFAS 109,“Accounting for as equity. For public companies,Income Taxes”for recording the statement is effective immediately for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginningpotential impact of the first interimrepatriation provisions of the American Jobs Creation Act of 2004, enacted on October 22, 2004. FSP FAS 109-2 allows time beyond the financial reporting period beginningof enactment to evaluate the effects of the Jobs Act before applying the requirements of FSP FAS 109-2. Accordingly, the Company is evaluating the potential effects of the Jobs Act and have not adjusted its tax expense or deferred tax liability to reflect the requirements of FSP FAS 109-2.
In March 2004, the FASB issued EITF 03-1,“The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, which provided new guidance for assessing impairment losses on investments. Additionally, EITF 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF 03-1; however the disclosure requirements remained effective for annual periods ending after June 15,
2003.2004. The
adoption of SFAS No. 150 did not have a material effect on our financial position or results of operations. In April 2003,Company will evaluate the FASB issued SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative (as defined in SFAS No. 133), clarifies when a derivative contains a financing component, amends definitions to conform to language used in FIN No. 45 and amends certain other existing pronouncements to ensure consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect on our financial position or results of operations.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred and nullifies EITF No. 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under EITF Issue No. 94-3, an entity recognizes a liability for an exit cost on the date that the entity commits itself to an exit plan. In SFAS No. 146, an entity's commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability. SFAS No. 146 also establishes that fair value is the objective for the initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material effect on our consolidated financial position or results of operations.
In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104), which supercedes SAB 101, Revenue Recognition in Financial Statements. The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, which was superceded as a result of the issuanceimpact of EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material impact on the Company's financial statements.03-1 once final guidance is issued.
F-17F-19
Note 2
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Balance Sheet Components
| | December 31,
| |
|---|
| | 2003
| | 2002
| |
|---|
| | (In thousands)
| |
|---|
| Accounts receivable, net: | | | | | | | |
| | Receivables | | $ | 46,751 | | $ | 30,870 | |
| | Less: allowance for doubtful accounts | | | (4,717 | ) | | (3,758 | ) |
| | |
| |
| |
| | | $ | 42,034 | | $ | 27,112 | |
| | |
| |
| |
| Property and equipment, net: | | | | | | | |
| | Computer equipment | | $ | 23,120 | | $ | 22,430 | |
| | Furniture and fixtures | | | 8,037 | | | 7,852 | |
| | Assets under capital leases | | | 3,410 | | | — | |
| | Leasehold improvements | | | 7,801 | | | 8,568 | |
| | |
| |
| |
| | | | 42,368 | | | 38,850 | |
| | Less: accumulated depreciation | | | (29,485 | ) | | (33,423 | ) |
| | Less: accumulated amortization on capital leases | | | (1,697 | ) | | — | |
| | |
| |
| |
| | | $ | 11,186 | | $ | 5,427 | |
| | |
| |
| |
| Software development costs, net: | | | | | | | |
| | Software development costs | | $ | 37,695 | | $ | 29,935 | |
| | Less: accumulated amortization | | | (22,901 | ) | | (15,811 | ) |
| | |
| |
| |
| | | $ | 14,794 | | $ | 14,124 | |
| | |
| |
| |
(Continued)
| |
| Note 2 — | Balance Sheet Components |
| | | | | | | | | | |
| | | December 31, | |
| | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| | | (In thousands) | |
| Accounts receivable, net: | | | | | | | | |
| | Receivables | | $ | 59,863 | | | $ | 46,751 | |
| | Less: allowance for doubtful accounts | | | (3,256 | ) | | | (4,717 | ) |
| | | | | | | |
| | | $ | 56,607 | | | $ | 42,034 | |
| | | | | | | |
| Property and equipment, net: | | | | | | | | |
| | Computer equipment | | $ | 25,408 | | | $ | 23,120 | |
| | Furniture and fixtures | | | 6,993 | | | | 8,037 | |
| | Assets under capital leases | | | 2,916 | | | | 3,410 | |
| | Leasehold improvements | | | 7,562 | | | | 7,801 | |
| | | | | | | |
| | | | 42,879 | | | | 42,368 | |
| | Less: accumulated depreciation | | | (30,849 | ) | | | (29,485 | ) |
| | Less: accumulated amortization on capital leases | | | (2,021 | ) | | | (1,697 | ) |
| | | | | | | |
| | | $ | 10,009 | | | $ | 11,186 | |
| | | | | | | |
| Software development costs, net: | | | | | | | | |
| | Capitalized software development costs | | $ | 47,258 | | | $ | 37,695 | |
| | Less: accumulated amortization | | | (30,716 | ) | | | (22,901 | ) |
| | | | | | | |
| | | $ | 16,542 | | | $ | 14,794 | |
| | | | | | | |
| Accumulated other comprehensive loss: | | | | | | | | |
| | Cumulative foreign exchange translation adjustment | | $ | (6,040 | ) | | $ | (8,308 | ) |
| | Unrealized gains (losses) on available-for-sale securities | | | (1,911 | ) | | | 295 | |
| | | | | | | |
| | | $ | (7,951 | ) | | $ | (8,013 | ) |
| | | | | | | |
Accounts receivable and the corresponding deferred revenue
for unpaid customer balances on certain service agreements billed during the last quarter of the year
have been reduced byof $3.8 million and $2.4 million and
$1.6 million for the years endedremaining outstanding at December 31,
2004 and 2003,
and 2002. Revenue recognition on these agreements hasrespectively, were not
commenced,recorded because they are attributable to future periods.
On June 30, 2004, the Company entered into a non-recourse receivables purchase agreement with a financial institution, providing for the sale of trade receivables of up to $10.0 million outstanding. The transfer of the accounts receivable are recorded as sales and accounted for in accordance with SFAS 140“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. In the year ended December 31, 2004, the Company sold $14.9 million of accounts receivable to the financial institution. This arrangement is a means of accelerating cash collections in a manner that the Company believes is more cost-effective than offering early payment discounts. Trade receivables that were sold during the year ended December 31, 2004, and not yet collected, amounted to $7.2 million and are excluded from trade accounts receivable at December 31, 2004. The fees, losses and other amounts related to the Company’s sale and subsequent servicing of these receivables were not material to the Company’s consolidated financial statements.
Depreciation expense for the years ended December 31, 2004, 2003 and 2002 and 2001 was $5.9 million, $3.6 million $5.2 million, and $2.3$5.2 million, respectively. Assets under capital lease consist primarily of computer equipment and software.
F-20
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets
forforth the activity related to the allowance for doubtful accounts for the years ended December 31,
2004, 2003
2002 and
2001. During2002. Included in other adjustments in the year ended December 31, 2004 is an increase of $0.1 million of foreign exchange revaluation, with the offsetting amount related to Mercator reserves no longer deemed necessary. In the year ended December 31, 2003,
the allowance for doubtful accounts increasedother adjustments consist of an increase of $1.9 million due to the acquisition of
Mercator and in the year ended December 31, 2001 the allowance for doubtful accounts decreased by $8.5 million due to a transfer related the IBM Transaction. Accounts receivable of $2.4 million, $7.2 million and $10.5 million were written off as uncollectible in the years ended December 31, 2003, 2002 and 2001, respectively:
| | Balance at
Beginning
of Period
| | Charged to
Costs and
Expenses
| | Charged to
Revenues
| | Write Offs
| | Other
| | Balance
at End
of Year
|
|---|
| (In thousands) | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2003 | | $ | 3,758 | | $ | 971 | | $ | — | | $ | 1,948 | | $ | 1,936 | | $ | 4,717 |
| Year ended December 31, 2002 | | $ | 8,451 | | $ | 2,426 | | $ | 47 | | $ | 7,166 | | $ | — | | $ | 3,758 |
| Year ended December 31, 2001 | | $ | 14,234 | | $ | 12,039 | | $ | 1,179 | | $ | 10,521 | | $ | (8,480 | ) | $ | 8,451 |
F-18
Note 3 — Financial Instruments
Mercator.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Balance at | | | Charged to | | | | | | | | | Balance | |
| | | Beginning | | | Costs and | | | Charged to | | | | | | | at End | |
| | | of Year | | | Expenses | | | Revenues | | | Write Offs | | | Other | | | of Year | |
| | | | | | | | | | | | | | | | | | | |
| | | (In thousands) | |
| Year ended December 31, 2004 | | $ | 4,717 | | | $ | (364 | ) | | $ | 304 | | | $ | (1,320 | ) | | $ | (81 | ) | | $ | 3,256 | |
| Year ended December 31, 2003 | | $ | 3,758 | | | $ | 971 | | | $ | — | | | $ | (1,948 | ) | | $ | 1,936 | | | $ | 4,717 | |
| Year ended December 31, 2002 | | $ | 8,451 | | | $ | 2,426 | | | $ | 47 | | | $ | (7,166 | ) | | $ | — | | | $ | 3,758 | |
| |
| Note 3 — | Financial Instruments |
The following is a summary of available-for-sale debt and marketable equity securities:
| | | | | | | | | | | | | | | | | |
| | | | | Available-for-Sale | | | |
| | | | | Securities | | | |
| | | | | | | | |
| | | | | Gross | | | Gross | | | |
| | | | | Unrealized | | | Unrealized | | | Estimated | |
| | | Cost | | | Gains | | | Losses | | | Fair Value | |
| | | | | | | | | | | | | |
| | | | | (In thousands) | | | |
December 31, 2004 | | | | | | | | | | | | | | | | |
| U.S. treasury securities | | $ | 41,252 | | | $ | — | | | $ | (391 | ) | | $ | 40,861 | |
| Euro dollar Time Deposit | | | 2,352 | | | | — | | | | — | | | | 2,352 | |
| Commercial paper, corporate bonds and medium-term notes | | | 190,746 | | | | 63 | | | | (910 | ) | | | 189,899 | |
| U.S. government agency bonds | | | 165,622 | | | | 4 | | | | (677 | ) | | | 164,949 | |
| Money Market Funds | | | 3,007 | | | | — | | | | — | | | | 3,007 | |
| Marketable equity securities | | | 63 | | | | — | | | | — | | | | 63 | |
| | | | | | | | | | | | | |
| | | $ | 403,042 | | | $ | 67 | | | $ | (1,978 | ) | | $ | 401,131 | |
| | | | | | | | | | | | | |
| Amounts included in cash and cash equivalents | | | 86,655 | | | | 63 | | | | (1 | ) | | | 86,717 | |
| Amounts included in short-term investments | | | 316,324 | | | | 4 | | | | (1,977 | ) | | | 314,351 | |
| Amounts included in long-term investments | | | 63 | | | | — | | | | | | | | 63 | |
| | | | | | | | | | | | | |
| | | $ | 403,042 | | | $ | 67 | | | $ | (1,978 | ) | | $ | 401,131 | |
| | | | | | | | | | | | | |
| | Available-for-Sale Securities
|
|---|
| | Cost
| | Gross
Unrealized
Gains
| | Gross
Unrealized
Losses
| | Estimated
Fair value
|
|---|
| | (In thousands)
|
|---|
| December 31, 2003 | | | | | | | | | | | | |
| U.S. treasury securities | | $ | 31,958 | | $ | 10 | | $ | (175 | ) | $ | 31,793 |
| Money market mutual funds | | | 75,241 | | | — | | | — | | | 75,241 |
| Commercial paper, corporate bonds and medium-term notes | | | 162,070 | | | 674 | | | — | | | 162,744 |
| U.S. government agency bonds | | | 138,796 | | | 25 | | | (122 | ) | | 138,699 |
| Euro dollar time deposits | | | 2,593 | | | — | | | — | | | 2,593 |
| Marketable equity securities | | | 97 | | | 79 | | | — | | | 176 |
| | |
| |
| |
| |
|
| | | $ | 410,755 | | $ | 788 | | $ | (297 | ) | $ | 411,246 |
| | |
| |
| |
| |
|
| Amounts included in cash and cash equivalents | | $ | 97,389 | | $ | — | | $ | — | | $ | 97,389 |
| Amounts included in short-term investments | | | 313,269 | | | 709 | | | (297 | ) | | 313,681 |
| Amounts included in long-term investments | | | 97 | | | 79 | | | — | | | 176 |
| | |
| |
| |
| |
|
| | | $ | 410,755 | | $ | 788 | | $ | (297 | ) | $ | 411,246 |
| | |
| |
| |
| |
|
December 31, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. treasury securities | | $ | 71,266 | | $ | 400 | | $ | (2 | ) | $ | 71,664 |
| Commercial paper, corporate bonds and medium-term notes | | | 88,008 | | | 1,057 | | | — | | | 89,065 |
| U.S. government agency bonds | | | 148,352 | | | 1,344 | | | (1 | ) | | 149,695 |
| Marketable equity securities | | | 216 | | | — | | | — | | | 216 |
| | |
| |
| |
| |
|
| | | $ | 307,842 | | $ | 2,801 | | $ | (3 | ) | $ | 310,640 |
| | |
| |
| |
| |
|
| Amounts included in cash and cash equivalents | | $ | 22,225 | | $ | — | | $ | — | | $ | 22,225 |
| Amounts included in short-term investments | | | 285,401 | | | 2,801 | | | (3 | ) | | 288,199 |
| Amounts included in long-term investments | | | 216 | | | — | | | — | | | 216 |
| | |
| |
| |
| |
|
| | | $ | 307,842 | | $ | 2,801 | | $ | (3 | ) | $ | 310,640 |
| | |
| |
| |
| |
|
F-21
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | |
| | | | | Available-for-Sale | | | |
| | | | | Securities | | | |
| | | | | | | | |
| | | | | Gross | | | Gross | | | |
| | | | | Unrealized | | | Unrealized | | | Estimated | |
| | | Cost | | | Gains | | | Losses | | | Fair Value | |
| | | | | | | | | | | | | |
| | | | | (In thousands) | | | |
December 31, 2003 | | | | | | | | | | | | | | | | |
| U.S. treasury securities | | $ | 31,958 | | | $ | 10 | | | $ | (175 | ) | | $ | 31,793 | |
| Money market mutual funds | | | 75,241 | | | | — | | | | — | | | | 75,241 | |
| Commercial paper, corporate bonds and medium-term notes | | | 162,070 | | | | 674 | | | | — | | | | 162,744 | |
| U.S. government agency bonds | | | 138,796 | | | | 25 | | | | (122 | ) | | | 138,699 | |
| Euro dollar time deposits | | | 2,593 | | | | — | | | | — | | | | 2,593 | |
| Marketable equity securities | | | 97 | | | | 79 | | | | — | | | | 176 | |
| | | | | | | | | | | | | |
| | | $ | 410,755 | | | $ | 788 | | | $ | (297 | ) | | $ | 411,246 | |
| | | | | | | | | | | | | |
| Amounts included in cash and cash equivalents | | $ | 93,489 | | | $ | — | | | $ | — | | | $ | 93,489 | |
| Amounts included in short-term investments | | | 317,169 | | | | 709 | | | | (297 | ) | | | 317,581 | |
| Amounts included in long-term investments | | | 97 | | | | 79 | | | | — | | | | 176 | |
| | | | | | | | | | | | | |
| | | $ | 410,755 | | | $ | 788 | | | $ | (297 | ) | | $ | 411,246 | |
| | | | | | | | | | | | | |
Maturities of debt securities at market value at December 31,
20032004 are as follows (in thousands):
| Mature in one year or less | | $ | 217,406 |
| Mature after one year through five years | | $ | 193,664 |
Note 4 — Derivative Financial Instruments
| | | | | |
| Mature in one year or less | | $ | 137,360 | |
| Mature after one year through five years | | | 263,771 | |
| | | | |
| | | $ | 401,131 | |
| |
| Note 4 — | Derivative Financial Instruments |
The Company enters into foreign currency forward exchange contracts primarily as an economic hedge against the value of intercompany accounts receivable or accounts payable denominated in foreign currencies against fluctuations in exchange rates until such receivables are collected or payables are disbursed. The purpose of the
Company'sCompany’s foreign exchange exposure management policy and practices is to attempt to minimize the impact of exchange rate fluctuations on the value of the foreign currency denominated assets and liabilities being hedged. These transactions and other forward foreign exchange contracts do not meet the accounting rules established under SFAS No. 133 to qualify for recording of the unrecognized after-tax gain or loss portion of the fair value of the contracts in other
F-19
comprehensive income (loss), and the Company has not designated the instruments as hedges for accounting purposes. Therefore, the related fair value of the derivative hedge contract is recognized in earnings.
The table below summarizes by currency the contractual amounts of the Company'sCompany’s foreign currency forward exchange contracts at December 31, 20032004 and 2002.2003. The information is provided in U.S. dollar equivalents and presents the notional amount (contract amount). Since these contracts were entered into on the last day of 20032004 and 2002,2003, respectively, the contract forward rate and the market forward rate are the same. The Company'sCompany’s foreign currency forward contracts are not accounted for as hedges, but are derivative financial instruments and are carried at fair value. All contracts mature within three months. In addition to the contracts listed below, at December 31, 2003,2004, the Company has accrued, as a component of accrued liabilitiesother current assets on the consolidated balance sheet, a gain of $3.2$1.4 million related to the fair market value of forward currency contracts that had closed as of December 31, 20032004 but were not settled until January 3, 2004.4 and January 5, 2005. During the year ended December 31, 2003,2004, the Company recognized gross unrealized losses on foreign
F-22
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
currency transactions of $1.8 million, gross gains on foreign currency transactions of
$0.2$2.2 million and
recognized gross realized losses oncumulative translation gains of $0.6 million as a result of complete or substantially complete liquidation of investments in foreign
currency transactions of $0.7 million.Forward Contracts
| | Contract
Amount
|
|---|
| | (in thousands)
|
|---|
| At December 31, 2003 | | | |
| Forward currency to be sold under contract: | | | |
| | Swiss Franc | | $ | 3,603 |
| | Singapore Dollar | | | 2,059 |
| | Korean Won | | | 2,052 |
| | Norwegian Krona | | | 1,697 |
| | Brazilian Real | | | 1,662 |
| | Australian Dollar | | | 1,412 |
| | Slovak Koruna | | | 1,244 |
| | Other (individually less than $1 million) | | | 2,101 |
| | |
|
| Total | | | 15,830 |
| | |
|
| Forward currency to be purchased under contract: | | | |
| | British Pound | | | 44,056 |
| | Euro | | | 1,740 |
| | Other (individually less than $1 million) | | | 2,571 |
| | |
|
| Total | | | 48,367 |
| | |
|
| Grand Total | | $ | 64,197 |
| | |
|
| | | | |
F-20
At December 31, 2002 |
|
|
|
| Forward currency to be sold under contract: | | | |
| | Euro | | $ | 10,247 |
| | Australian Dollar | | | 6,246 |
| | New Taiwan Dollar | | | 5,341 |
| | Thailand Bhat | | | 3,228 |
| | Korean Won | | | 3,207 |
| | Swiss Franc | | | 3,318 |
| | Singapore Dollar | | | 2,517 |
| | South African Rand | | | 3,252 |
| | Japanese Yen | | | 1,244 |
| | Norwegian Krona | | | 1,649 |
| | New Zealand Dollar | | | 1,143 |
| | Brazilian Real | | | 1,848 |
| | Other (individually less than $1 million) | | | 923 |
| | |
|
| Total | | $ | 44,163 |
| | |
|
| Forward currency to be purchased under contract: | | | |
| | British Pound | | $ | 29,154 |
| | Other (individually less than $1 million) | | | 733 |
| | |
|
| Total | | $ | 29,887 |
| | |
|
| Grand Total | | $ | 74,050 |
| | |
|
entities.
| | | | | | |
| | | Contract | |
| | | Amount | |
| | | | |
| | | (In thousands) | |
At December 31, 2004 | | | | |
| Forward currency to be sold under contract: | | | | |
| | Swiss Franc | | $ | 4,374 | |
| | Euro | | | 3,874 | |
| | Korean Won | | | 2,107 | |
| | Norwegian Krone | | | 1,984 | |
| | Czech Koruna | | | 1,984 | |
| | Singapore Dollar | | | 1,651 | |
| | Brazilian Real | | | 1,399 | |
| | | | |
| | | | 17,373 | |
| | | | |
| Forward currency to be purchased under contract: | | | | |
| | British Pound | | | 39,252 | |
| | Other (individually less than $1 million) | | | 1,814 | |
| | | | |
| | | | 41,066 | |
| | | | |
| Total | | $ | 58,439 | |
| | | | |
At December 31, 2003 | | | | |
| Forward currency to be sold under contract: | | | | |
| | Swiss Franc | | $ | 3,603 | |
| | Singapore Dollar | | | 2,059 | |
| | Korean Won | | | 2,052 | |
| | Norwegian Krone | | | 1,697 | |
| | Brazilian Real | | | 1,662 | |
| | Australian Dollar | | | 1,412 | |
| | Slovak Koruna | | | 1,244 | |
| | Other (individually less than $1 million) | | | 2,101 | |
| | | | |
| | | | 15,830 | |
| | | | |
| Forward currency to be purchased under contract: | | | | |
| | British Pound | | | 44,056 | |
| | Euro | | | 1,740 | |
| | Other (individually less than $1 million) | | | 2,571 | |
| | | �� | |
| | | | 48,367 | |
| | | | |
| Total | | $ | 64,197 | |
| | | | |
While the contract amounts provide one measure of the volume of these transactions, they do not represent the amount of the Company'sCompany’s exposure to credit risk. The amount of the Company'sCompany’s credit risk exposure (arising from the possible inabilities of counter parties to meet the terms of their contracts) is
F-23
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
generally limited to the amounts, if any, by which the counter
parties'parties’ obligations exceed the obligations of the Company as these contracts can be settled on a net basis at the option of the Company.
The Company controls credit risk through credit approvals, limits and monitoring procedures. As of December 31,
20032004 and
2002,2003, other than foreign currency forward exchange contracts discussed above, the Company does not currently invest in or hold any other derivative financial instruments.
Note 5 — Stockholders' Equity
| |
| Note 5 — | Stockholders’ Equity |
| |
| Preferred Stock The Board of Directors has authorized 5,000,000 shares of preferred stock with a par value of $0.01 per share.
|
The Board of Directors has authorized 5,000,000 shares of preferred stock with a par value of $0.01 per share.
| |
| Common Stock During 2001, the Company announced that its Board of Directors authorized a $350.0 million stock repurchase program. The Company may repurchase outstanding shares of its Common Stock from time to time in the open market and through privately negotiated transactions. During 2002 and 2001, the Company repurchased approximately 6.6 million and 8.5 million shares of common stock for an aggregate purchase price of approximately $74.2 million and $143.0 million, respectively. No shares were repurchased by the Company in 2003. The Company retired 6.7 million shares in 2001 that were
F-21
repurchased in that year. An additional 100,000 shares were retired in 2003. As of December 31, 2003, the Company has repurchased 15.1 million shares under the program, at a total cost of $217.2 million.
|
During 2001, the Board of Directors authorized a $350.0 million stock repurchase program. The Company may repurchase outstanding shares of its common stock from time to time in the open market and through privately negotiated transactions. During 2004 and 2002, the Company repurchased approximately 1.9 million and 6.6 million shares of common stock for an aggregate purchase price of approximately $31.6 and $74.2 million, respectively. The Company repurchased no shares in 2003. The Company retired 100,000 shares in 2003. As of December 31, 2004, the Company has repurchased 17.0 million shares under the program, at a total cost of $248.8 million.
In connection with its acquisition of Mercator, the Company assumed certain outstanding warrants convertible into 203,395 shares of common stock with exercise prices ranging from $18.77 to $50.03. On October 20, 2003 the warrants issued to Vector Capital II LP convertible into 18,848 shares of common stock were exercised upon payment to Vector of $430,000. This payment has been recorded in purchase accounting as a component of goodwill associated with the Mercator acquisition. During 2004 warrants convertible into 76,547 shares of common stock expired, unexercised. At December 31, 2004 warrants convertible into 108,000 shares of common stock are outstanding at exercise prices ranging from $40.00 to $50.03 per share.
F-24
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| Note 6 — | Net Income (Loss) Per Common Share The following table sets forth the computation of basic and diluted net income (loss) per common share:
| | 2003
| | 2002
| | 2001
|
|---|
| | (In thousands, except per share data)
|
|---|
| Numerator: | | | | | | | | | | | | Net income (loss) | | $ | 15,805 | | $ | (63,573 | ) | $ | 624,948 | | | |
| |
| |
|
Denominator: |
|
|
|
|
|
|
|
|
| | | Denominator for basic net income (loss) per common share — | | | | | | | | | | | | | Weighted-average shares outstanding | | | 58,409 | | | 61,931 | | | 68,983 | | | | Weighted-average shares to be issued for litigation settlement | | | — | | | — | | | 390 | | | |
| |
| |
| | | | | 58,409 | | | 61,931 | | | 69,373 | | | |
| |
| |
| | | Effect of dilutive securities: | | | | | | | | | | | | | Employee stock options | | | 1,294 | | | — | | | 912 | | | | Contingently issuable shares for litigation settlement | | | — | | | — | | | 796 | | | | Common stock warrants | | | — | | | — | | | 3 | | | |
| |
| |
| | | Denominator for diluted net income (loss) per common share — adjusted weighted-average shares and assumed conversions | | | 59,703 | | | 61,931 | | | 71,084 | | | |
| |
| |
| | Basic net income (loss) per common share | | $ | 0.27 | | $ | (1.03 | ) | $ | 9.01 | | | |
| |
| |
| | Diluted net income (loss) per common share | | $ | 0.26 | | $ | (1.03 | ) | $ | 8.79 | | | |
| |
| |
|
Options to purchase shares of the Company's common stock with exercise prices below the average market price for the year ended December 31, 2002 totaling 0.2 million, have been excluded from the dilutive calculation as the potential common shares associated with these options are anti-dilutive due to the net loss for the period.
The Company excluded other potential common shares for the years ended December 31, 2003, 2002, and 2001 from its diluted net loss per share computation because the exercise prices of these securities were equal to or exceeded the average market value of the Common Stock for the same periods and, therefore, these securities were anti-dilutive. The following is a summary of the excluded potential common shares and the related exercise/conversion features:
| | December 31,
|
|---|
| | 2003
| | 2002
| | 2001
|
|---|
| | (In thousands)
|
|---|
| Potentially dilutive securities: | | | | | | | | | Stock options | | 3,744 | | 7,200 | | 9,620 | | | Series B Warrants | | — | | — | | 576 |
The stock options outstanding have per share exercise prices ranging from $16.76 to $341.58, $0.20 to $89.00, and $0.20 to $112.40 at December 31, 2003, 2002 and 2001, respectively. These stock options are exercisable at various dates through December 2013. Options outstanding during the year ended December 31, 2002 included options to purchase 3.2 million shares of the Company's Common Stock, the terms of which were extended in 2001 in conjunction with the IBM Transaction. These options were
F-22
exercised or expired as of October 29, 2002 and had exercise prices ranging from $0.80 to $112.40 per share.
The Series B Warrants were issued in connection with the conversion of certain shares of the Company's Series B Preferred into shares of Common Stock in July of 2000. Upon conversion of the Series B Preferred, the holders received Series B Warrants exercisable for a number of shares of Common Stock equal to 20% of the shares of Common Stock into which the shares of Series B Preferred were converted. These warrants expired unexercised on November 19, 2002.
As part of the Company's settlement in 1999 of various private securities and related litigation arising out of the restatement of its financial statements, the Company agreed to issue a minimum of 2.3 million shares ("settlement shares") of Common Stock at a guaranteed value of $91.0 million ("stock price guarantee"). The stock price guarantee is satisfied with respect to any distribution of settlement shares if the closing price of the common stock averages at least $40.44 per share for ten consecutive trading days during the six-month period subsequent to the distribution. The first distribution of settlement shares occurred in November and December 1999 when the Company issued approximately 0.7 million settlement shares to the plaintiff's counsel. The stock price guarantee was satisfied with respect to this first distribution of settlement shares. In April 2001, the Company issued the remainder of the settlement shares. The stock price guarantee was not satisfied with respect to this final distribution of settlement shares, and the Company ultimately elected to satisfy the stock price guarantee by making a payment of $26.2 million in cash in November 2001. Until the fourth quarter of 2001, the Company presumed it would satisfy the stock price guarantee by issuing the required amount of shares ("contingently issuable shares"). Accordingly, the contingently issuable shares are included as dilutive securities above for the period from January 1, 2001 to September 30, 2001.
|
The following table sets forth the computation of basic and diluted net income (loss) per common share:
| | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| | | (In thousands, except per share data) | |
| Numerator: | | | | | | | | | | | | |
| | Net income (loss) | | $ | 14,951 | | | $ | 15,805 | | | $ | (63,573 | ) |
| | | | | | | | | | |
| Denominator: | | | | | | | | | | | | |
| | Denominator for basic net income (loss) per common share — Weighted-average shares outstanding | | | 59,208 | | | | 58,409 | | | | 61,931 | |
| | Effect of dilutive securities: | | | | | | | | | | | | |
| | | Employee stock options | | | 1,425 | | | | 1,294 | | | | — | |
| | | | | | | | | | |
| | Denominator for diluted net income (loss) per common share — adjusted weighted-average shares and assumed conversions | | | 60,633 | | | | 59,703 | | | | 61,931 | |
| | | | | | | | | | |
| Basic net income (loss) per common share | | $ | 0.25 | | | $ | 0.27 | | | $ | (1.03 | ) |
| | | | | | | | | | |
| Diluted net income (loss) per common share | | $ | 0.25 | | | $ | 0.26 | | | $ | (1.03 | ) |
| | | | | | | | | | |
Options to purchase shares of the Company’s common stock with exercise prices below the average market price for the year ended December 31, 2002 totaling 0.2 million have been excluded from the diluted calculation as the potential common shares associated with these options are anti-dilutive due to the net loss for the period.
The Company excluded other potential common shares for the years ended December 31, 2004, 2003 and 2002 from its diluted net income (loss) per share computation because the exercise prices of these securities were equal to or exceeded the average market value of the common stock for the same periods and, therefore, these securities were anti-dilutive. The following is a summary of the excluded potential common shares and the related exercise/conversion features:
| | | | | | | | | | | | | | |
| | | December 31, | |
| | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| | | | | (In thousands) | | | |
| Potentially dilutive securities: | | | | | | | | | | | | |
| | Stock options | | | 5,774 | | | | 3,744 | | | | 7,200 | |
| | Range of exercise prices | | $ | 17.14-$233.29 | | | $ | 16.76-$341.58 | | | $ | 0.20-$89.00 | |
| | Expiring through | | | April 2014 | | | | December 2013 | | | | December 2012 | |
| |
| | Warrants | | | 108 | | | | 185 | | | | — | |
| | Range of exercise prices | | $ | 40.00-$50.03 | | | $ | 22.28-$50.03 | | | | — | |
| | Expiring through | | | December 2008 | | | | December 2008 | | | | — | |
Options outstanding during the year ended December 31, 2002 included options to purchase 3.2 million shares of the Company’s common stock, the terms of which were extended in 2001 in conjunction with the IBM Transaction. These options were exercised or expired as of October 29, 2002 and had exercise prices ranging from $0.80 to $112.40 per share.
F-25
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| Note 7 — | Employee Benefit Plans |
In February 1989, the Company adopted the 1989 Outside Directors Stock Option Plan (as amended and restated, the “1989 Plan”), whereby non-employee directors are automatically granted 20,000 non-qualified stock options upon election to the Board of Directors and 15,000 non-qualified stock options annually thereafter. One-third of the options vest and become exercisable in each full year of the outside director’s continuous service as a director of the Company and are issued with an exercise price equal to fair market value of the Company’s common stock determined as of the date of grant. On June 17, 2003, stockholders of the Company approved an amendment to increase the number of shares available for issuance under the 1989 Plan from 400,000 shares to 650,000 shares, of which 248,750 shares are reserved for future issuance as of December 31, 2004.
In March 1994, the Company adopted the 1994 Stock Option and Award Plan (as amended and restated, the “1994 Plan”). Incentive stock options, nonqualified stock options, restricted shares, or a combination thereof, can be granted to employees, at not less than the fair market value on the date of grant and generally vest in annual installments over two to four years. The Board or a committee made up solely of outside directors, and not less than two directors, administers the 1994 Plan. At present, the compensation committee of the Board of Directors administers and grants awards under the 1994 Plan, provided that during any fiscal year of the Company, no participant shall receive stock options exercisable for more than 500,000 shares of common stock. No more than 20% of the maximum number of shares authorized for issuance under the 1994 Plan may be issued pursuant to restricted stock awards. However, the compensation committee may grant options exercisable for up to 1,000,000 shares of common stock during any fiscal year of the Company in which the individual first becomes an employee and/or is promoted from a position as a non-executive officer employee to a position as an executive officer. In April 2000, the Company’s Board of Directors approved an amendment to the 1994 Plan whereby the options are generally not exercisable until one year from the date of grant. On June 17, 2003, the stockholders of the Company approved an amendment to increase the number of shares available for issuance under the 1994 Plan from 6,000,000 shares to 8,250,000 shares, of which 2,371,983 shares are reserved for future issuance as of December 31, 2004.
In July 1997, the Company adopted the 1997 Non-Statutory Stock Option Plan (as amended the “1997 Plan”), authorizing the grant of non-statutory stock options to employees and consultants. Terms of each option are determined by the Board of Directors or committee delegated such duties by the Board of Directors. A total of 425,000 shares have been authorized for issuance under the 1997 Plan, of which 296,250 shares are reserved for future issuance as of December 31, 2004.
In July 1998, the Company adopted the 1998 Non-Statutory Stock Option Plan (as amended and restated, the “1998 Plan”). Options and restricted shares can be granted to employees and consultants with terms designated by the Board of Directors or committee delegated such duties by the Board of Directors. On June 27, 2003, the Board of Directors adopted an amendment to increase the number of shares available for issuance under the 1998 Plan from 5,125,000 shares to 8,125,000 shares, of which 2,291,176 shares are reserved for future issuance as of December 31, 2004. These options are issued at fair market value and generally vest over a four year period with 25% of the option shares vesting after one year and the remaining 75% of the option shares vesting in monthly increments over the following three years.
As a result of its acquisition of Mercator in September 2003, the Company assumed all outstanding Mercator stock options. Each Mercator stock option so assumed is subject to the same terms and conditions as the original grant and generally vests over four years and expires ten years from date of grant. Each option was adjusted at a ratio of approximately 0.1795 shares of common stock for each one share of Mercator common stock, and the exercise price was adjusted by dividing the exercise price by approximately 0.1795. At the date of acquisition the fair value of the options to purchase shares of common stock of Ascential exchanged for
F-26
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Mercator stock options were valued utilizing the Black-Scholes valuation model and $15.7 million was recorded as additional paid in capital in purchase accounting. Additionally, the intrinsic value of the unvested options to purchase common stock of Ascential that were issued for Mercator stock options was valued at $2.4 million and recorded in deferred compensation as discussed in Note 12.
Following is a summary of activity for all stock option plans for the three years ended December 31, 2004:
| | | | | | | | | |
| | | | | Weighted | |
| | | Number of | | | Average | |
| | | Shares | | | Exercise Price | |
| | | | | | | |
| Outstanding at December 31, 2001 | | | 10,532,038 | | | $ | 22.64 | |
| Options granted | | | 2,392,498 | | | | 11.08 | |
| Options exercised | | | (147,670 | ) | | | 8.40 | |
| Options canceled | | | (5,576,872 | ) | | | 24.72 | |
| | | | | | | |
| Outstanding at December 31, 2002 | | | 7,199,994 | | | | 17.48 | |
| Options assumed | | | 1,832,760 | | | | 23.34 | |
| Options granted | | | 1,963,943 | | | | 16.65 | |
| Options exercised | | | (2,054,193 | ) | | | 12.60 | |
| Options canceled | | | (645,109 | ) | | | 26.65 | |
| | | | | | | |
| Outstanding at December 31, 2003 | | | 8,297,395 | | | | 19.07 | |
| Options granted | | | 4,777,183 | | | | 21.65 | |
| Options exercised | | | (373,821 | ) | | | 9.93 | |
| Options canceled | | | (1,051,499 | ) | | | 28.76 | |
| | | | | | | |
| Outstanding at December 31, 2004 | | | 11,649,258 | | | | 19.55 | |
| | | | | | | |
The following table summarizes information about options outstanding at December 31, 2004:
| | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | | Options Exercisable | |
| | | | | | | |
| | | Number | | | Weighted | | | | | Number | | | |
| | | Outstanding | | | Average | | | Weighted | | | Exercisable | | | Weighted | |
| | | as of | | | Remaining | | | Average | | | as of | | | Average | |
| | | December 31, | | | Contractual | | | Exercise | | | December 31, | | | Exercise | |
| Range of Exercise Prices | | 2004 | | | Life | | | Price | | | 2004 | | | Price | |
| | | | | | | | | | | | | | | | |
| $0.19 to $2.18 | | | 11,272 | | | | 2.53 | | | $ | 0.21 | | | | 11,272 | | | $ | 0.21 | |
| $3.23 to $4.62 | | | 19,322 | | | | 5.48 | | | | 4.53 | | | | 18,283 | | | | 4.53 | |
| $5.24 to $7.74 | | | 284,351 | | | | 6.99 | | | | 6.42 | | | | 196,842 | | | | 6.44 | |
| $7.91 to $11.64 | | | 2,042,015 | | | | 6.94 | | | | 10.39 | | | | 1,115,659 | | | | 10.47 | |
| $11.88 to $17.48 | | | 3,701,303 | | | | 8.35 | | | | 15.12 | | | | 1,218,833 | | | | 15.20 | |
| $18.00 to $27.88 | | | 5,078,356 | | | | 7.74 | | | | 23.60 | | | | 1,973,995 | | | | 20.41 | |
| $28.21 to $38.17 | | | 216,207 | | | | 4.76 | | | | 34.48 | | | | 216,039 | | | | 34.49 | |
| $42.25 to $57.86 | | | 148,350 | | | | 6.27 | | | | 50.38 | | | | 148,327 | | | | 50.38 | |
| $67.03 to $95.23 | | | 114,299 | | | | 5.32 | | | | 69.88 | | | | 114,299 | | | | 69.88 | |
| $115.60 to $169.92 | | | 15,834 | | | | 4.58 | | | | 119.77 | | | | 15,834 | | | | 119.77 | |
| $217.62 to $233.29 | | | 17,949 | | | | 5.39 | | | | 221.54 | | | | 17,949 | | | | 221.54 | |
| | | | | | | | | | | | | | | | |
| Total | | | 11,649,258 | | | | 7.66 | | | $ | 19.55 | | | | 5,047,332 | | | $ | 19.94 | |
| | | | | | | | | | | | | | | | |
At December 31, 2003 and 2002, respectively, 4,334,801 and 3,555,057 options were exercisable in connection with all stock option plans.
F-27
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In May 1997, the Company’s stockholders approved the 1997 Employee Stock Purchase Plan (as amended and restated, the “ESPP”). A total of 2,000,000 shares have been authorized for issuance under the ESPP. The ESPP permits eligible employees to purchase common stock through payroll deductions of up to 10 percent of an employee’s compensation, including commissions, overtime, bonuses and other incentive compensation. The price of Common Stock purchased under the ESPP is equal to 85 percent of the lower of the fair market value of the Common Stock at the beginning or at the end of each calendar quarter in which an eligible employee participates. The ESPP qualifies as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. During 2004, 2003 and 2002, the Company issued 205,562 shares, 164,080 shares and 190,250 shares, respectively, under the ESPP. On June 18, 2004 and June 17, 2003, the stockholders of the Company approved amendments to increase the number of shares available for issuance under the ESPP from 2,250,000 shares to 3,250,000 shares, and from 2,000,000 shares to 2,250,000, respectively. There were 1,169,854 shares available for grant under the ESPP at December 31, 2004.
| |
| Restricted Stock Option Plan (as amended and restated, the "1989 Plan"), whereby non-employee directors are automatically granted 20,000 non-qualified stock options upon election to the Board of Directors and 15,000 non-qualified stock options annually thereafter. One-third of the options vest and become exercisable in each full year of the outside director's continuous service as a director of the Company and are issued with an exercise price equal to fair market value of the Company's common stock determined as of the date of grant. On June 17, 2003, stockholders of the Company approved an amendment to increase the number of shares available for issuance under the 1989 Plan from 400,000 shares to 650,000 shares of which 323,750 shares are reserved for future issuance as of December 31, 2003 In March 1994, the Company adopted the 1994 Stock Option and Award Plan (as amended and restated, the "1994 Plan"). Incentive stock options, nonqualified stock options, restricted shares, or a combination thereof, can be granted to employees, at not less than the fair market value on the date of grant and generally vest in annual installments over two to four years. The Board or a committee made up solely of outside directors, and not less than two directors, administers the 1994 Plan. At present, the compensation committee of the Board of Directors administers and grants awards under the 1994 Plan, provided that during any fiscal year of the Company, no participant shall receive stock options exercisable for more than 500,000 shares of common stock. No more than 20% of the maximum number of shares authorized for issuance under the 1994 Plan may be issued pursuant to restricted stock awards. However, the compensation committee may grant options exercisable for up to 1,000,000 shares of common stock during any fiscal year of the Company in which the individual first becomes an employee and/or is promoted from a position as a non-executive officer employee to a position as an executive officer. In April 2000, the Company's Board of Directors approved an amendment to the 1994 Plan whereby the options are generally not exercisable until one year from the date of grant. On
F-23
June 17, 2003, the stockholders of the Company approved an amendment to increase the number of shares available for issuance under the 1994 Plan from 6,000,000 shares to 8,250,000 shares, of which 4,095,533 shares are reserved for future issuance as of December 31, 2003.
In July 1997, the Company adopted the 1997 Non-Statutory Stock Option Plan (as amended the "1997 Plan"), authorizing the grant of non-statutory stock options to employees and consultants. Terms of each option are determined by the Board of Directors or committee delegated such duties by the Board of Directors. A total of 425,000 shares have been authorized for issuance under the 1997 Plan, of which 296,250 shares are reserved for future issuance as of December 31, 2003.
In July 1998, the Company adopted the 1998 Non-Statutory Stock Option Plan (as amended and restated, the "1998 Plan"). Options and restricted shares can be granted to employees and consultants with terms designated by the Board of Directors or committee delegated such duties by the Board of Directors. On June 27, 2003, the Board of Directors adopted an amendment to increase the number of shares available for issuance under the 1998 Plan from 5,125,000 shares to 8,125,000 shares, of which 4,443,719 shares are reserved for future issuance as of December 31, 2003. These options are issued at fair market value and generally vest over a four year period with 25% of the option shares vesting after one year and the remaining 75% of the option shares vesting in monthly increments over the following three years.
As a result of its acquisition of Mercator Software, Inc ("Mercator") in September 2003, the Company assumed all outstanding Mercator stock options. Each Mercator stock option so assumed is subject to the same terms and conditions as the original grant and generally vests over four years and expires ten years from date of grant. Each option was adjusted at a ratio of approximately 0.1795 shares of common stock for each one share of Mercator common stock, and the exercise price was adjusted by dividing the exercise price by approximately 0.1795. At the date of acquisition the fair value of the options to purchase shares of common stock of Ascential exchanged for Mercator stock options were valued utilizing the Black-Scholes valuation model and $15.7 million was recorded as additional paid in capital in purchase accounting. Additionally, the intrinsic value of the unvested options to purchase common stock of Ascential that were issued for Mercator stock options was valued at $2.4 million and recorded in deferred compensation as discussed in Note 12 of Notes to Consolidated Financial Statements.
As a result of its acquisition of Torrent Systems, Inc ("Torrent") in November 2001, the Company assumed all unvested outstanding Torrent stock options. Each Torrent stock option so assumed is subject to the same terms and conditions as the original grant and generally vests over four or five years and expires ten years from date of grant. Each option was adjusted at a ratio of approximately 0.0767 shares of common stock for each one share of Torrent common stock, and the exercise price was adjusted by dividing the exercise price by approximately 0.0767.
F-24
Following is a summary of activity for all stock option plans for the three years ended December 31, 2003:
| | Number of
Shares
| | Weighted
Average
Exercise Price
|
|---|
| Outstanding at December 31, 2000 | | 11,780,221 | | $ | 24.80 | | Options granted | | 1,857,779 | | | 18.40 | | Options exercised | | (629,323 | ) | | 13.96 | | Options canceled | | (2,476,639 | ) | | 31.88 | | | |
| | | | | Outstanding at December 31, 2001 | | 10,532,038 | | | 22.64 | | Options granted | | 2,392,498 | | | 11.08 | | Options exercised | | (147,670 | ) | | 8.40 | | Options canceled | | (5,576,872 | ) | | 24.72 | | | |
| | | | | Outstanding at December 31, 2002 | | 7,199,994 | | | 17.48 | | Options assumed | | 1,832,760 | | | 23.34 | | Options granted | | 1,963,943 | | | 16.65 | | Options exercised | | (2,054,193 | ) | | 12.60 | | Options canceled | | (645,109 | ) | | 26.65 | | | |
| | | | | Outstanding at December 31, 2003 | | 8,297,395 | | $ | 19.07 | | | |
| | | |
The following table summarizes information about options outstanding at December 31, 2003:
| | Options Outstanding
| | Options Exercisable
|
|---|
Range of Exercise Prices
| | Number
Outstanding
as of
December 31,
2003
| | Weighted
Average
Remaining
Contractual
Life
| | Weighted
Average
Exercise
Price
| | Number
Exercisable
as of
December 31,
2003
| | Weighted
Average
Exercise
Price
|
|---|
| $0.19 to $2.18 | | 11,384 | | 3.51 | | $ | 0.23 | | 11,384 | | $ | 0.23 | | $3.23 to $4.62 | | 22,462 | | 6.51 | | | 4.52 | | 14,798 | | | 4.52 | | $5.24 to $7.74 | | 430,026 | | 8.26 | | | 6.12 | | 253,337 | | | 6.02 | | $7.91 to $11.72 | | 2,135,352 | | 7.85 | | | 10.33 | | 856,799 | | | 10.50 | | $11.88 to $17.48 | | 2,154,777 | | 8.34 | | | 15.38 | | 775,429 | | | 14.95 | | $18.00 to $27.88 | | 2,805,231 | | 7.35 | | | 20.62 | | 1,714,563 | | | 20.82 | | $28.21 to $39.88 | | 256,635 | | 5.77 | | | 34.62 | | 252,503 | | | 34.63 | | $42.25 to $57.86 | | 245,277 | | 7.29 | | | 49.98 | | 243,756 | | | 49.98 | | $67.03 to $95.23 | | 193,665 | | 6.13 | | | 71.27 | | 169,646 | | | 71.71 | | $115.60 to $190.11 | | 22,843 | | 5.82 | | | 133.97 | | 22,843 | | | 133.97 | | $217.62 to $341.58 | | 19,743 | | 6.37 | | | 226.81 | | 19,743 | | | 226.81 | | | |
| | | | | | |
| | | | | Total | | 8,297,395 | | 7.69 | | $ | 19.07 | | 4,334,801 | | $ | 22.72 | | | |
| | | | | | |
| | | |
At December 31, 2002 and 2001, respectively, 3,555,057 and 6,911,220 options were exercisable in connection with all stock option plans.
In May 1997, the Company's stockholders approved the 1997 Employee Stock Purchase Plan (as amended and restated, the "ESPP"). A total of 2,000,000 shares have been authorized for issuance under the ESPP. The ESPP permits eligible employees to purchase common stock through payroll deductions of up to 10 percent of an employee's compensation, including commissions, overtime, bonuses and other incentive compensation. The price of Common Stock purchased under the ESPP is
F-25
equal to 85 percent of the lower of the fair market value of the Common Stock at the beginning or at the end of each calendar quarter in which an eligible employee participates. The ESPP qualifies as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. During 2003, 2002 and 2001, the Company issued 164,080 shares, 190,250 shares and 356,750 shares, respectively, under the ESPP. On June 17, 2003, the stockholders of the Company approved an amendment to increase the number of shares available for issuance under the ESPP from 2,000,000 shares to 2,250,000. Shares available for grant under the ESPP were 375,416 at December 31, 2003.
|
Subsequent to December 31, 2004, the Company issued 819,000 restricted shares to certain employees and executive officers for a nominal amount. Transferability of the shares is restricted until the earlier of the achievement of specified financial growth performance milestones, a change in control or five years. Accordingly, the Company will record $11.5 million of deferred compensation in 2005 to be amortized to compensation expense as the transfer restrictions lapse.
| |
| 401(k) Plan The Company has a 401(k) plan covering substantially all of its U.S. employees. Under this plan, participating employees may defer up to 15 percent of their pre-tax earnings, subject to the Internal Revenue Service annual contribution limits. The Company matches 50 percent of each employee's contribution up to a maximum of $2,500 annually. The Company's matching contributions to this 401(k) plan for 2003, 2002 and 2001 were $0.8 million, $1.0 million and $3.8 million, respectively.
|
The Company has a 401(k) plan covering substantially all of its U.S. employees. Under this plan, participating employees may defer up to 15 percent of their pre-tax earnings, subject to the Internal Revenue Service annual contribution limits. The Company matches 50 percent of each employee’s contribution up to a maximum of $2,500 annually. The Company’s matching contributions to this 401(k) plan for 2004, 2003 and 2002 were $1.1 million, $0.8 million and $1.0 million, respectively.
| |
| Other Retirement Plans The Company maintains a "split dollar" life insurance arrangement with respect to three current and certain former executive officers and employees, assumed in its acquisition of Ardent. Pursuant to these arrangements, the recipients may borrow against the excess cash surrender values of their policies over cumulative paid-in premiums. The Company is entitled to recover the amount of premiums paid by the Company upon termination of the policy or death of the recipient. Following the passage of the Sarbanes-Oxley Act of 2002, the Company ceased paying premiums on policies held by its executive officers. The Company has established an investment account, the future value of which is sufficient to pay the annual remaining premiums for plan participants other than the two executive officers, which are due on various dates through 2006. The Company has no plans to expand these arrangements or offer similar arrangements to additional executive officers or employees.
The Company accounts for these policies as a defined contribution plan and expenses premiums on the policies as incurred, which represents the compensation element of the plan. In addition, since the Company controls its share of the cash surrender value of the policies at all times, it accounts for any changes in cash surrender value in accordance with the guidance provided in Financial Accounting Standards Board Technical Bulletin No. 85-4,Accounting for Purchases of Life Insurance. Accordingly, increases or decreases in cash surrender value are recognized each period and the asset recorded on the Company's books represents the lesser of the Company's share of cash surrender value or the cumulative premiums paid on the policies. The investment account is recorded at the current market value. The total of the cash surrender value and the investment account is included in other long term assets and was $7.2 million and $7.4 million at December 31, 2003 and 2002, respectively.
|
The Company maintains a “split dollar” life insurance arrangement, assumed in a previous acquisition, with respect to three current and certain former executive officers and employees. Pursuant to these arrangements, the recipients may borrow against the excess cash surrender values of their policies over cumulative paid-in premiums. The Company is entitled to recover the amount of premiums paid by the Company upon termination of the policy or death of the recipient. Following the passage of the Sarbanes-Oxley Act of 2002, the Company ceased paying premiums on policies held by its executive officers under the split dollar plan, however the Board of Directors has voted to reimburse them for the annual premium cost. The Company has established an investment account, the future value of which is sufficient to pay the annual remaining premiums for plan participants other than the two executive officers, which are due on various dates through 2006. The Company has no plans to expand these arrangements or offer similar arrangements to additional executive officers or employees.
The Company accounts for these policies as a defined contribution plan and expenses premiums on the policies as incurred, which represents the compensation element of the plan. In addition, since the Company controls its share of the cash surrender value of the policies at all times, it accounts for any changes in cash surrender value in accordance with the guidance provided in FASB Technical Bulletin No. 85-4,Accounting for Purchases of Life Insurance. Accordingly, increases or decreases in cash surrender value are recognized each period and the asset recorded on the Company’s books represents the lesser of the Company’s share of cash surrender value or the cumulative premiums paid on the policies. The investment account is recorded at
F-28
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the current market value. The total of the cash surrender value and the investment account is included in other long-term assets was $7.2 million and $7.2 million at December 31, 2004 and 2003, respectively.
| |
| Note 8 — | Commitments and Contingencies Operating and Capital Leases. The Company leases certain of its office facilities and equipment under non-cancelable operating leases and total rent expense, excluding amounts charged to "Accrued merger, realignment and other charges", was $7.9 million, $8.6 million and $23.5 million in 2003, 2002 and 2001, respectively. Assets recorded under capital leases totaled $3.4 million, net of accumulated depreciation of $1.7 million, and are included in Property Plant and Equipment at December 31, 2003. The lease obligation under capital leases was $1.5 million and $0.2 million at December 31, 2003 and 2002, respectively.
Future minimum payments by year and in the aggregate, under non-cancelable operating and capital leases, excluding the assigned lease for the Santa Clara, California facility mentioned below, but including amounts which will be charged to "Accrued merger, realignment and other charges" (see
F-26
Note 16 to these Notes to Consolidated Financial Statements), as of December 31, 2003, are as follows (in thousands):
Year Ending December 31
| | Operating Leases
| | Capital Leases
|
|---|
| 2004 | | $ | 15,917 | | $ | 892 | | 2005 | | | 13,647 | | | 626 | | 2006 | | | 11,137 | | | 185 | | 2007 | | | 9,189 | | | — | | 2008 | | | 8,310 | | | — | | Thereafter | | | 25,940 | | | — | | | |
| |
| | Total payments | | | 84,140 | | | 1,703 | | | Less: Non-cancelable sublease income | | | 5,139 | | | — | | | Less: Amount representing interest | | | — | | | 237 | | | |
| |
| | Total payments, net | | $ | 79,001 | | $ | 1,466 | | | |
| |
|
In November 1996, the Company leased approximately 200,000 square feet of office space in Santa Clara, California. The lease term extends through March 2013 and the remaining minimum lease payments amount to approximately $53.9 million. The Company assigned this lease to Network Associates, Inc., an unrelated third party, in the fourth quarter of 1997. The Company remains contingently liable for minimum lease payments under this assignment.
Guarantees. In November 2002, the FASB issued FIN No. 45,Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. FIN No. 45 requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee and requires additional disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. The adoption of FIN No. 45 did not have a material effect on our financial position or results of operations. The following is a summary of our agreements that we have determined are within the scope of FIN No. 45.
|
Operating and Capital Leases.The Company leases certain of its office facilities and equipment under non-cancelable operating leases and total rent expense, excluding amounts charged to “Accrued merger, realignment and other charges”, was $8.6 million, $7.9 million and $8.6 million in 2004, 2003 and 2002, respectively. Assets recorded under capital leases totaled $2.9 million, net of accumulated depreciation of $2.0 million, and are included in property and equipment at December 31, 2004. The remaining obligation under capital leases was $0.6 million and $1.5 million at December 31, 2004 and 2003, respectively.
Future minimum payments by year and in the aggregate, under non-cancelable operating and capital leases, excluding the assigned lease for the Santa Clara, California facility mentioned below, but including amounts which will be charged to “Accrued merger, realignment and other charges” (see Note 15), as of December 31, 2004, are as follows (in thousands):
| | | | | | | | | | |
| Year Ending December 31 | | Operating Leases | | | Capital Leases | |
| | | | | | | |
| 2005 | | | 19,373 | | | $ | 504 | |
| 2006 | | | 15,706 | | | | 143 | |
| 2007 | | | 13,086 | | | | — | |
| 2008 | | | 10,386 | | | | — | |
| 2009 | | | 5,835 | | | | — | |
| Thereafter | | | 23,375 | | | | — | |
| | | | | | | |
| Total payments | | | 87,761 | | | | 647 | |
| | Less: Non-cancelable sublease income | | | 3,699 | | | | — | |
| | Less: Amount representing interest | | | — | | | | 81 | |
| | | | | | | |
| Total payments, net | | | 84,062 | | | $ | 566 | |
| | | | | | | |
In November 1996, the Company leased approximately 200,000 square feet of office space in Santa Clara, California. The lease term extends through March 2013 and the remaining minimum lease payments amount to approximately $48.7 million. The Company assigned this lease to Network Associates, Inc., an unrelated third party, in the fourth quarter of 1997. The Company remains contingently liable for minimum lease payments under this assignment.
Guarantees. In November 2002, the FASB issued FIN No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. FIN 45 requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee and requires additional disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. The adoption of FIN 45 in 2003 did not have a material effect on the Company’s financial position or results of operations. The following is a summary of our agreements that we have determined are within the scope of FIN 45.
The Company generally warrants that its unmodified software products, when used as specified, will substantially conform to the applicable user documentation for a specified period of time (generally 90 days in the United States, and longer in jurisdictions with applicable statutory requirements). Additionally, the Company generally warrants that its consulting services will be performed in a professional and workmanlike manner. In general, liability for these warranties is limited to the amounts paid by the customer. If necessary, the Company would provide for the estimated cost of product and service warranties based on specific
F-29
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
warranty claims and claim history; however, the Company has never incurred significant expense under its product or services warranties. As a result, the Company believes the estimated fair value of these agreements is immaterial. The Company also generally offers indemnification with respect to certain types of intellectual property claims and, occasionally, other matters.
As part of the IBM Transaction, the Company agreed to indemnify IBM for certain representations and warranties that were made under the terms of the IBM Transaction agreements. IBM had retained $100.0 million of the sale proceeds as a holdback to satisfy any indemnification obligations that might arise for any representations or warranties made by the Company as part of the IBM Transaction. The agreement with IBM provided that the Company would indemnify IBM and its affiliates against any loss, claim, damage, liability or other expense incurred in connection with (i) any failure of any representation or warranty of the Company to be true and correct in all respects; provided, however, that any such liability, in the aggregate, exceeds on a cumulative basis $10.0 million (and only to the extent of any such excess); (ii) any breach of any obligation of the Company; (iii) any of the Excluded Liabilities, as defined in the agreement; or (iv) the operation or ownership of the Excluded Assets, as defined in the agreement. The Company received the $100.0 million holdback payment from IBM, plus accrued interest, in January 2003. No formal indemnification claims have been made by IBM from the time that the Company received the holdback payment through the date of this filing. Indemnification obligations of the Company with respect to certain representations and warranties under the agreement with IBM terminated on July 1, 2003 as discussed further in Note 13.
The Company is obligated to indemnify certain prior directors and officers for various matters arising from their actions during the period they were employed or associated with the Company. In the past, the Company has paid the legal fees of some former officers, which payments were not believed to have a material adverse effect on the Company’s financial condition. The Company’s indemnification obligations are defined by indemnification agreements and the Company’s charter and by-laws. Subsequent to December 31, 2004, we paid $0.2 million related to the resolution of an indemnification matter involving a person who was an officer of the Company prior to the IBM Transaction. The Company is insured for other costs and losses that could be incurred by virtue of its future indemnification obligations. In May 2002 and November 2003, the Company entered into standby letters of credit that expire by May 2006 and November 2007, respectively, which guarantee a total of $1.4 million of potential tax payments related to certain payments made to two former officers of the Company. These potential tax payments, which have been partially reserved based on management’s assessment of the potential payments and relate to severance paid to these former officers in accordance with a change in control agreement that was triggered by the IBM Transaction as discussed further in Note 13. Payment under the standby letter of credit may be due upon final determination of this tax liability.
The Company has agreed to indemnify and hold KPMG LLP (KPMG) harmless against and from any and all legal costs and expenses incurred by KPMG in successful defense of any legal action or proceeding that arises as a result of KPMG’s consent to the inclusion of its audit report on the Company’s consolidated statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2002 included in this annual report on Form 10-K.
During 2003 the Company issued a $2.5 million standby letter of credit to guarantee certain lease obligations pursuant to the lease between Mercator and the landlord of an office facility located in Wilton, Connecticut. The letter of credit is automatically extended annually, but not beyond July 1, 2013.
The Company was also required to enter into standby letters of credit to guarantee approximately $0.2 million of lease payments for certain facilities in Europe. These guarantees do not have expiration dates and would allow landlords to obtain lease payments from the Company’s bank if the Company defaulted on its lease payment obligations.
F-30
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Litigation. From time to time, in the ordinary course of business, the Company is involved in various other legal proceedings and claims, including but not limited to those related to the operations of the former database business and/or asserted by former employees of the Company relating to their employment or compensation by the Company. The Company does not believe that any of these other proceedings and claims will have a material adverse effect on the Company’s business or financial condition.
| |
| Note 9 — | Business Segments |
The Company has two segments that report to its Chief Executive Officer (the “Chief Operating Decision Maker”). The first segment, Ascential Software, develops and markets data integration software and related services worldwide. The second segment, Informix Software, provided database management systems for data warehousing, transaction processing, and e-business applications. “We”, the “Company” or “Ascential Software Corporation” refers to Ascential Software and Informix Software on a combined basis. Segment operating performance is evaluated primarily on income before taxes. The Company completed the IBM Transaction during the third quarter of 2001. Accordingly, the Company has derived no revenue from operations associated with the Informix Software segment after 2001, and the only remaining operating segment subsequent to the IBM Transaction is Ascential Software. Expenses continued to be incurred by the Informix Software segment related to the winding down of issues with respect to the sale of that business. Below is a summary of the results of operations based on the two operating businesses for the years ended December 31, 2004, 2003 and 2002 (in thousands):
| | | | | | | | | | | | | | |
| | | Ascential | | | Informix | | | |
| | | Software | | | Software | | | Total | |
| | | | | | | | | | |
2004 | | | | | | | | | | | | |
| | Net revenues from unaffiliated customers | | $ | 271,879 | | | $ | — | | | $ | 271,879 | |
| | Operating income (loss) | | | 6,912 | | | | (860 | ) | | | 6,052 | |
| | Income (loss) before income taxes | | | 16,743 | | | | (222 | ) | | | 16,521 | |
| | Depreciation and amortization | | | 14,327 | | | | — | | | | 14,327 | |
| | Identifiable tangible assets at December 31, 2004 | | | 581,621 | | | | — | | | | 581,621 | |
| | Capital expenditures | | | 4,639 | | | | — | | | | 4,639 | |
2003 | | | | | | | | | | | | |
| | Net revenues from unaffiliated customers | | $ | 185,586 | | | $ | — | | | $ | 185,586 | |
| | Operating loss | | | (8,815 | ) | | | (5,100 | ) | | | (13,915 | ) |
| | Income (loss) before income taxes | | | 2,620 | | | | (3,111 | ) | | | (491 | ) |
| | Depreciation and amortization | | | 10,008 | | | | — | | | | 10,008 | |
| | Identifiable tangible assets at December 31, 2003 | | | 607,095 | | | | — | | | | 607,095 | |
| | Capital expenditures | | | 3,549 | | | | — | | | | 3,549 | |
2002 | | | | | | | | | | | | |
| | Net revenues from unaffiliated customers | | $ | 113,018 | | | $ | — | | | $ | 113,018 | |
| | Operating loss | | | (78,522 | ) | | | (22,916 | ) | | | (101,438 | ) |
| | Loss before income taxes | | | (64,032 | ) | | | (17,372 | ) | | | (81,404 | ) |
| | Depreciation and amortization | | | 10,013 | | | | — | | | | 10,013 | |
| | Identifiable tangible assets at December 31, 2002 | | | 718,386 | | | | — | | | | 718,386 | |
| | Capital expenditures | | | 2,950 | | | | — | | | | 2,950 | |
F-31
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The accounting policies of the segments are the same as those described above in Note 1. The difference between the operating income (loss) of the Company’s reportable operating segments and the consolidated income (loss) before income taxes represents other income, net.
In addition to the segment information above, information as to the Company’s operations in different geographical areas is as follows:
| | | | | | | | | | | |
| | | December 31, | |
| | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| | | (In thousands) | |
| Tangible long-lived assets: | | | | | | | | |
| North America | | | | | | | | |
| | United States | | $ | 20,609 | | | $ | 20,952 | |
| | Other | | | 21 | | | | 16 | |
| | | | | | | |
| | | North America Total | | | 20,630 | | | | 20,968 | |
| Europe | | | 1,597 | | | | 1,993 | |
| Asia/ Pacific | | | 1,672 | | | | 1,148 | |
| | | | | | | |
| Total tangible long-lived assets | | $ | 23,899 | | | $ | 24,109 | |
| | | | | | | |
| | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| | | (In thousands) | |
| Revenue from unaffiliated customers(1) | | | | | | | | | | | | |
| North America | | | | | | | | | | | | |
| | United States | | $ | 127,945 | | | $ | 99,842 | | | $ | 60,801 | |
| | Other | | | 9,091 | | | | 1,675 | | | | 1,050 | |
| | | | | | | | | | |
| | North America Total | | | 137,036 | | | | 101,517 | | | | 61,851 | |
| Europe | | | 106,594 | | | | 65,272 | | | | 33,908 | |
| Asia/ Pacific | | | 28,249 | | | | 18,797 | | | | 13,520 | |
| Latin America(2) | | | — | | | | — | | | | 3,739 | |
| | | | | | | | | | |
| Total revenue from unaffiliated customers | | $ | 271,879 | | | $ | 185,586 | | | $ | 113,018 | |
| | | | | | | | | | |
| |
| (1) | For those customer contracts entered into by the United States, and longer in jurisdictions with applicable statutory requirements). Additionally, the Company generally warrants that its consulting services will be performed in a professional and workmanlike manner. In general, liability for these warranties is limited to the amounts paid by the customer. If necessary, the Company would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history; however, the Company has never incurred significant expense under its product or services warranties. As a result, the Company believes the estimated fair value of these agreements is immaterial. The Company also generally offers indemnification with respect to certain types of intellectual property claims and, occasionally, other matters. As part of the IBM Transaction, the Company agreed to indemnify IBM for certain representations and warranties that were made under the terms of the IBM Transaction agreements. IBM had retained $100.0 million of the sale proceeds as a Holdback to satisfy any indemnification obligations that might arise for any representations or warranties made by the Company as part of the IBM Transaction. The agreement with IBM provided that the Company would indemnify IBM and its affiliates against any loss, claim, damage, liability or other expense incurred in connection with (i) any failure of any representation or warranty of the Company to be true and correct in all respects; provided, however, that any such liability, in the aggregate, exceeds on a cumulative basis $10.0 million
F-27
(and only to the extent of any such excess); (ii) any breach of any obligation of the Company; (iii) any of the Excluded Liabilities, as defined in the agreement; or (iv) the operation or ownership of the Excluded Assets, as defined in the agreement. The Company received the $100.0 million Holdback payment from IBM, plus accrued interest, in January 2003. No formal indemnification claims have been made by IBM from the time that the Company received the Holdback payment through the date of this filing. Indemnification obligations of the Company with respect to certain representations and warranties under the agreement with IBM terminated on July 1, 2003 as discussed further in Note 14 of these Consolidated Financial Statements.
The Company is obligated to indemnify certain prior directors and officers for various matters arising from their actions during the period they were employed or associated with the Company. The Company is paying the legal fees of some former officers, which payments are currently not expected to have a material adverse effect on the Company's financial condition. The Company may be entitled to seek reimbursement from such individuals for these payments if certain conditions are satisfied. The Company's indemnification obligations are defined by indemnification agreements and the Company's charter and by-laws. The Company is insured for other costs and losses that could be incurred by virtue of its future indemnification obligations. In May 2002 and November 2003, the Company entered into standby letters of credit that expire by May 2006 and November 2007, respectively, which guarantee a total of $1.4 million of potential tax payments related to certain payments made to two former officers of the Company. These potential tax payments, which have been partially reserved based on management's assessment of the potential payments and relate to severance paid to these former officers in accordance with a change in control agreement that was triggered by the IBM Transaction as discussed further in Note 14 to these Consolidated Financial Statements. Payment under the standby letter of credit may be due upon final determination of this tax liability.
During 2003 the Company issued a $2.5 million standby letter of credit to guarantee certain lease obligations pursuant to the lease between Mercator and the landlord of an office facility located in Wilton, Connecticut. The letter of credit is automatically extended annually, but not beyond July 1, 2013.
The Company was also required to enter into standby letters of credit to guarantee approximately $0.4 million of lease payments for certain facilities in Europe. These guarantees do not have expiration dates and would allow landlords to obtain lease payments from the Company's bank if the Company defaulted on its lease payment obligations.
In connection with its acquisition of Mercator, the Company assumed certain outstanding warrants previously issued by Mercator and convertible into Mercator common stock prior to the merger. Pursuant to the terms of the Merger Agreement and the respective warrant agreements, following the merger each holder of such Mercator warrants, other than warrants issued to Vector Capital II LP or otherwise exercised or deemed exercised prior to the merger, is generally entitled to receive, upon payment of the exercise price the merger consideration of $3.00 per share for each former share of Mercator common stock underlying the Mercator warrant. As of September 30, 2003, there were outstanding Mercator warrants representing 1,028,119 former shares of Mercator common stock, with exercise prices ranging from $4.00 per share to $8.98 per share, and other than warrants issued to Vector Capital II LP, exercisable for the merger. Pursuant to an agreement between Mercator and Vector Capital II LP, Vector had the right, for a seven business day period in October 2005, to surrender its warrant for 105,000 former shares of Mercator common stock to Mercator in exchange for payment of $500,000. On October 20, 2003 the warrants issued to Vector Capital II LP were sold, assigned and transferred to Mercator upon payment by Mercator to Vector of $430,000. This payment has been recorded in purchase accounting as a reduction in the goodwill associated with the Mercator acquisition.
F-28
Note 9 — Business Segments
During the first quarter of 2001, in conjunction with its 2000 strategic realignment, the Company began operating under two segments that reported to the Company's chief executive officer (the "Chief Operating Decision Maker"). The first segment, Ascential Software, develops and markets enterprise data integration software and related services worldwide. The second segment, Informix Software, provided database management systems for data warehousing, transaction processing, and e-business applications. The "Company" or "Ascential Software Corporation" refers to Ascential Software and Informix Software on a combined basis beginning in 2001. By December 31, 2000, the Company had defined and allocated personnel among the management, selling, marketing, research and development and service organizations for the two operating businesses. Prior to this occurrence, the Company had not achieved sufficient separation of the employees and infrastructure of the two operating businesses to properly measure the results of the operations on a stand-alone basis. The Company could only evaluate segment operating performance in 2001 based on net revenues and certain operating expenses. Beginning in 2002, segment operating performance is evaluated primarily on income before income taxes.
As discussed in Note 14 in these Notes to Consolidated Financial Statements, the Company completed the IBM Transaction during the third quarter of 2001. Accordingly, the Company no longer derives revenue from the Informix Software segment and the only remaining operating segment subsequent to the sale is Ascential Software. Expenses continued to be incurred by the Informix Software segment related to the winding down of issues with respect to the sale of that business.
Below is a summary of the results of operations based on the two operating businesses for the years ended December 31, 2003, 2002 and 2001 (in thousands):
| | Ascential
Software
| | Informix
Software
| | Total
| |
|---|
| 2003 | | | | | | | | | | | | | Net revenues from unaffiliated customers | | $ | 185,586 | | $ | — | | $ | 185,586 | | | | Operating loss | | | (8,815 | ) | | (5,100 | ) | | (13,915 | ) | | | Income (loss) before income taxes | | | 2,620 | | | (3,111 | ) | | (491 | ) | | | Depreciation and amortization | | | 10,008 | | | — | | | 10,008 | | | | Identifiable assets at December 31, 2003 | | | 966,079 | | | — | | | 966,079 | | | | Capital expenditures | | | 3,549 | | | — | | | 3,549 | | | 2002 | | | | | | | | | | | | | Net revenues from unaffiliated customers | | $ | 113,018 | | $ | — | | $ | 113,018 | | | | Operating loss | | | (78,522 | ) | | (22,916 | ) | | (101,438 | ) | | | Loss before income taxes | | | (64,032 | ) | | (17,372 | ) | | (81,404 | ) | | | Depreciation and amortization | | | 10,013 | | | — | | | 10,013 | | | | Identifiable assets at December 31, 2002 | | | 906,250 | | | — | | | 906,250 | | | | Capital expenditures | | | 2,950 | | | — | | | 2,950 | | | 2001 | | | | | | | | | | | | | Net revenues from unaffiliated customers | | $ | 123,980 | | $ | 357,352 | | $ | 481,332 | | | | Operating income (loss) | | | (105,290 | ) | | 9,130 | | | (96,160 | ) | | | Identifiable assets at December 31, 2001 | | | 1,079,740 | | | — | | | 1,079,740 | |
The accounting policies of the segments are the same as those described above in Note 1 to these Notes to the Consolidated Financial Statements.
F-29
Revenue from external customers for each group of similar products and services offered by Ascential Software and Informix Software are summarized below for the years ended December 31, 2003, 2002, and 2001:
| | 2003
| | 2002
| | 2001
|
|---|
| | (in thousands)
|
|---|
| Ascential Software | | | | | | | | | | | License revenues | | $ | 92,550 | | $ | 59,611 | | $ | 62,417 | | | |
| |
| |
| | Service revenues: | | | | | | | | | | | | Maintenance revenues | | | 55,156 | | | 29,962 | | | 29,197 | | | Consulting and education revenues | | | 37,880 | | | 23,445 | | | 32,366 | | | |
| |
| |
| | Total service revenues | | | 93,036 | | | 53,407 | | | 61,563 | | | |
| |
| |
| | Total revenues — Ascential Software | | $ | 185,586 | | $ | 113,018 | | $ | 123,980 | | | |
| |
| |
| | Informix Software | | | | | | | | | | | License revenues | | $ | — | | $ | — | | $ | 149,319 | | Service revenues: | | | | | | | | | | | | Maintenance revenues | | | — | | | — | | | 183,729 | | | Consulting and education revenues | | | — | | | — | | | 24,304 | | | |
| |
| |
| | Total service revenues | | | — | | | — | | | 208,033 | | | |
| |
| |
| | Total revenues — Informix Software | | $ | — | | $ | — | | $ | 357,352 | | | |
| |
| |
| | Ascential Software Corporation (Combined total of Informix Software and Ascential Software) | | | | | | | | | | | License revenues | | $ | 92,550 | | $ | 59,611 | | $ | 211,736 | | | |
| |
| |
| | Service revenues: | | | | | | | | | | | | Maintenance revenues | | | 55,156 | | | 29,962 | | | 212,926 | | | Consulting and education revenues | | | 37,880 | | | 23,445 | | | 56,670 | | | |
| |
| |
| | Total service revenues | | | 93,036 | | | 53,407 | | | 269,596 | | | |
| |
| |
| | Total revenues | | $ | 185,586 | | $ | 113,018 | | $ | 481,332 | | | |
| |
| |
|
The reconciliation of the operating income (loss) of the Company's reportable operating segments to the Company's income (loss) before income taxes is as follows for the years ended December 31, 2003, 2002, and 2001:
| | 2003
| | 2002
| | 2001
| |
|---|
| | (In thousands)
| |
|---|
| Operating loss of reportable operating segments | | $ | (13,915 | ) | $ | (101,438 | ) | $ | (96,426 | ) | | Consolidating adjustments | | | — | | | — | | | 266 | | | Other income, net | | | 13,424 | | | 20,034 | | | 878,460 | | | | |
| |
| |
| | | Income (loss) before income taxes | | $ | (491 | ) | $ | (81,404 | ) | $ | 782,300 | | | | |
| |
| |
| |
F-30
In addition to the segment information above, information as to the Company's operations in different geographical areas is as follows:
| | December 31,
|
|---|
| | 2003
| | 2002
|
|---|
| | (In thousands)
|
|---|
| Long-lived assets: | | | | | | | | North America | | | | | | | | | United States | | $ | 379,936 | | $ | 202,786 | | | Other | | | 16 | | | 41 | | | |
| |
| | | | North America Total | | | 379,952 | | | 202,827 | | Europe | | | 1,993 | | | 1,408 | | Asia/Pacific | | | 1,148 | | | 1,302 | | | |
| |
| | Total long-lived assets | | $ | 383,093 | | $ | 205,537 | | | |
| |
|
| | Years Ended December 31,
|
|---|
| | 2003
| | 2002
| | 2001
|
|---|
| | (In thousands)
|
|---|
| Revenue from unaffiliated customers(1) | | | | | | | | | | | North America | | | | | | | | | | | | United States | | $ | 99,842 | | $ | 60,801 | | $ | 242,362 | | | Other | | | 1,675 | | | 1,050 | | | 6,102 | | | |
| |
| |
| | | North America Total | | | 101,517 | | | 61,851 | | | 248,464 | | Europe | | | 65,272 | | | 33,908 | | | 147,904 | | Asia/Pacific | | | 18,797 | | | 13,520 | | | 47,988 | | Latin America(2) | | | — | | | 3,739 | | | 36,976 | | | |
| |
| |
| | Total revenue from unaffiliated customers | | $ | 185,586 | | $ | 113,018 | | $ | 481,332 | | | |
| |
| |
|
(1)The Company allocates revenue to operating segments depending on the location of the country where the order is placed, the location of the countrygeographic territories where the license is installed or the service is delivered, the type of revenue (license or service) and whether the sale was through a reseller or to an end user.
- delivered.
|
|
| (2) | In late 2002, the Company closed its operations in Latin America. During 2003 and 2004, all Latin sales activity was managed by sales professionals in North America through resellers. In the above table, Europe includes primarily United Kingdom, France, Germany, and Italy; Asia/Pacific includes primarily Australia, Korea, and Japan; and Latin America includes primarily Mexico, Brazil, and Argentina.
F-31
|
In the above table, Europe includes primarily United Kingdom, France, Germany, and Italy; Asia/ Pacific includes primarily Australia, Korea, China and Japan; and Latin America includes primarily Mexico, Brazil, and Argentina.
F-32
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| Note 10 — | Income Taxes The provision for income taxes applicable to income (loss) before income taxes consists of the following:
| | December 31,
|
|---|
| | 2003
| | 2002
| | 2001
|
|---|
| | (In thousands)
|
|---|
| Currently payable (receivable): | | | | | | | | | | | | Federal | | $ | (18,965 | ) | $ | (13,656 | ) | $ | 84,930 | | | State | | | 2,200 | | | 120 | | | 13,648 | | | Foreign | | | 1,860 | | | 1,341 | | | 22,415 | | | |
| |
| |
| | | | | (14,905 | ) | | (12,195 | ) | | 120,993 | | | |
| |
| |
| | Reduction in goodwill for the tax benefit from utilization of acquired company's tax attributes | | | 990 | | | 30 | | | 2,584 | | | |
| |
| |
| | Charge equivalent to the federal and state tax benefit related to employee stock options | | | 1,952 | | | 586 | | | 26,928 | | | |
| |
| |
| | Deferred: | | | | | | | | | | | | Federal | | | (3,500 | ) | | (1,530 | ) | | 4,642 | | | State | | | (833 | ) | | (4,722 | ) | | 2,205 | | | Foreign | | | — | | | — | | | — | | | |
| |
| |
| | | | | (4,333 | ) | | (6,252 | ) | | 6,847 | | | |
| |
| |
| | | | $ | (16,296 | ) | $ | (17,831 | ) | $ | 157,352 | | | |
| |
| |
|
Income (loss) before income taxes consists of the following:
| | Years Ended December 31,
|
|---|
| | 2003
| | 2002
| | 2001
|
|---|
| | (In thousands)
|
|---|
| Domestic | | $ | (8,660 | ) | $ | (51,019 | ) | $ | 622,857 | | Foreign | | | 8,169 | | | (30,385 | ) | | 159,443 | | | |
| |
| |
| | | | $ | (491 | ) | $ | (81,404 | ) | $ | 782,300 | | | |
| |
| |
|
The provision for income taxes differs from the amount computed by applying the federal statutory income tax rate to income (loss) before income taxes. The sources and tax effects of the differences at December 31, 2003, 2002 and 2001 are as follows:
| | 2003
| | 2002
| | 2001
| |
|---|
| | (In thousands)
| |
|---|
| Computed tax expense (benefit) at federal statutory rate | | $ | (172 | ) | $ | (28,492 | ) | $ | 273,805 | | | Valuation allowance | | | 5,076 | | | 26,945 | | | (149,469 | ) | | State income taxes, net of federal tax benefit | | | 4,572 | | | (4,571 | ) | | 34,121 | | | Foreign withholding taxes not currently creditable | | | — | | | 977 | | | 3,649 | | | Foreign tax credits | | | (235 | ) | | — | | | (11,805 | ) | | Foreign taxes, net | | | (1,358 | ) | | (1,958 | ) | | (33,391 | ) | | Non-deductible charges | | | 1,346 | | | — | | | 18,093 | | | Prior year tax benefits utilized | | | — | | | (17,533 | ) | | — | | | Reserve adjustment | | | (25,157 | ) | | 4,925 | | | 21,305 | | | Other, net | | | (368 | ) | | 1,876 | | | 1,044 | | | | |
| |
| |
| | | | Total income tax expense (benefit), and effective tax rate | | $ | (16,296 | ) | $ | (17,831 | ) | $ | 157,352 | | | | |
| |
| |
| |
F-32
The reserve adjustment of $25.2 million was recorded to reflect the impact of closed tax audits, expiring statutes of limitations for the assessment of tax and changes in estimates resulting from additional or new information
|
The provision (benefit) for income taxes applicable to income (loss) before income taxes consists of the following:
| | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| | | (In thousands) | |
| Currently payable (receivable): | | | | | | | | | | | | |
| | Federal | | $ | (58 | ) | | $ | (18,965 | ) | | $ | (13,656 | ) |
| | State | | | (814 | ) | | | 2,200 | | | | 120 | |
| | Foreign | | | 828 | | | | 1,860 | | | | 1,341 | |
| | | | | | | | | | |
| | | | (44 | ) | | | (14,905 | ) | | | (12,195 | ) |
| | | | | | | | | | |
| Reduction in goodwill for the tax benefit from utilization of acquired company’s tax attributes | | | 1,028 | | | | 990 | | | | 30 | |
| | | | | | | | | | |
| Charge equivalent to the federal and state tax benefit related to employee stock options | | | 2,778 | | | | 1,952 | | | | 586 | |
| | | | | | | | | | |
| Deferred: | | | | | | | | | | | | |
| | Federal | | | (1,770 | ) | | | (3,500 | ) | | | (1,530 | ) |
| | State | | | (422 | ) | | | (833 | ) | | | (4,722 | ) |
| | Foreign | | | — | | | | — | | | | — | |
| | | | | | | | | | |
| | | | (2,192 | ) | | | (4,333 | ) | | | (6,252 | ) |
| | | | | | | | | | |
| | | $ | 1,570 | | | $ | (16,296 | ) | | $ | (17,831 | ) |
| | | | | | | | | | |
Income (loss) before income taxes consists of the following:
| | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| | | (In thousands) | |
| Domestic | | $ | 18,306 | | | $ | (8,660 | ) | | $ | (51,019 | ) |
| Foreign | | | (1,785 | ) | | | 8,169 | | | | (30,385 | ) |
| | | | | | | | | | |
| | | $ | 16,521 | | | $ | (491 | ) | | $ | (81,404 | ) |
| | | | | | | | | | |
The following table sets forth the activity related to the income tax valuation allowance for the years ended December 31, 2004 and 2003.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Charges to | | | (Credits)/ | | | Credits to | | | |
| | | Balance at | | | Income | | | Charges to | | | Income | | | Balance at | |
| | | Beginning | | | Tax | | | Other | | | Tax | | | End of | |
| | | of Year | | | Provision | | | Accounts(1) | | | Provision | | | Year | |
| | | | | | | | | | | | | | | | |
| Year ended December 31, 2004 | | $ | 167,411 | | | $ | 19,596 | | | $ | (2,799 | ) | | $ | (7,954 | ) | | $ | 176,254 | |
| Year ended December 31, 2003 | | $ | 97,125 | | | $ | 20,415 | | | $ | 59,737 | | | $ | (9,866 | ) | | $ | 167,411 | |
| |
| (1) | Amount represents valuation allowance activity related to certain tax accruals. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. Deferred taxes are not provided on the undistributed earnings through December 31, 2003 of approximately $145.9 million of subsidiaries operating outside the U.S. that have been or are intended to be permanently reinvested. The amount of unrecognized deferred tax liability on the undistributed earnings cannot be practicably determined at this time. Significant components of the Company's deferred tax assets and liabilities are as follows:
| | December 31,
| |
|---|
| | 2003
| | 2002
| |
|---|
| | (In thousands)
| |
|---|
| Deferred Tax Assets: | | | | | | | | | | Reserves and accrued expenses | | $ | 4,290 | | $ | 5,883 | | | | Deferred revenue | | | 610 | | | 269 | | | | Foreign net operating loss carryforwards | | | 33,501 | | | 29,786 | | | | Domestic net operating loss carryforwards | | | 90,590 | | | 51,239 | | | | Foreign tax credits | | | — | | | 8,281 | | | | Tax credit carryforwards | | | 39,732 | | | 36,709 | | | | Acquisition and restructuring reserves | | | 16,388 | | | 10,718 | | | | Other | | | 1,211 | | | 1,158 | | | | |
| |
| | | | Total deferred tax assets | | | 186,322 | | | 144,043 | | | | Valuation allowance for deferred tax assets | | | (167,411 | ) | | (97,125 | ) | | | |
| |
| | | | Deferred tax assets, net of valuation allowance | | | 18,911 | | | 46,918 | | | | |
| |
| | | Deferred Tax Liabilities: | | | | | | | | | | Capitalized software development costs | | | (6,506 | ) | | (6,238 | ) | | | Deferred gain | | | — | | | (38,503 | ) | | | Acquisition reserves | | | (8,660 | ) | | (4,635 | ) | | | Deferred income | | | (2,947 | ) | | (2,197 | ) | | | |
| |
| | | Total deferred tax liabilities | | | (18,113 | ) | | (51,573 | ) | | | |
| |
| | | Net deferred tax assets (liabilities) | | $ | 798 | | $ | (4,655 | ) | | | |
| |
| |
At December 31, 2003, the Company had approximately $84.0 million and $226 million of foreign and federal net operating loss carryforwards, respectively. The foreign net operating loss carryforwards expire at various dates beginning in 2004 with some of the losses having an indefinite carryforward period. The federal net operating loss carryforwards expire at various dates from 2004 through 2021. At December 31, 2003, the Company had approximately $40.0 million of various federal tax credit carryforwards that will expire at various dates from 2004 through 2023. Utilization of a substantial amount of the loss and credit carryforwards are subject to an annual limitation imposed by change in ownership provisions of United States Internal Revenue Code Section 382.
The valuation allowance was increased by $70.3 million in 2003, primarily due to the acquisition of Mercator, and increased by $23.9 million in 2002. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company
F-33
believes that it is more likely than not the deferred tax assets at December 31, 2003, net of the valuation allowance, will be realized as a result of the reversal of existing taxable temporary differences.
Subsequently recognizable tax benefits relating to the valuation allowance for deferred tax assets at December 31, 2003 will be as follows (in thousands):
| Income tax benefit from continuing operations | | $ | 70,298 | | Goodwill and other non-current intangible assets | | | 97,114 | | | |
| | Total | | $ | 167,412 | | | |
|
business combinations. |
F-33
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The provision for income taxes differs from the amount computed by applying the federal statutory income tax rate to income (loss) before income taxes. The sources and tax effects of the differences at December 31, 2004, 2003 and 2002 are as follows:
| | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| | | (In thousands) | |
| Computed tax expense (benefit) at federal statutory rate | | $ | 5,783 | | | $ | (172 | ) | | $ | (28,492 | ) |
| Valuation allowance | | | 1,785 | | | | 5,076 | | | | 26,945 | |
| State income taxes, net of federal tax benefit | | | 275 | | | | 4,572 | | | | (4,571 | ) |
| Foreign withholding taxes not currently creditable | | | — | | | | — | | | | 977 | |
| Foreign tax credits | | | — | | | | (235 | ) | | | — | |
| Foreign taxes, net | | | (3,206 | ) | | | (1,358 | ) | | | (1,958 | ) |
| Non-deductible charges | | | — | | | | 1,346 | | | | — | |
| Prior year tax benefits utilized | | | — | | | | — | | | | (17,533 | ) |
| Reserve adjustment | | | (2,885 | ) | | | (25,157 | ) | | | 4,925 | |
| Other, net | | | (182 | ) | | | (368 | ) | | | 1,876 | |
| | | | | | | | | | |
| | Total income tax expense (benefit) | | $ | 1,570 | | | $ | (16,296 | ) | | $ | (17,831 | ) |
| | | | | | | | | | |
The reserve adjustments in 2004 and 2003, $2.9 million and $25.2 million respectively, were recorded to reflect the impact of closed tax audits, expiring statutes of limitations for the assessment of tax and changes in estimates resulting from additional or new information related to certain tax accruals.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. Deferred taxes are not provided on the undistributed earnings through December 31, 2004 of approximately $131.3 million of subsidiaries operating outside the U.S. that have been or are intended to be permanently reinvested. The amount of unrecognized deferred tax liability on the undistributed earnings cannot be practicably determined at this time. The Company is currently evaluating the impact of the repatriation provisions of the American Jobs Creation Act to determine the amount of earnings to repatriate, if any.
F-34
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Significant components of the Company’s deferred tax assets and liabilities are as follows:
| | | | | | | | | | |
| | | December 31, | |
| | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| | | (In thousands) | |
| Deferred Tax Assets: | | | | | | | | |
| | Reserves and accrued expenses | | $ | 2,934 | | | $ | 4,290 | |
| | Deferred revenue | | | 287 | | | | 610 | |
| | Foreign net operating loss carryforwards | | | 31,680 | | | | 33,501 | |
| | Domestic net operating loss carryforwards | | | 94,718 | | | | 90,590 | |
| | Tax credit carryforwards | | | 49,753 | | | | 39,732 | |
| | Acquisition and restructuring reserves | | | 7,497 | | | | 16,388 | |
| | Other | | | 1,864 | | | | 1,211 | |
| | | | | | | |
| | Total deferred tax assets | | | 188,733 | | | | 186,322 | |
| | Valuation allowance for deferred tax assets | | | (176,254 | ) | | | (167,411 | ) |
| | | | | | | |
| | Deferred tax assets, net of valuation allowance | | | 12,479 | | | | 18,911 | |
| | | | | | | |
| Deferred Tax Liabilities: | | | | | | | | |
| | Capitalized software development costs | | | (7,206 | ) | | | (6,506 | ) |
| | Acquisition reserves | | | (4,750 | ) | | | (8,660 | ) |
| | Deferred income | | | (136 | ) | | | (2,947 | ) |
| | | | | | | |
| Total deferred tax liabilities | | | (12,092 | ) | | | (18,113 | ) |
| | | | | | | |
| Net deferred tax assets | | $ | 387 | | | $ | 798 | |
| | | | | | | |
At December 31, 2004, the Company had approximately $79.2 million and $236.8 million of foreign and federal net operating loss carryforwards, respectively. The foreign net operating loss carryforwards expire at various dates beginning in 2005 with some of the losses having an indefinite carryforward period. The federal net operating loss carryforwards expire at various dates from 2007 through 2021. At December 31, 2004, the Company had approximately $33.3 million of various federal tax credit carryforwards that will expire at various dates from 2005 through 2024. Utilization of a substantial amount of the loss and credit carryforwards is subject to an annual limitation imposed by change in ownership provisions of United States Internal Revenue Code Section 382.
The valuation allowance was increased by $8.8 million in 2004. In 2003, the valuation allowance was increased by $70.3 million, primarily due to the acquisition of Mercator. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company believes that it is more likely than not the deferred tax assets at December 31, 2004, net of the valuation allowance, will be realized as a result of the reversal of existing taxable temporary differences.
Subsequently recognizable tax benefits relating to the valuation allowance for deferred tax assets at December 31, 2004 is as follows (in thousands):
| | | | | |
| Income tax benefit from continuing operations | | $ | 78,136 | |
| Goodwill and other non-current intangible assets | | | 98,118 | |
| | | | |
| Total | | $ | 176,254 | |
| | | | |
F-35
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| Note 11 — | Goodwill and Other Intangible Assets The Company adopted certain provisions of SFAS No. 141 and 142 effective July 1, 2001, and adopted the remaining provisions with respect to goodwill and intangible assets determined to have indefinite useful lives acquired in a purchase business combination, as of January 1, 2002. As a result, the Company ceased amortizing goodwill beginning January 1, 2002, and evaluates goodwill for impairment in accordance with SFAS No. 142 (see Note 1 of Notes to Consolidated Financial Statements). The changes in the carrying amount of goodwill for the year ended December 31, 2003 and 2002 are as follows (in thousands):
| | 2003
| | 2002
|
|---|
| Balance beginning of year | | $ | 162,670 | | $ | 68,158 | | Additions from acquisitions | | | 162,810 | | | 93,388 | | Adjustments | | | (1,153 | ) | | 1,124 | | | |
| |
| | Balance end year | | $ | 324,327 | | $ | 162,670 | | | |
| |
|
During 2003, the Company recorded $162.8 million of goodwill related to the acquisition of Mercator. Also during 2003, the $93.4 million of goodwill related to the acquisition of Vality which occurred in 2002 was adjusted by a decrease of $1.2 million (see Note 12 of Notes to Consolidated Financial Statements). This adjustment primarily includes a $1.0 million reversal of facilities reserves that are no longer necessary due to exiting certain facilities, $0.7 of adjustments to the net assets and liabilities assumed, offset by an adjustment of $0.5 million to deferred taxes related to Vality. In 2002, the $38.5 million in goodwill recorded for the acquisition of Torrent in November 2001 was adjusted by $0.9 million and $0.2 million related to adjustments to deferred taxes and deferred compensation, respectively.
Other intangible assets amounted to $19.9 million (net of accumulated amortization of $12.8 million) and $11.1 million (net of accumulated amortization of $6.4 million) at December 31, 2003 and 2002, respectively. These intangible assets consist primarily of customer lists and existing technology acquired through business combinations. During 2003 the Company acquired Mercator (see Note 12 of Notes to Consolidated Financial Statements) and assigned fair values to the identifiable intangible assets of $15.2 million, based upon an appraisal. These identifiable intangible assets include $7.0 million for existing technology, $7.0 million for customer lists and $1.2 million for agreements not to compete. The Company is amortizing these assets on a straight line basis over their estimated useful lives of one year for the agreement not to compete and five years for customer lists and existing technology.
F-34
There are no expected residual values related to the recorded identifiable intangible assets. Amortization expense for the years ended December 31, 2003, 2002 and 2001 was $6.4 million, $4.6 million and $1.8 million, respectively. Estimated future amortization expense for the Company's identifiable intangible assets as of December 31, 2003, assuming no future impairment charges or acquisitions, would be as follows (in thousands):
|
As a result of adopting SFAS 142, the Company ceased amortizing goodwill beginning January 1, 2002, and evaluates goodwill for impairment in accordance with SFAS 142 (see Note 1). The changes in the carrying amount of goodwill for the year ended December 31, 2004 and 2003 are as follows (in thousands):
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| Balance beginning of year | | $ | 324,327 | | | $ | 162,670 | |
| Additions from acquisitions | | | 263 | | | | 162,810 | |
| Adjustments | | | 867 | | | | (1,153 | ) |
| | | | | | | |
| Balance end of year | | $ | 325,457 | | | $ | 324,327 | |
| | | | | | | |
During 2004, the Company recorded $0.3 million of goodwill related to the purchase of the assets of iNuCom (India) Limited and its affiliate iNuCom.com, Inc. (collectively referred to as “iNuCom”) (see Note 12). Also during 2004, the $162.8 million of goodwill related to the acquisition of Mercator recorded during 2003 was adjusted upward in the amount of $1.5 million. This adjustment primarily includes an increase of $2.9 million related to finalizing estimates of accrued merger, restructuring and other expenses in purchase accounting, $0.6 million of adjustments to the net assets and liabilities assumed, offset by a decrease of $2.0 million to deferred taxes related to Mercator. In addition, the $92.1 million of goodwill related to the acquisition of Vality was adjusted by a decrease of $0.4 million during 2004. This adjustment principally includes a decrease of $0.3 million related to deferred taxes associated with Vality and a $0.1 million reversal of acquisition reserves that were no longer necessary. Also, during 2004, the $39.7 million of goodwill related to the acquisition of Torrent was adjusted by a decrease of $0.2 million to deferred taxes related to Torrent. During 2003, the Company recorded $162.8 million of goodwill related to the acquisition of Mercator. Also during 2003, the $93.4 million of goodwill related to the acquisition of Vality which occurred in 2002 was adjusted by a decrease of $1.2 million (see Note 12). This adjustment primarily includes a $1.0 million reversal of facilities reserves that were no longer necessary due to exiting certain facilities, $0.7 million of adjustments to the net assets and liabilities assumed, offset by an adjustment of $0.5 million to deferred taxes related to Vality.
Other intangible assets amounted to $11.5 million (net of accumulated amortization of $21.2 million) and $19.9 million (net of accumulated amortization of $12.8 million) at December 31, 2004 and 2003, respectively. These intangible assets consist primarily of customer relationships and existing technology acquired through business combinations. During 2003 the Company acquired Mercator (see Note 12) and assigned fair values to the identifiable intangible assets of $15.2 million, based upon an appraisal. These identifiable intangible assets include $7.0 million for existing technology, $7.0 million for customer relationships and $1.2 million for agreements not to compete. The Company is amortizing these assets on a straight line basis over their estimated useful lives of one year for the agreements not to compete and five years for customer relationships and existing technology.
There are no expected residual values related to the recorded identifiable intangible assets. Amortization expense for the years ended December 31, 2004, 2003 and 2002 was $8.4 million, $6.4 million and $4.6 million, respectively. Estimated future amortization expense for the Company’s identifiable intangible
F-36
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
assets as of December 31, 2004, assuming no future impairment charges or acquisitions, would be as follows (in thousands):
| | | | | |
| | | Amortization | |
| Year | | Expense | |
| | | | |
| 2005 | | $ | 3,831 | |
| 2006 | | | 2,916 | |
| 2007 | | | 2,800 | |
| 2008 | | | 1,906 | |
| 2009 | | | — | |
| | | | |
| Estimated total future amortization | | $ | 11,453 | |
| | | | |
Year
| | Amortization
Expense
|
|---|
| 2004 | | $ | 8,413 |
| 2005 | | | 3,828 |
| 2006 | | | 2,916 |
| 2007 | | | 2,800 |
| 2008 | | | 1,906 |
| | |
|
| Estimated total future amortization | | $ | 19,863 |
| | |
|
The following table reconciles the 2001 operating loss and net income to their respective balances adjusted to exclude amortization expense of goodwill, and amortization expense of workforce which was reclassified as goodwill with the Company's adoption of SFAS 142 (in thousands except for per share amounts):
| | 2001
| |
|---|
| Operating Loss | | | | |
| Operating loss | | $ | (96,160 | ) |
| Add-back: goodwill amortization | | | 7,030 | |
| | |
| |
| Adjusted operating loss | | $ | (89,130 | ) |
| | |
| |
| Net income (loss) | | | | |
| Reported net income | | $ | 624,948 | |
| Add-back: goodwill amortization, net of tax effect | | | 7,030 | |
| | |
| |
| Adjusted net income | | $ | 631,978 | |
| | |
| |
| Basic Earnings Per Share | | | | |
| Reported net income | | $ | 9.01 | |
| Goodwill amortization, net of tax effect | | | 0.11 | |
| | |
| |
| Adjusted net income | | $ | 9.12 | |
| | |
| |
| Diluted Earnings Per Share | | | | |
| Reported net income | | $ | 8.79 | |
| Goodwill amortization, net of tax effect | | | 0.09 | |
| | |
| |
| Adjusted net income | | $ | 8.88 | |
| | |
| |
| |
| Note 12 — | Business Combinations On August 2, 2003, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement"), by and among the Company, Greek Acquisition Corporation, a wholly-owned subsidiary of the Company ("Merger Sub"), and Mercator, pursuant to which the Company, through Merger Sub, offered to purchase all of the outstanding common shares of Mercator such shares, together with any associated preferred stock rights, the ("Mercator Shares") at a price per share of $3.00 in cash without interest thereon (the "Offer Price"), upon the terms and subject to the conditions set forth in an Offer to Purchase and related Letter of Transmittal (which together with any amendments or supplements thereto constituted the "Offer") distributed to Mercator's stockholders on August 8, 2003.
F-35
On September 12, 2003, the Company completed its acquisition of Mercator pursuant to the Merger Agreement. Following expiration of the Offer on September 11, 2003, Ascential accepted for payment the Mercator Shares tendered and exercised an option (the "Option") granted to it by Mercator for 19.99% of the then outstanding common stock of Mercator at a price of $3.00 per share. As a result of the purchase of the Mercator Shares and the exercise of the Option, Ascential, through Merger Sub, owned more than 90% of the Mercator Shares.
On September 12, 2003, the Company effected a short form merger (the "Merger") whereby Mercator was merged with and into Merger Sub, with Mercator surviving as a wholly owned subsidiary of the Company. In the Merger, each outstanding Mercator Share (other than (i) Mercator Shares owned by the Company, Merger Sub or their respective subsidiaries, and (ii) Mercator Shares that were held by stockholders, if any, who properly exercised their appraisal rights under the Delaware General Corporation Law), were converted into the right to receive $3.00 per share in cash, without interest thereon. In addition, all outstanding options to purchase Mercator Shares granted were converted into options to purchase shares of common stock of the Company, subject to certain adjustments.
Mercator's products addressed high performance, real time, complex data transformation and routing requirements in transaction oriented environments. The Company purchased Mercator to broaden and complement its existing enterprise data integration capabilities, increase its size and scale, and leverage the increased customer base of the combined companies. This acquisition also resulted in an in-place workforce of engineering, sales and marketing talent that has the knowledge and expertise to complement the existing Ascential workforce. Upon the closing of the acquisition of Mercator on September 12, 2003, the Company began the process of integrating Mercator and established a reserve of $36.2 million to restructure the Mercator organization. This restructuring reserve primarily includes the cost of severance for certain redundant general and administrative functions and the costs related to the closure of certain redundant facilities as discussed further in Note 16 to these Consolidated Financial Statements.
The acquisition has been accounted for under the purchase method of accounting, and accordingly, the results of operations of Mercator have been included in the Company's consolidated financial statements since the date of acquisition. As of December 31, 2003, the Company had paid approximately $109.3 million to acquire the outstanding Mercator Shares. In addition, the purchase price includes $5.0 million for transaction costs and $15.7 million for the fair value of options to purchase shares of common stock of Ascential exchanged for Mercator stock options, offset by $2.4 million recorded in deferred compensation for the intrinsic value of unvested options to purchase common stock of Ascential that were issued in exchange for Mercator stock options. Of the $2.4 million recorded in deferred compensation, $1.9 million will be amortized to compensation expense over the remaining vesting period of the underlying options. The remaining $0.5 million will be offset against the merger reserve (see Note 16 of Notes to Consolidated Financial Statements) related to the acceleration of the vesting of certain options of employees when they are terminated. During the year ended December 31, 2003, $0.3 million was amortized to compensation expense and $0.5 million was offset against the merger reserve.
In purchase accounting, the net assets of Mercator have been adjusted to their fair market value and consolidated into the net assets of the Company. A summary of the purchase price for the Mercator acquisition is as follows (in millions):
|
In October 2004, the Company purchased the assets of iNuCom for $0.5 million in cash, including transaction costs. Of the total consideration, $0.2 million was allocated to fixed assets acquired and the residual $0.3 million was allocated to goodwill. The strategy of the acquisition was to create a facility dedicated primarily to research and development in Hyderabad, India. iNuCom was an engineering services subcontractor that the Company had previously utilized.
On September 12, 2003, the Company completed its acquisition of Mercator. Mercator’s products addressed high performance, real time, complex data transformation and routing requirements in transaction oriented environments. The Company purchased Mercator to broaden and complement its existing enterprise data integration capabilities, increase its size and scale, and leverage the increased customer base of the combined companies. This acquisition also resulted in an in-place workforce of engineering, sales and marketing talent that has the knowledge and expertise to complement the existing Ascential workforce.
The acquisition was accounted for under the purchase method of accounting, and accordingly, the results of operations of Mercator have been included in the Company’s consolidated financial statements since the date of acquisition. The Company paid approximately $109.3 million to acquire the outstanding common stock of Mercator. In addition, the purchase price includes $5.0 million for transaction costs and $15.7 million for the fair value of options to purchase shares of common stock of Ascential exchanged for Mercator stock options, offset by $2.4 million recorded in deferred compensation for the intrinsic value of unvested options to purchase common stock of Ascential that were issued in exchange for Mercator stock options. Of the $2.4 million recorded in deferred compensation, $0.3 million will be amortized to compensation expense over the remaining vesting period of the underlying options. Of the remaining $2.1 million, $1.1 million was amortized to compensation expense ($0.8 million in 2004 and $0.3 million in 2003), $0.8 million was offset against the merger reserve related to the acceleration of the vesting of certain options of employees when they are terminated ($0.3 million in 2004 and $0.5 million in 2003 — see Note 15) and $0.2 million was reduced against additional paid in capital related to unvested options for employees who voluntarily terminated.
Upon the closing of the acquisition of Mercator on September 12, 2003, the Company began the process of integrating Mercator and established a reserve of $36.2 million to restructure the Mercator organization. This restructuring reserve primarily includes the cost of severance for certain redundant general and administrative functions and the costs related to the closure of certain redundant facilities as discussed further in Note 15.
F-37
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In purchase accounting, the net assets of Mercator were recorded at their fair market value and consolidated into the net assets of the Company. A summary of the purchase price for the Mercator acquisition is as follows (in millions):
| | | | | | |
| Cash paid to acquire stock, net of cash acquired of $14.4 million | | $ | 94.9 | |
| Cash paid and accrued for transaction costs | | | 5.0 | |
| Stock options exchanged | | | 13.3 | |
| Accrued merger, restructuring and other expenses | | | 36.2 | |
| | | | |
| | Total | | $ | 149.4 | |
| | | | |
The purchase price was allocated as follows:
| | | | | | | |
| Accounts receivable | | $ | 11.2 | |
| Net fixed assets | | | 5.0 | |
| Other assets | | | 4.1 | |
| | | | |
| | Total assets acquired | | | 20.3 | |
| | | | |
| Current liabilities | | | (30.4 | ) |
| Deferred revenue | | | (19.0 | ) |
| Long term liabilities | | | (12.5 | ) |
| | | | |
| | Total liabilities acquired | | | (61.9 | ) |
| | | | |
| Net liabilities assumed, net of cash acquired | | | (41.6 | ) |
| Assets held for sale | | | 6.8 | |
| Deferred income taxes | | | 4.2 | |
| Intangible assets: | | | | |
| | Existing technology | | | 7.0 | |
| | Covenants not to compete | | | 1.2 | |
| | Customer relationships | | | 7.0 | |
| | Goodwill | | | 162.8 | |
| | | | |
| | | Total intangible assets | | | 178.0 | |
| In-process research and development | | | 2.0 | |
| | | | |
| | Total | | $ | 149.4 | |
| | | | |
As of the date of the closing of the Mercator acquisition, the Company became responsible for the then outstanding $8.1 million principal loan balance owed by Mercator to its lender pursuant to the terms and conditions of the term loan facility with that lender (the “Loan Agreement”). The acquisition of Mercator on September 12, 2003 constituted a change in control of Mercator, which was an event of default under the Loan Agreement. On September 18, 2003 the lender waived the event of default subject to payment of all amounts due under the Loan Agreement. The Company repaid the entire loan balance prior to September 30, 2003. During October 2003 the remaining fees and the accrued interest liability of $0.2 million related to this loan were paid and the Loan Agreement was terminated.
The portion of the purchase price allocated to in-process research and development costs (“IPRD”) in the Mercator acquisition was $2.0 million, or approximately 1% of the purchase price. At the acquisition date, Mercator’s in-process project was Release 6.8 of the Mercator Inside Integrator Software product. This project was approximately 37% complete, based upon costs expended to date and estimated costs to complete
F-38
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the project. Mercator had incurred approximately $3.5 million in expenses related to this project at the date of the acquisition. The key features of Release 6.8 include multiple event server functionality, enhanced support for standard XML data and support for the latest 64-bit hardware, operating systems and application software.
As of the Mercator acquisition date, this technology had not reached technological feasibility and had no alternative use. The technological feasibility of an in-process product is established when the enterprise has completed all planning, designing, coding and testing activities that are necessary to establish that the product can be produced to meet its design specifications. The value of IPRD was determined using an income approach. This approach takes into consideration earnings remaining after deducting from cash flows related to the in-process technology the market rates of return on contributory assets, including assembled workforce, customer accounts and existing technology. The cash flows are then discounted to present value at an appropriate rate. Discount rates are determined by an analysis of the risks associated with each of the identified intangible asset. Given the riskier nature of the cash flows related to the IPRD, a higher discount was warranted, and is based on the cost of equity plus 500 basis points. The resulting cash flows attributable to the IPRD was discounted at a rate of 15.0%. The net cash flows to which this discount rate was applied are based on management’s estimates of revenues, operating expenses, and income taxes from such acquired technology. During 2004, the project was renamed Ascential DataStage TX 7.5 and was released in July 2004. The costs to complete the project were consistent with management’s estimates at the time of purchase.
The remaining identifiable intangible assets acquired, including existing technology, customer relationships and agreements not to compete between the Company and former Mercator executives, were assigned fair values based upon an appraisal and amounted to $15.2 million in the aggregate. The Company believes that these identifiable intangible assets have no residual value. The existing technology and customer relationships are being amortized over five years and the covenant not to compete is being amortized over one year. In determining the amortization method of these intangibles, the Company considered the guidance of SFAS 142, which requires amortization of an intangible asset based upon the pattern in which the asset’s economic benefits are consumed or otherwise used up. Based upon long range forecasts and management’s assessment of the economic benefit of these intangibles, it was concluded that an accelerated amortization method could not be reliably determined. Accordingly, the identifiable intangible assets of Mercator are being amortized on a straight-line basis over their estimated useful life. In accordance with current accounting standards, the goodwill is not being amortized and will be tested for impairment as required by SFAS No. 142 (see Note 1).
The total purchase price exceeded fair value of the net assets acquired and liabilities assumed which resulted in goodwill of $162.8 million. The goodwill represents a significant portion of the purchase price. The Company believes that the majority of the benefits to be derived from this acquisition will be experienced through synergies, such as the elimination of redundant functions and facilities and cross selling opportunities, which are included in goodwill. The Company anticipates that, barring unforeseen circumstances, none of the $178.0 million of intangible assets recorded in connection with the Mercator acquisition will be deductible for income tax purposes. During the year ended December 31, 2004, the Company recorded adjustments to goodwill to reflect updated estimates of facilities reserves and other adjustments to assets and liabilities assumed (see Note 11).
During the three months ended December 31, 2003, the Company commenced efforts to sell its Key/ Master data entry software line, which was formerly owned by Mercator, and is not part of the Company’s core enterprise data integration offering. On January 27, 2004, the Company entered into a software purchase agreement with Phoenix Software International, Inc. (“Phoenix”) pursuant to which the Company sold the rights to its Key/ Master data entry product line. Accordingly, at December 31, 2003, this technology was recorded as an asset held for sale, as a component of other current assets, at its fair market value of $6.8 million.
F-39
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On April 3, 2002, the Company acquired Vality, a private company that specialized in enterprise data quality management. The results of Vality’s operations have been included in the consolidated financial statements since the date of the acquisition. The Company expects that this acquisition will enable the Company to create a market leading offering that integrates ETL (extraction, transformation, and load), meta data management, and data quality and data cleansing technologies. As of December 31, 2003, the Company had paid the net amount of $94.5 million to acquire Vality, which consists of $91.7 million paid to acquire 100% of the outstanding common and preferred shares of Vality and vested stock options, and $2.8 million for transaction costs, which is net of $7.0 million of cash acquired from Vality. The acquisition was accounted for using the purchase method of accounting, and a summary of the purchase price for the acquisition is as follows (in millions):
| | | | | |
| Cash paid to acquire stock and options (less cash acquired of $7.0 million) | | $ | 91.7 | |
| Cash paid for transaction costs | | | 2.8 | |
| Accrued merger costs | | | 3.8 | |
| | | | |
| Total | | $ | 98.3 | |
| | | | |
The purchase price was allocated as follows:
| | | | | | |
| Net liabilities assumed, net of cash acquired | | $ | (2.9 | ) |
| Deferred income taxes | | | (1.9 | ) |
| Intangible assets: | | | | |
| | Existing technology | | | 8.2 | |
| | Covenant not to compete | | | 0.3 | |
| | Goodwill | | | 93.4 | |
| | | | |
| | Total intangible assets | | | 101.9 | |
| In-process research and development | | | 1.2 | |
| | | | |
| Total | | $ | 98.3 | |
| | | | |
The portion of the purchase price allocated to in-process research and development costs (“IPRD”) in the Vality acquisition was $1.2 million, or approximately 1% of the total purchase price. The value allocated to the project identified as in process was charged to operations in the second quarter of 2002.
The remaining identified intangible assets acquired, including, without limitation, technology and covenants not to compete between the Company and certain former members of senior management of Vality, were assigned fair values based upon an independent appraisal and amounted to $8.5 million in the aggregate. The Company believes that these identified intangible assets have no residual value. The excess of the purchase price over the identified tangible and intangible assets was recorded as goodwill and amounted to approximately $93.4 million. During the year ended December 31, 2003, the Company recorded a decrease in accrued merger costs as a result of settling a lease obligation earlier than anticipated and other adjustments to the net liabilities assumed (see Note 11). The existing technology is being amortized over three years and the covenant not to compete has been amortized over one year. In accordance with current accounting standards, the goodwill is not being amortized and will be tested for impairment as required by SFAS 142 (see Note 11). The Company anticipates that none of the $101.9 million of the intangible assets recorded in connection with the Vality acquisition will be deductible for income tax purposes.
F-40
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table represents the unaudited pro forma results of operations of the Company for the fiscal years ended December 31, 2003 and 2002 as if the acquisitions of Mercator and Vality had occurred as of the beginning of the applicable fiscal year. Pro forma adjustments related to the acquisition of iNuCom have been excluded as adjustment amounts are not material. The pro forma financial information below excludes IPRD charges of $2.0 million and $1.2 million in 2003 and 2002, respectively, since it is considered a material nonrecurring charge. The pro forma financial information has been prepared for comparative purposes only and does not necessarily reflect the results of operations that would have occurred had these three companies constituted a single entity during such periods.
| | | | | | | | | |
| | | Years Ended | |
| | | December 31, | |
| | | | |
| | | 2003 | | | 2002 | |
| | | | | | | |
| | | (In thousands, except for | |
| | | per share data) | |
| Net revenues | | $ | 244,111 | | | $ | 228,898 | |
| Net income (loss) | | $ | (4,572 | ) | | $ | (89,557 | ) |
| Diluted net income (loss) per share | | $ | (0.08 | ) | | $ | (1.45 | ) |
| Cash paid to acquire stock, net of cash acquired of $14.4 million | | $ | 94.9 |
| Cash paid and accrued for transaction costs | | | 5.0 |
| Stock options exchanged | | | 13.3 |
| Accrued merger, restructuring and other expenses | | | 36.2 |
| | |
|
| | Total | | $ | 149.4 |
| | |
|
F-36
The purchase price was allocated as follows:
| | | Accounts receivable | | $ | 11.2 | |
| | | Net fixed assets | | | 5.0 | |
| | | Other assets | | | 4.1 | |
| | |
| |
| | | | Total assets acquired | | | 20.3 | |
| | |
| |
| | | Current liabilities | | | (30.4 | ) |
| | | Deferred revenue | | | (19.0 | ) |
| | | Long term liabilities | | | (12.5 | ) |
| | |
| |
| | | | Total liabilities acquired | | | (61.9 | ) |
| | |
| |
| | | Net liabilities assumed, net of cash acquired | | | (41.6 | ) |
| | Assets held for sale | | | 6.8 | |
| | Deferred income taxes | | | 4.2 | |
| | Intangible assets: | | | | |
| | | Existing technology | | | 7.0 | |
| | | Covenants not to compete | | | 1.2 | |
| | | Customer relationships | | | 7.0 | |
| | | Goodwill | | | 162.8 | |
| | |
| |
| | | | Total intangible assets | | | 178.0 | |
| | In-process research and development | | | 2.0 | |
| | |
| |
| Total | | $ | 149.4 | |
| | |
| |
As of the date of the closing of the Mercator acquisition, the Company became responsible for the then outstanding $8.1 million principal loan balance owed by Mercator to its lender pursuant to the terms and conditions of the term loan facility with that lender (the "Loan Agreement"). The acquisition of Mercator on September 12, 2003 constituted a change in control of Mercator, which was an event of default under the Loan Agreement. On September 18, 2003 the lender waived the event of default subject to payment of all amounts due under the Loan Agreement. The Company repaid the entire loan balance prior to September 30, 2003. During October 2003 the remaining fees and the accrued interest liability of $0.2 million related to this loan were paid and the Loan Agreement was terminated.
The portion of the purchase price allocated to in-process research and development costs ("IPRD") in the Mercator acquisition was $2.0 million, or approximately 1% of the purchase price. At the acquisition date, Mercator's in-process project was Release 6.8 of the Mercator Inside Integrator Software product. This project was approximately 37% complete, based upon costs expended to date and estimated costs to complete the project. Mercator had incurred approximately $3.5 million in expenses related to this project at the date of the acquisition. The key features of Release 6.8 include multiple event server functionality, enhanced support for standard XML data and support for the latest 64-bit hardware, operating systems and application software.
As of the Mercator acquisition date, this technology had not reached technological feasibility and had no alternative use. The technological feasibility of an in-process product is established when the enterprise has completed all planning, designing, coding and testing activities that are necessary to establish that the product can be produced to meet its design specifications. The value of IPRD was determined using an income approach. This approach takes into consideration earnings remaining after deducting from cash flows related to the in-process technology the market rates of return on contributory assets, including assembled workforce, customer accounts and existing technology. The cash flows are then discounted to present value at an appropriate rate. Discount rates are determined by an analysis of the risks associated with each of the identified intangible asset. Given the riskier
F-37
nature of the cash flows related to the IPRD, a higher discount was warranted, and is based on the cost of equity plus 500 basis points. The resulting cash flows attributable to the IPRD was discounted at a rate of 15.0%. The net cash flows to which this discount rate was applied are based on management's estimates of revenues, operating expenses, and income taxes from such acquired technology. It is anticipated that, barring unforeseen circumstances, substantially all of the features of Release 6.8 of Mercator Inside Integrator Software project are expected to be completed in the second quarter of 2004. Some of the risks and uncertainties inherent in the estimated costs to complete the project and the attainment of completion, include, but are not limited to, the difficulty of predicting the duration of product development and the risks that changes in the product requirements will result in unexpected redesign activity.
The remaining identifiable intangible assets acquired, including existing technology, customer lists and agreements not to compete between the Company and former Mercator executives, were assigned fair values based upon an appraisal and amounted to $15.2 million in the aggregate. The Company believes that these identifiable intangible assets have no residual value. The existing technology and customer lists are being amortized over five years and the covenant not to compete is being amortized over one year. In determining the amortization method of these intangibles the Company considered the guidance of SFAS 142, which requires amortization of an intangible asset based upon the pattern in which the asset's economic benefits are consumed or otherwise used up. Based upon long range forecasts and management's assessment of the economic benefit of these intangibles, it was concluded that an accelerated amortization method could not be reliably determined. Accordingly, the identifiable intangible assets of Mercator will be amortized on a straight-line basis over their estimated useful life. In accordance with current accounting standards, the goodwill is not being amortized and will be tested for impairment as required by SFAS No. 142 (See Note 1 of Notes to Consolidated Financial Statements).
The total purchase price exceeded fair value of the net assets acquired and liabilities assumed resulted in goodwill of $162.8 million. The goodwill represents a significant portion of the purchase price. The Company believes that the majority of the benefits to be derived from this acquisition will be experienced through synergies, such as the elimination of redundant functions and facilities and cross selling opportunities, which are included in goodwill. The Company anticipates that, barring unforeseen circumstances, none of the $178.0 million of intangible assets recorded in connection with the Mercator acquisition will be deductible for income tax purposes. The Company is in the process of completing the purchase price allocation which may be subject to refinements since additional information may require adjustments to the opening balance sheet or changes in estimates related to the facilities reserves as discussed in Note 16 to the Notes to Consolidated Financial Statements.
During the three months ended December 31, 2003 the Company commenced efforts to sell its Key/Master data entry software line, which was formerly owned by Mercator, and is not part of the Company's core enterprise data integration offering. On January 27, 2004, the Company entered into a software purchase agreement with Phoenix Software International, Inc. ("Phoenix") pursuant to which the Company sold the rights to its Key/Master data entry product line. Accordingly, at December 31, 2003, this technology was recorded as an asset held for sale, as a component of other current assets, at its fair market value of $6.8 million.
On April 3, 2002, the Company acquired Vality, a private company that specialized in enterprise data quality management. The results of Vality's operations have been included in the consolidated financial statements since the date of the acquisition. The Company expects that this acquisition will enable the Company to create a market leading offering that integrates ETL (extraction, transformation, and load), metadata management, and data quality and data cleansing technologies. As of December 31, 2003, the Company has paid the net amount of $94.5 million to acquire Vality, which consists of $91.7 million paid to acquire 100% of the outstanding common and preferred shares of Vality and vested stock options, and $2.8 million for transaction costs, which is net of $7.0 million of
F-38
cash acquired from Vality. The acquisition was accounted for using the purchase method of accounting, and a summary of the purchase price for the acquisition is as follows (in millions):
| Cash paid to acquire stock and options (less cash acquired of $7.0 million) | | $ | 91.7 |
| Cash paid for transaction costs | | | 2.8 |
| Accrued merger costs | | | 3.8 |
| | |
|
| Total | | $ | 98.3 |
| | |
|
The purchase price was allocated as follows:
| Net liabilities assumed, net of cash acquired | | $ | (2.9 | ) |
| Deferred income taxes | | | (1.9 | ) |
| Intangible assets: | | | | |
| | Existing technology | | | 8.2 | |
| | Covenant not to compete | | | 0.3 | |
| | Goodwill | | | 93.4 | |
| | |
| |
| | Total intangible assets | | | 101.9 | |
| In-process research and development | | | 1.2 | |
| | |
| |
| Total | | $ | 98.3 | |
| | |
| |
The portion of the purchase price allocated to in-process research and development costs ("IPRD") in the Vality acquisition was $1.2 million, or approximately 1% of the total purchase price. The value allocated to the project identified as in process was charged to operations in the second quarter of 2002.
The remaining identified intangible assets acquired, including, without limitation, technology and covenants not to compete between the Company and certain former members of senior management of Vality, were assigned fair values based upon an independent appraisal and amounted to $8.5 million in the aggregate. The Company believes that these identified intangible assets have no residual value. The excess of the purchase price over the identified tangible and intangible assets was recorded as goodwill and amounted to approximately $93.4 million. During the year ended December 31, 2003, the Company recorded a decrease in accrued merger costs as a result of settling a lease obligation earlier than anticipated and other adjustments to the net liabilities assumed (see Note 11 of these Notes to Consolidated Financial Statements). The existing technology is being amortized over three years and the covenant not to compete has been amortized over one year. In accordance with current accounting standards, the goodwill is not being amortized and will be tested for impairment as required by SFAS No. 142 (See Note 11 of Notes to Consolidated Financial Statements). The Company anticipates that none of the $101.9 million of the intangible assets recorded in connection with the Vality acquisition will be deductible for income tax purposes.
On November 28, 2001, the Company acquired Torrent, a provider of highly scalable parallel processing infrastructure software for the development and execution of data warehousing, business intelligence and analytical applications. Under terms of the acquisition, the Company paid $44.1 million, of which $6.3 million was paid in 2002, to acquire all outstanding common and preferred shares of Torrent. In addition, the Company issued options to purchase 54,000 shares of Common Stock in exchange for outstanding options to purchase Torrent common stock.
F-39
The acquisition was accounted for using the purchase method of accounting, and a summary of the purchase price for the acquisition is as follows (in millions):
| Cash paid to acquire stock and options | | $ | 44.1 |
| Accrued merger costs | | | 1.8 |
| Fair value of stock options exchanged | | | 0.7 |
| | |
|
| Total | | $ | 46.6 |
| | |
|
The purchase price was allocated as follows:
| Net liabilities assumed, net of cash acquired | | $ | (3.2 | ) |
| Intangible assets: | | | | |
| | Existing technology | | | 4.1 | |
| | Customer list | | | 1.1 | |
| | Deferred compensation from exchanged stock options | | | 0.6 | |
| | Goodwill | | | 38.5 | |
| | |
| |
| | Total intangible assets | | | 44.3 | |
| In-process research and development | | | 5.5 | |
| | |
| |
| Total | | $ | 46.6 | |
| | |
| |
The portion of the purchase price allocated to in-process research and development costs in the Torrent acquisition was $5.5 million, or approximately 12% of the total purchase price. The value allocated to the project identified as IPRD was charged to operations in the fourth quarter of 2001.
The remaining identified intangible assets acquired were assigned fair values based upon an appraisal and amounted to $5.2 million. The excess of the purchase price over the identified tangible and intangible assets was recorded as goodwill and amounted to approximately $38.5 million. The existing technology and customer list are being amortized over three years. In accordance with current accounting standards, the goodwill is not being amortized and is tested for impairment as required by SFAS No. 142 (See Note 11 of Notes to Consolidated Financial Statements).
The following table represents the unaudited pro forma results of operations of the Company for the fiscal years ended December 31, 2003, 2002 and 2001 as if the acquisitions of Mercator, Torrent and Vality had occurred as of the beginning of the applicable fiscal year. The pro forma financial information below excludes IPRD charges of $2.0 million, $1.2 million and $5.5 million in 2003, 2002 and 2001, respectively, since it is considered a material nonrecurring charge. The pro forma financial information has been prepared for comparative purposes only and does not necessarily reflect the results of operations that would have occurred had these three companies constituted a single entity during such periods.
| | Years Ended December 31,
|
|---|
| | 2003
| | 2002
| | 2001
|
|---|
| | (In thousands, except for per share data)
|
|---|
| Net revenues | | $ | 244,111 | | $ | 228,898 | | $ | 635,488 |
| Net income (loss) | | $ | (4,572 | ) | $ | (89,557 | ) | $ | 581,750 |
| Diluted net income (loss) per share | | $ | (0.08 | ) | $ | (1.45 | ) | $ | 8.18 |
| |
Note 13 — Litigation Prior to the completion of the Mercator acquisition, Anthony Kolton, a purported shareholder of Mercator, filed an action on August 19, 2003 against the Company, Merger Sub, Mercator and certain
F-40
individual directors and officers of Mercator (the "Individual Defendants") in the Court of Chancery for the State of Delaware. The complaint alleged, among other claims directed at the Individual Defendants, that the disclosures in the Schedule 14D-9 filed in connection with the Company's tender offer were incomplete and inadequate. Kolton sought an order from the Court enjoining the offer. All defendants vigorously denied and continue to deny that any of them is subject to any liability whatsoever by reason of any of the matters referenced in the complaint.
On August 22, 2003, the parties to the Action entered into a Memorandum of Understanding ("MOU") providing for settlement of the action following the making of certain additional disclosure by Mercator (which disclosure was included in an amended Schedule 14D-9 disseminated to Mercator stockholders). Pursuant to the MOU the defendants also agreed not to oppose Kolton's request for attorneys' fees not to exceed $150,000. On September 12, 2003, Ascential completed its acquisition of Mercator. On October 2, 2003, the parties entered into a Stipulation and Agreement of Settlement on the terms set forth in the MOU.
On October 7, 2003, the Court entered an order certifying a class composed of all holders of common stock of Mercator and their successors in interest and transferees, immediate and remote, from August 2, 2003 through and including September 12, 2003, and excluding the defendants in the action, pursuant to a Stipulation of Settlement entered into by the parties to the Action, which also provides for the dismissal of the action with prejudice upon the terms and conditions stated therein. The Court conducted a Settlement Hearing on November 24, 2003, and following such hearing entered an order dismissing the litigation on the terms set forth in the Stipulation and Agreement of Settlement, including payment of Kolton's attorneys' fees not to exceed $150,000.
From time to time, in the ordinary course of business, the Company is involved in various other legal proceedings and claims, including but not limited to those related to the operations of the former database business and/or asserted by former employees of the Company relating to their employment or compensation by the Company. The Company does not believe that any of these other proceedings and claims will have a material adverse effect on the Company's business or financial condition.
Note 14 —
| Sale of the Database Business Assets Holdback. On July 1, 2001, the Company completed the initial closing of the IBM Transaction, which consisted of the sale to IBM of substantially all of the assets and certain liabilities of the Company's database business for $1.0 billion in cash. The IBM Transaction was completed on August 1, 2001, upon the closing of the sale of the assets related to the database business in the nine remaining countries that were not closed on July 1, 2001. As part of the IBM Transaction, IBM retained $100.0 million of the sale proceeds as a holdback (the "Holdback") to satisfy the indemnification obligations that might have arisen under the IBM Transaction purchase agreement (the "MPA"). The MPA provided that the Company would indemnify IBM and its affiliates against any loss, claim, damage, liability or other expense incurred in connection with (i) any failure of any representation or warranty of the Company under the MPA to be true and correct in all respects; provided, however, that any such liability, in the aggregate, exceeds on a cumulative basis $10.0 million (and only to the extent of any such excess); (ii) any breach of any obligation of the Company under the MPA; (iii) any of the Excluded Liabilities, as defined in the MPA; or (iv) the operation or ownership of the Excluded Assets, as defined in the MPA. The MPA provided that IBM would retain the Holdback until January 1, 2003, except for any funds necessary to provide for any claims made prior to that date. The MPA also provided that the Company would receive interest from July 1, 2001 to the payment date of the Holdback. In January 2003, IBM released the full amount of the Holdback to the Company, in the amount of $109.3 million, which included accrued interest. Indemnification obligations of the Company with respect to certain representations and warranties under the MPA terminated on July 1, 2003.
F-41
Working Capital Adjustment. Under the terms of the MPA, the Company was obligated to transfer $124.0 million in net working capital to IBM from the database business operations (the "Working Capital Adjustment") as of July 1, 2001. Working Capital was defined in the MPA as the sum of (i) net accounts receivable and (ii) prepaid expenses, minus (a) ordinary course trade payables and (b) accrued ordinary course expenses (other than any such expenses incurred in connection with former employees, officers, directors, or independent contractors). These items were a subset of the various assets and liabilities of the database business that were transferred to IBM upon the closing of the IBM Transaction.
On March 29, 2002, the Company was paid $11.0 million by IBM in final settlement of the net working capital adjustment. If the net working capital transferred to IBM on the closing date exceeded $124.0 million, IBM was obligated to pay the Company 50% of the excess over $124.0 million. If the net working capital transferred to IBM was less than $124.0 million, the Company was obligated to pay IBM an amount equal to the shortfall. As of December 31, 2001, the Company expected to be reimbursed at least $3.7 million from IBM, which it estimated to be the minimum net working capital adjustment. Accordingly, the Company had previously recognized the minimum net working capital adjustment of $3.7 million as an increase to the gain resulting from the IBM Transaction. As a result, the Company recorded the incremental $7.3 million received in "Gain on sale of database business, net of adjustments" during the first quarter of 2002.
Gain Adjustment. During 2002, the Company also recorded a gain adjustment of $0.3 million, primarily to decrease the long-term assets sold to IBM and a $1.4 million loss to "Gain on sale of database business, net". The $1.4 million loss consists of $0.9 million of accrued professional and administrative fees required to dissolve subsidiaries rendered inactive as a consequence of the IBM Transaction and $0.5 million to adjust the segmentation of accounts receivable sold to IBM as part of the sale of the database business assets.
Accrued IBM Transaction Costs. As a result of the IBM Transaction, the Company recorded a $41.9 million charge during 2001 to accrue for costs associated with the sale of the database business assets. The following table sets forth the components of the accrued transaction costs and related cash payments made during the years ended December 31, 2003 and 2002 (in millions):
|
Holdback. On July 1, 2001, the Company completed the initial closing of the IBM Transaction, which consisted of the sale to IBM of substantially all of the assets and certain liabilities of the Company’s database business for $1.0 billion in cash. The IBM Transaction was completed on August 1, 2001, upon the closing of the sale of the assets related to the database business in the nine remaining countries that were not closed on July 1, 2001. As part of the IBM Transaction, IBM retained $100.0 million of the sale proceeds as a holdback (the “Holdback”) to satisfy the indemnification obligations that might have arisen under the IBM Transaction purchase agreement (the “MPA”). The MPA provided that the Company would indemnify IBM and its affiliates against any loss, claim, damage, liability or other expense incurred in connection with (i) any failure of any representation or warranty of the Company under the MPA to be true and correct in all respects; provided, however, that any such liability, in the aggregate, exceeds on a cumulative basis $10.0 million (and only to the extent of any such excess); (ii) any breach of any obligation of the Company under the MPA; (iii) any of the Excluded Liabilities, as defined in the MPA; or (iv) the operation or ownership of the Excluded Assets, as defined in the MPA. The MPA provided that IBM would retain the Holdback until January 1, 2003, except for any funds necessary to provide for any claims made prior to that date. The MPA also provided that the Company would receive interest from July 1, 2001 to the payment date of the Holdback. In January 2003, IBM released the full amount of the Holdback to the Company, in the amount of $109.3 million, which included accrued interest. Indemnification obligations of the Company with respect to certain representations and warranties under the MPA terminated on July 1, 2003.
Working Capital Adjustment. Under the terms of the MPA, the Company was obligated to transfer $124.0 million in net working capital to IBM from the database business operations (the “Working Capital Adjustment”) as of July 1, 2001. Working Capital was defined in the MPA as the sum of (i) net accounts receivable and (ii) prepaid expenses, minus (a) ordinary course trade payables and (b) accrued ordinary course expenses (other than any such expenses incurred in connection with former employees, officers, directors, or independent contractors). These items were a subset of the various assets and liabilities of the database business that were transferred to IBM upon the closing of the IBM Transaction.
On March 29, 2002, the Company was paid $11.0 million by IBM in final settlement of the net working capital adjustment. If the net working capital transferred to IBM on the closing date exceeded $124.0 million, IBM was obligated to pay the Company 50% of the excess over $124.0 million. If the net working capital transferred to IBM was less than $124.0 million, the Company was obligated to pay IBM an amount equal to the shortfall. As of December 31, 2001, the Company expected to be reimbursed at least $3.7 million from
F-41
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
IBM, which it estimated to be the minimum net working capital adjustment. Accordingly, the Company had previously recognized the minimum net working capital adjustment of $3.7 million as an increase to the gain resulting from the IBM Transaction. As a result, the Company recorded the incremental $7.3 million received in “Gain on sale of database business, net of adjustments” during the first quarter of 2002.
Gain Adjustment. During 2002, the Company also recorded reductions to the gain recorded of $0.2 million, primarily to decrease the long-term assets sold to IBM, $3.2 million related to the resolution of informal matters raised by IBM related to the IBM Transaction and $0.9 million consisting of accrued professional and administrative fees required to dissolve subsidiaries rendered inactive as a consequence of the IBM Transaction.
Accrued IBM Transaction Costs. As a result of the IBM Transaction, the Company recorded a $41.9 million charge during 2001 to accrue for costs associated with the sale of the database business assets. The following table sets forth the components of the accrued transaction costs and related cash payments made during the years ended December 31, 2004, 2003 and 2002 (in millions):
| | | | | | | | | | | | | | | | | |
| | | Accrual | | | | | | | Accrual | |
| | | Balance at | | | | | | | Balance at | |
| | | December 31, | | | Charges and | | Cash | | | December 31, | |
| | | 2003 | | | Adjustments | | Payments | | | 2004 | |
| | | | | | | | | | | | |
| Professional fees | | $ | 0.5 | | | $ | — | | | $ | (0.2 | ) | | $ | 0.3 | |
| Severance and employment-related costs | | | 1.4 | | | | — | | | | — | | | | 1.4 | |
| | | | | | | | | | | | | |
| Accrued Transaction costs and related charges included in accrued expenses | | $ | 1.9 | | | $ | — | | | $ | (0.2 | ) | | $ | 1.7 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Accrual | | | | | | | Accrual | |
| | | Balance at | | | | | | | Balance at | |
| | | December 31, | | | Charges and | | | Cash | | | December 31, | |
| | | 2002 | | | Adjustments | | | Payments | | | 2003 | |
| | | | | | | | | | | | | |
| Professional fees | | $ | 1.2 | | | $ | — | | | $ | (0.7 | ) | | $ | 0.5 | |
| Severance and employment-related costs | | | 4.4 | | | | (1.7 | ) | | | (1.3 | ) | | | 1.4 | |
| | | | | | | | | | | | | |
| Accrued Transaction costs and related charges included in accrued expenses | | $ | 5.6 | | | $ | (1.7 | ) | | $ | (2.0 | ) | | $ | 1.9 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Accrual | | | | | | | Accrual | |
| | | Balance | | | | | | | Balance | |
| | | December 31, | | | Charges/ | | | Cash | | | December 31, | |
| | | 2001 | | | Adjustments | | | Payments | | | 2002 | |
| | | | | | | | | | | | | |
| Professional fees | | $ | 3.0 | | | $ | 2.1 | | | $ | (3.9 | ) | | $ | 1.2 | |
| Severance and employment-related costs | | | 10.3 | | | | (0.9 | ) | | | (5.0 | ) | | | 4.4 | |
| Other Charges | | | 0.7 | | | | (0.3 | ) | | | (0.4 | ) | | | — | |
| | | | | | | | | | | | | |
| Accrued transaction costs and related charges included in accrued expenses | | $ | 14.0 | | | $ | 0.9 | | | $ | (9.3 | ) | | $ | 5.6 | |
| | | | | | | | | | | | | |
Professional fees primarily consist of fees for investment bankers, attorneys and accountants for services provided related to the IBM Transaction. Severance and employment-related charges primarily consist of (i) severance payments and related taxes for approximately 30 sales and marketing employees and 70 general and administrative employees of the database business who did not join IBM after the IBM Transaction, and (ii) a $4.7 million charge that related to the modification of vesting and exercise terms of stock options for certain terminated executives and for database employees who joined IBM. As discussed above, during the third quarter of 2002, the Company accrued $0.9 million of professional and administrative fees required to
F-42
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
dissolve subsidiaries rendered inactive as a consequence of the IBM Transaction. During 2002, the Company reversed $0.9 million of accrued severance and related costs, as certain employees terminated employment voluntarily, reversed $0.3 million of accrued transfer taxes as the Company was ultimately required to pay less than what was originally estimated, and accrued $1.2 million of professional fees to reflect an increase in estimated costs to reorganize the Company as a consequence of the IBM Transaction. The accrual balance of $1.7 million for professional fees, severance and related costs is expected to be paid on various dates extending through 2007. During 2003, the Company reversed $1.7 million of taxes related to severance to other income, reflecting the restructuring of various underlying severance agreements.
The database business and the Company’s ongoing operations were in the same line of business, and the database business did not represent “a separate major line of business or class of customer.” Both sold information management software to medium-sized and large enterprises. In addition, the product offerings of the two businesses worked together to form an information management system. The customers of the Company’s ongoing business needed a database in order for the Company’s products to perform; therefore, the target markets for the two businesses were the same. In addition, the assets, results of operations, and activities of the database business could not be clearly distinguished from the other assets, results of operations and activities of the Company prior to 2001. As such, the sale of the database business assets to IBM represented the sale of a product line rather than the disposal of a business segment. Accordingly, the ongoing transition costs associated with the winding down of the database business have been recorded as a component of continuing operations.
Transition Services and Other. The Company and IBM provided certain transition services to each other for a limited period of time following the closing of the IBM Transaction. These services mainly consisted of the performance of certain administrative functions, hosting systems and the provision of office space in shared facilities of which one of the parties is the primary leaseholder. To facilitate the provision of these services, at the time of the IBM Transaction, the Company and IBM entered into reciprocal transitional service agreements, under which both parties agreed to provide and utilize transitional services at agreed established rates that the Company believes represent the fair value of such services. During the year ended December 31, 2002, the Company provided to IBM and purchased from IBM transitional services amounting to $3.8 million and $2.5 million, respectively. The provision for shared administrative functions and office space in shared facilities ended during the second quarter of 2002. Effective December 31, 2002, the provision of shared infrastructure cost was substantially completed, except with respect to certain software support functions that were completed on March 31, 2003.
During 2002, the Company paid IBM $13.2 million to fund the transfer of certain employee related accruals, $2.9 million to buy out certain lease obligations, $2.0 million to pay for the transfer of certain long-term assets and $2.4 million for royalties and other obligations owed to IBM. In conjunction with the payments made to IBM, IBM paid the Company $21.6 million to fund certain severance costs, $11.0 million to settle the net working capital adjustment under the Agreement and $0.8 million for taxes and other fees.
| | Accrual
Balance at
December 31,
2002
| | Charges and
Adjustments
| | Cash
Payments
| | Accrual
Balance at
December 31,
2003
|
|---|
| Professional fees | | $ | 1.2 | | $ | — | | $ | (0.7 | ) | $ | 0.5 |
| Severance and employment-related costs | | | 4.4 | | | (1.7 | ) | | (1.3 | ) | | 1.4 |
| | |
| |
| |
| |
|
| Accrued Transaction costs and related charges included in accrued expenses | | $ | 5.6 | | $ | (1.7 | ) | $ | (2.0 | ) | $ | 1.9 |
| | |
| |
| |
| |
|
| | Accrual
Balance
December 31,
2001
| | Charges/
Adjustments
| | Cash
Payments
| | Accrual
Balance
December 31,
2002
|
|---|
| Professional fees | | $ | 3.0 | | $ | 2.1 | | $ | (3.9 | ) | $ | 1.2 |
| Severance and employment-related costs | | | 10.3 | | | (0.9 | ) | | (5.0 | ) | | 4.4 |
| Other Charges | | | 0.7 | | | (0.3 | ) | | (0.4 | ) | | — |
| | |
| |
| |
| |
|
| Accrued transaction costs and related charges included in accrued expenses | | $ | 14.0 | | $ | 0.9 | | $ | (9.3 | ) | $ | 5.6 |
| | |
| |
| |
| |
|
F-42
| | Charges
| | Payments/
Non-Cash
Charges
| | Due
from
IBM
| | Accrual Balance
December 31,
2001
|
|---|
| Professional fees | | $ | 35.7 | | $ | (32.7 | ) | $ | — | | $ | 3.0 |
| Severance and employment-related costs | | | 24.6 | | | (14.3 | ) | | — | | | 10.3 |
| Severance reimbursement from IBM | | | (21.3 | ) | | — | | | 21.3 | | | — |
| Other charges | | | 2.9 | | | (2.2 | ) | | — | | | 0.7 |
| | |
| |
| |
| |
|
| Accrued transaction costs and related charges included in Accrued expenses | | $ | 41.9 | | $ | (49.2 | ) | $ | 21.3 | | $ | 14.0 |
| | |
| |
| |
| |
|
Professional fees primarily consist of fees for investment bankers, attorneys and accountants for services provided related to the IBM Transaction. Severance and employment-related charges primarily consist of (i) severance payments and related taxes for approximately 30 sales and marketing employees and 70 general and administrative employees of the database business who did not join IBM after the IBM Transaction, and (ii) a $4.7 million charge that related to the modification of vesting and exercise terms of stock options for certain terminated executives and for database employees who joined IBM. As discussed above, during the third quarter of 2002, the Company accrued $0.9 million of professional and administrative fees required to dissolve subsidiaries rendered inactive as a consequence of the IBM Transaction. During 2002, the Company reversed $0.9 million of accrued severance and related costs, as certain employees terminated employment voluntarily, reversed $0.3 million of accrued transfer taxes as the Company was ultimately required to pay less than what was originally estimated, and accrued $1.2 million of professional fees to reflect an increase in estimated costs to reorganize the Company as a consequence of the IBM Transaction. As of December 31, 2003, severance payments and related taxes had been paid in connection with the termination of substantially all of these employees. The accrual balance of $1.9 million for professional fees, severance and related costs is expected to be paid on various dates extending through 2007. During 2003, the Company reversed $1.7 million of taxes related to severance to other income, reflecting the restructuring of various underlying severance agreements.
As a result of the IBM Transaction, the Company has recorded a cumulative gain, after transaction costs and related charges, but excluding income taxes, of $868.7 million through December 31, 2002. The following table sets forth the components of the gain (in millions):
| Cash proceeds received from IBM | | $ | 900.0 | |
| IBM holdback | | | 100.0 | |
| | |
| |
| Gross sale proceeds | | | 1,000.0 | |
| Deferred revenue adjustment | | | (11.6 | ) |
| Employee—related accrual adjustment | | | (13.2 | ) |
| Minimum net working capital adjustment | | | 3.7 | |
| | |
| |
| Adjusted sale proceeds | | | 978.9 | |
| Net assets transferred to IBM | | | (71.3 | ) |
| Transaction costs and related charges | | | (41.9 | ) |
| | |
| |
| Gain resulting from the IBM Transaction through December 31, 2001 | | | 865.7 | |
| Final net working capital adjustment | | | 7.3 | |
| Long-term asset segmentation | | | 0.3 | |
| Payment of informal claims | | | (3.2 | ) |
| Accrued costs to dissolve subsidiaries | | | (0.9 | ) |
| Adjustment of accounts receivable segmentation | | | (0.5 | ) |
| | |
| |
| Gain, net of adjustments, resulting from the IBM Transaction through December 31, 2002 | | $ | 868.7 | |
| | |
| |
F-43
The database business and the Company's ongoing operations were in the same line of business, and the database business did not represent "a separate major line of business or class of customer." Both sold information management software to medium-sized and large enterprises. In addition, the product offerings of the two businesses worked together to form an information management system. The customers of the Company's ongoing business needed a database in order for the Company's products to perform; therefore, the target markets for the two businesses were the same. In addition, the assets, results of operations, and activities of the database business could not be clearly distinguished from the other assets, results of operations and activities of the Company prior to 2001. As such, the sale of the database business assets to IBM represented the sale of a product line rather than the disposal of a business segment.
Transition Services and Other. The Company and IBM provided certain transition services to each other for a limited period of time following the closing of the IBM Transaction. These services mainly consisted of the performance of certain administrative functions, hosting systems and the provision of office space in shared facilities of which one of the parties is the primary leaseholder. To facilitate the provision of these services, at the time of the IBM Transaction, the Company and IBM entered into reciprocal transitional service agreements, under which both parties agreed to provide and utilize transitional services at agreed established rates that the Company believes represent the fair value of such services. During the year ended December 31, 2002, the Company provided to IBM and purchased from IBM transitional services amounting to $3.8 million and $2.5 million, respectively. During the year ended December 31, 2001, the Company provided transitional services to IBM totaling $2.6 million and purchased transitional services from IBM totaling $4.1 million. The provision for shared administrative functions and office space in shared facilities ended during the second quarter of 2002. Effective December 31, 2002, the provision of shared infrastructure cost was substantially completed, except with respect to certain software support functions that were completed on March 31, 2003.
During 2002, the Company paid IBM $13.2 million to fund the transfer of certain employee related accruals, $2.9 million to buy out certain lease obligations, $2.0 million to pay for the transfer of certain long-term assets and $2.4 million for royalties and other obligations owed to IBM. In conjunction with the payments made to IBM, IBM paid the Company $21.6 million to fund certain severance costs, $11.0 million to settle the net working capital adjustment under the Agreement and $0.8 million for taxes and other fees.
| |
Note 1514 — | Termination of the Content Management Product Line On January 22, 2002, the Company's Board of Directors endorsed the decision to divest the Company's content management product line because it did not align with the Company's strategic goals. The net assets of the product line were available for immediate sale and an investment bank was engaged to assist in the divestiture process. At the time, the Company intended to complete the divestiture as soon as possible and, in any event, within one year of the Company's decision to sell the product line.
As of March 31, 2002, the Company believed that the actions taken by the Company met the criteria under SFAS No. 144 for classification of a disposal group as "Assets held for sale" and "Liabilities associated with assets held for sale" and used this presentation on the balance sheet in the report filed on Form 10-Q for the three months ended March 31, 2002. Accordingly, the Company ceased amortizing capitalized software costs as of January 22, 2002. The Company has included the operating results of this product line for the year ended December 31, 2002, as a component of "Operating loss" in the Condensed Consolidated Statement of Operations. The Company was unable to distinguish certain historical financial information associated with this product line prior to January 2002; accordingly, the Company has not presented historical results as discontinued operations in accordance with the provisions of SFAS No. 144. The assets related to the content management
F-44
product line were evaluated by the Company and were carried at cost, which was less than the estimated fair market value net of costs to sell. As of May
|
During 2002, the Company terminated its content management product line, except for completion of previously committed consulting and support contracts, and recorded charges totaling $7.8 million. Total charges consisted of $4.5 million categorized as “Cost of software” for the impairment of software costs previously capitalized and charges totaling $3.3 million as “Merger, realignment, and other charges”. The $3.3 million of “Merger, realignment, and other charges” includes $1.7 million of severance costs, $0.8 million of equipment impairment costs and $0.8 million of other exit costs. In addition, the Company recorded $1.7 million in bad debt expense for the year ended December 31, 2002 related to the write off of accounts receivable balances that were deemed uncollectible as a result of the termination of this product line.
F-43
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 15 2002, the Company did not expect to record a loss on the divestiture of its content management product line. During June 2002, the Company ceased efforts to find a buyer for its content management product line as no interested buyers had been identified. During the three months ended June 30, 2002, in conjunction with its decision to cease efforts to find a buyer, the Company terminated associated operations, except for completion of previously committed consulting and support contracts, and recorded charges totaling $7.3 million consisting of $4.5 million categorized as "Cost of software" for the impairment of software costs previously capitalized and charges totaling $2.8 million as "Merger, realignment, and other charges". The $2.8 million of "Merger, realignment, and other charges" includes $1.4 million of severance costs, $0.8 million of equipment impairment costs and $0.6 million of other exit costs. During the three months ended September 30, 2002, the Company recorded additional charges totaling $0.5 million as "Merger, realignment, and other charges" comprised of $0.3 million of severance costs and $0.2 million of other exit costs. In addition, the Company recorded $1.7 million in bad debt expense for the year ended December 31, 2002 related to the write off of accounts receivable balances that were deemed uncollectible as a result of the termination of this product line.
Note 16 —
| Accrued Merger, Realignment and Other Charges The following table summarizes the balance of components of the "Accrued merger, realignment and other charges" at December 31, 2003 and 2002 (in millions):
|
The following table summarizes the balance of components of the “Accrued merger, realignment and other charges” at December 31, 2004 and 2003 (in millions):
| | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| Facility and equipment charges resulting from the IBM Transaction | | $ | 6.7 | | | $ | 8.8 | |
| Facility, severance, and other accruals arising from the Mercator acquisition | | | 26.1 | | | | 36.9 | |
| Other accrued merger and realignment charges | | | 0.1 | | | | 1.0 | |
| | | | | | | |
| Total accrued merger, realignment and other charges | | $ | 32.9 | | | $ | 46.7 | |
| | | | | | | |
During the year ended December 31, 2004, the Company recorded $1.3 million and $3.7 million of merger, realignment and other charges related to foreign currency translation and revised assumptions for facility and equipment charges, net of sublease income, resulting from the IBM Transaction and Mercator acquisition, respectively. The Company also reversed $0.2 million other exit costs previously recorded under the third quarter 2002 realignment plan.
During the year ended December 31, 2003, the Company recorded $3.9 million of merger, realignment and other charges consisting of $2.0 million related to its third quarter 2003 realignment plan and $2.4 million related to revised assumptions for facility and equipment charges resulting from the IBM Transaction. The Company also reversed $0.3 million of facility and other exit costs previously recorded as a result of other actions initiated during 2002 and 2001, the 2000 strategic realignment, and the acquisition of Ardent Software, Inc. (“Ardent”) and other charges.
The components of the Company’s net merger, realignment and other charges are outlined below.
| | December 31, 2003
| | December 31, 2002
|
|---|
| Facility and equipment charges resulting from the IBM Transaction | | $ | 8.8 | | $ | 13.0 |
| Facility, severance, and other accruals arising from the Mercator acquisition | | | 36.9 | | | — |
| Other accrued merger and realignment charges: | | | | | | |
| | Third quarter 2003 realignment | | | 0.8 | | | — |
| | Third quarter 2002 realignment | | | 0.2 | | | 1.5 |
| | 2000 strategic realignment | | | — | | | 0.7 |
| | Ardent merger and other | | | — | | | 0.5 |
| | |
| |
|
| | Total other accrued merger and realignment charges | | $ | 1.0 | | $ | 2.7 |
| | |
| |
|
| | Total accrued merger, realignment and other charges | | $ | 46.7 | | $ | 15.7 |
| | |
| |
|
During the year ended December 31, 2003, the Company recorded $3.9 million of "Merger, realignment and other" charges consisting of $2.0 million related to its third quarter 2003 realignment plan and $2.4 million related to revised assumptions for facility and equipment charges resulting from the IBM Transaction. The Company also reversed $0.3 million of facility and other exit costs previously recorded as a result of other actions initiated during 2002 and 2001, the 2000 strategic realignment, and the acquisition of Ardent Software, Inc. ("Ardent") and other charges.
The components of the Company's net merger, realignment and other charges are outlined below.
| |
| Facility and Equipment Charges resulting from IBM Transaction As a result of the IBM Transaction (see Note 14 of Notes to Consolidated Financial Statements) the Company no longer required as much facility space and, accordingly, recorded charges
|
As a result of the IBM Transaction (see Note 13), we no longer required as much facility space and, accordingly, recorded an initial charge in 2001 and adjustments during
2002, 2003 and 2004 for facilities and equipment costs related to our vacant, or partially vacant, facilities. The accumulated charges were comprised of reserves for residual lease obligations, restoration costs and write-offs related to leasehold improvements and other fixed assets at these vacated, and partially vacated, facilities. The following table summarizes the accrual activity for the remaining accrual consisting entirely of residual leas obligations for the years ended December 31, 2004, 2003 and 2002
and 2001 for facilities and equipment costs related to the Company's vacant,F-45
or partially vacant, facilities. The accumulated charges were comprised of reserves for residual lease obligations and restoration costs and write-offs related to leasehold improvements and other fixed assets at these vacated, and partially vacated, facilities. The following table summarizes the accrual activity for the years ended December 31, 2003, 2002, and 2001 (in millions):
| | | | | | | | | | | | | | | | | |
| | | Accrual Balance | | | | | | | Accrual Balance | |
| | | at Beginning | | | Charges/ | | | Cash | | | at End | |
| | | of Year | | | Adjustments | | | Payments | | | of Year | |
| | | | | | | | | | | | | |
| Year Ended December 31, 2004 | | $ | 8.8 | | | $ | 1.3 | | | $ | (3.4 | ) | | $ | 6.7 | |
| Year Ended December 31, 2003 | | $ | 13.0 | | | $ | 2.4 | | | $ | (6.6 | ) | | $ | 8.8 | |
| Year Ended December 31, 2002 | | $ | 25.0 | | | $ | 4.3 | | | $ | (16.3 | ) | | $ | 13.0 | |
The $6.7 million of residual lease obligations at December 31, 2004 is comprised of $5.8 million of lease-related payments expected to be made for these facilities through the end of each corresponding lease term, net of rental payments from IBM or other sublessees, and $0.9 million of estimated restoration costs for facilities that the Company has either exited or finalized plans to exit. The leases expire from 2005 through 2018.
On March 31, 2002, the Company paid IBM $2.9 million for a release from lease obligations in seven facilities located in the United States and the United Kingdom while assuming additional lease obligations for
F-44
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
two facilities in Ireland and Germany. The result of the negotiated release was a reduction in the Company’s accrual for previously estimated lease obligations for the seven facilities by an aggregate of $7.0 million while increasing its previously estimated obligation by $2.0 million for the facilities in Ireland and Germany, resulting in a $5.0 million net reduction in the total charge. Additionally, during the year ended December 31, 2002, the Company revised the assumptions used to calculate the estimate of residual lease obligations and restoration costs for its other remaining properties that resulted in $9.3 million of adjustments to the Company’s facilities accrual. The majority of the adjustment related to decreasing market prices for sublease rental receipts, difficulty in obtaining sublease tenants, primarily in the United States and Europe, and additional costs arising from negotiations to exit facilities prior to the end of the lease term. In total the Company estimated it would receive $11.6 million of sublease income, $2.8 million for properties already sublet and $8.8 million from properties where a sublet was anticipated. The Company’s sublease estimates assumed that no subtenants would default on rental payments and that the Company would be able to obtain subtenants at local market rates where market conditions were considered favorable. Sublease assumptions also included a vacancy period from the time the Company vacated the facility to the time the subtenant began to pay rent. The following sets forth the components of the charges recorded to “Merger, realignment and other charges” during the year ended December 31, 2002 (in millions):
| | | | | |
| | | Year Ended | |
| | | December 31, | |
| | | 2002 | |
| | | | |
| Release of lease obligations | | $ | (7.0 | ) |
| Additional assumed lease obligations | | | 2.0 | |
Revision of assumptions to reflect current market conditions and negotiated
exit costs | | | 9.3 | |
| | | | |
| Net charge | | $ | 4.3 | |
| | | | |
During the years ended December 31, 2004 and 2003 we recorded charges of $1.3 million and $2.4 million, respectively, for additional facilities and equipment costs at both domestic and international locations as a result of foreign currency translation and changes in the estimates of remaining residual lease obligations and estimated sublease income.
The Company may record additional adjustments or charges in the future due to changes in estimates arising from the size and quantity of its facilities that are being exited and the volatility of the real estate markets in which the Company’s facilities are located. As of December 31, 2004, barring unforeseen circumstances, the Company does not expect future charges related to undiscounted lease obligations and restoration costs, excluding estimated sublease income, to exceed $1.6 million, the maximum remaining unaccrued obligation under existing contractual lease terms.
| | Accrual
Balance at
December 31,
2002
| | Cash
Payments
| | Charges/
Adjustments
| | Accrual
Balance at
December 31,
2003
|
|---|
| Residual lease obligations and restoration costs | | $ | 13.0 | | $ | (6.6 | ) | $ | 2.4 | | $ | 8.8 |
| | Accrual
Balance at
December 31,
2001
| | Cash
Payments
| | Charges/
Adjustments
| | Accrual
Balance at
December 31,
2002
|
|---|
| Residual lease obligations and restoration costs | | $ | 25.0 | | $ | (16.3 | ) | $ | 4.3 | | $ | 13.0 |
| | Charges
| | Cash
Payments
| | Non-cash
Charges
| | Accrual
Balance at
December 31, 2001
|
|---|
| Residual lease obligations and restoration costs | | $ | 33.0 | | $ | (8.0 | ) | $ | — | | $ | 25.0 |
| Fixed asset write-offs | | | 2.3 | | | — | | | (2.3 | ) | | — |
| | |
| |
| |
| |
|
| | | $ | 35.3 | | $ | (8.0 | ) | $ | (2.3 | ) | $ | 25.0 |
| | |
| |
| |
| |
|
The $8.8 million of residual lease obligations at December 31, 2003 is comprised of $7.6 million of lease-related payments that the Company estimates it will make for each facility through the end of the corresponding lease term, net of rental payments from IBM or other sublessees, and $1.2 million of estimated restoration costs for facilities that the Company has either exited or finalized plans to exit. The unpaid residual lease obligations and restoration costs relate to facilities that the Company has exited or had plans to exit at December 31, 2003 and expire from 2003 through 2008.
The Company may record additional adjustments or charges in the future due to changes in estimates arising from the size and quantity of its facilities that are being exited and the volatility of the real estate markets in which the Company's facilities are located. As of December 31, 2003, barring unforeseen circumstances, the Company does not expect future charges related to undiscounted lease obligations and restoration costs, excluding estimated sublease income, to exceed $2.2 million, the maximum remaining unaccrued obligation under existing contractual lease terms.
On March 31, 2002, the Company paid IBM $2.9 million for a release from lease obligations in seven facilities located in the United States and the United Kingdom while assuming additional lease obligations for two facilities in Ireland and Germany. The result of the negotiated release was a reduction in the Company's accrual for previously estimated lease obligations for the seven facilities by an aggregate of $7.0 million while increasing its previously estimated obligation by $2.0 million for the facilities in Ireland and Germany, resulting in a $5.0 million net reduction in the total charge.
During the year ended December 31, 2002, the Company revised the assumptions used to calculate the estimate of residual lease obligations and restoration costs for its other remaining properties that resulted in $9.3 million of adjustments to the Company's facilities accrual. The majority of the adjustment related to decreasing market prices for sublease rental receipts, difficulty in obtaining sublease tenants, primarily in the United States and Europe, and additional costs arising from
F-46
negotiations to exit facilities prior to the end of the lease term. In total the Company estimated it would receive $11.6 million of sublease income, $2.8 million for properties already sublet and $8.8 million from properties where a sublet was anticipated. The Company's sublease estimates assumed that no subtenants would default on rental payments and that the Company would be able to obtain subtenants at local market rates where market conditions were considered favorable. Sublease assumptions also included a vacancy period from the time the Company vacated the facility to the time the subtenant began to pay rent. The following sets forth the components of the charges recorded to "Merger, realignment and other charges" during the year ended December 31, 2002 (in millions):
| | Year Ended
December 31, 2002
| |
|---|
| Release of lease obligations | | $ | (7.0 | ) |
| Additional assumed lease obligations | | | 2.0 | |
| Revision of assumptions to reflect current market conditions and negotiated exit costs | | | 9.3 | |
| | |
| |
| Net charge | | $ | 4.3 | |
| | |
| |
In connection with the IBM Transaction (See Note 14 of Notes to Consolidated Financial Statements), the Company recorded a $35.3 million charge during 2001 for facilities and equipment costs related to facilities that the Company no longer occupied at December 31, 2001. This charge was comprised of a reserve for residual lease obligations and restoration costs and write-offs related to leasehold improvements and other fixed assets at these abandoned facilities. The $33.0 million charge for residual lease obligations was based upon lease obligations that the Company estimated it would incur from the date of the Company's exit from the facility to the end of the corresponding lease term, net of rental payments from IBM or other sub-lessees. This charge also included estimated restoration costs for facilities that the Company had either exited or finalized plans to exit as of December 31, 2001. The leases relating to facilities that the Company had exited or planned to exit at December 31, 2001 expired beginning in 2002 through 2008. Included in the $33.0 million charge for residual lease obligations and restoration costs was $1.7 million of lease payments made in 2001 that related to vacant space in facilities that the Company planned to exit permanently, but had not completely exited by December 31, 2001. The Company expected to complete the permanent exiting of these facilities at various dates during 2002. Lease payments to be made prior to the permanent exit date were not accrued.
| |
| Facility, severance, and other accruals arising from the Mercator acquisition At the date of acquisition, Mercator had $10.5 million in "Accrued merger, realignment, and other" costs which were assumed by the Company at fair value. This reserve was recorded by Mercator prior to the acquisition for certain exit costs related to partially occupied facilities.
As a result of restructuring actions taken in connection with the Mercator acquisition, $33.8 million of merger related costs were accrued in the purchase accounting for Mercator. These charges were primarily comprised of $17.4 million related to the closure of certain Mercator facilities as a consequence of the transaction, $14.4 million due to severance and related costs associated with terminating certain Mercator employees, and $2.0 million related to the cost of canceling certain contractual commitments. The severance and related costs relate to approximately 158 Mercator employees that will be terminated as a result of the acquisition. The Company expects, barring unforeseen circumstances, that substantially all of the severance and related costs will be paid out by the end of 2004. The $27.9 million in facility exit costs accrued as of September 12, 2003, the date of acquisition, consists primarily of lease related payments on Mercator facilities for leases that expire at various dates through 2012.
F-47
The following table summarizes the accrual activity for the period since the acquisition through December 31, 2003 (in millions):
|
At the date of acquisition, Mercator had $10.5 million in “Accrued merger, realignment, and other” costs which were assumed by the Company at fair value. This reserve was recorded by Mercator prior to the acquisition for certain exit costs related to partially occupied facilities.
As a result of restructuring actions taken in connection with the Mercator acquisition, $33.8 million of merger related costs were accrued in the purchase accounting for Mercator. These charges were primarily comprised of $17.4 million related to the closure of certain Mercator facilities as a consequence of the transaction, $14.4 million due to severance and related costs associated with terminating certain Mercator employees, and $2.0 million related to the cost of canceling certain contractual commitments. The severance and related costs relate to approximately 158 Mercator employees that will be terminated as a result of the acquisition. At December 31, 2004, $0.2 million remained accrued for severance. The $27.9 million in facility
F-45
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
exit costs accrued as of September 12, 2003, the date of acquisition, consists primarily of lease related payments on Mercator facilities for leases that expire at various dates through 2015.
The following table summarizes the accrual activity for the years ended December 31, 2004 and 2003 (in millions):
| | | | | | | | | | | | | | | | | |
| | | Accrual | | | | | | | Accrual | |
| | | Balance at | | | | | | | Balance at | |
| | | December 31, | | | Charges and | | | Cash | | | December 31, | |
| | | 2003 | | | Adjustments | | | Payments | | | 2004 | |
| | | | | | | | | | | | | |
| Residual lease obligations | | $ | 28.4 | | | $ | 2.9 | | | $ | (5.7 | ) | | $ | 25.6 | |
| Severance costs | | | 8.4 | | | | 0.7 | | | | (8.8 | ) | | | 0.3 | |
| Other exit costs | | | 0.1 | | | | 0.1 | | | | — | | | | 0.2 | |
| | | | | | | | | | | | | |
| Total | | $ | 36.9 | | | $ | 3.7 | | | $ | (14.5 | ) | | $ | 26.1 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Accrued in | | | | | | | |
| | | Purchase | | | | | | | Accrual | |
| | | Accounting | | | | | | | Balance at | |
| | | September 12, | | | Charges and | | | Cash | | | December 31, | |
| | | 2003 | | | Adjustments | | | Payments | | | 2003 | |
| | | | | | | | | | | | | |
| Residual lease obligations | | $ | 27.9 | | | $ | 1.8 | | | $ | (1.3 | ) | | $ | 28.4 | |
| Severance costs | | | 14.4 | | | | 0.6 | | | | (6.6 | ) | | | 8.4 | |
| Other exit costs | | | 2.0 | | | | (1.0 | ) | | | (0.9 | ) | | | 0.1 | |
| | | | | | | | | | | | | |
| Total | | $ | 44.3 | | | $ | 1.4 | | | $ | (8.8 | ) | | $ | 36.9 | |
| | | | | | | | | | | | | |
During the period since the acquisition through December 31, 2003 the Company increased the Mercator merger reserve by a net amount of $1.4 million. The increase of $1.8 million in the facilities reserves was primarily due to the additional costs of tenant improvements in a domestic location, the closure of an additional foreign facility, and an increase in the reserves required due to fluctuations in foreign exchange rates, which resulted in a corresponding increase to the goodwill recorded in connection with the Mercator acquisition. The additional $0.6 million of severance costs is due to the termination of additional Mercator employees, which resulted in a corresponding increase to the goodwill recorded in connection with the Mercator acquisition. The $1.0 million decrease in other exit costs consists of a $0.5 million non-cash write-off of deferred financing charges related to the loan agreement that the Company repaid and $0.5 million of amortization of deferred compensation related to the acceleration of the vesting of certain options of employees when they were terminated (see Note 12). The value of these options was recorded as part of purchase accounting.
During the year ended December 31, 2004, the Company adjusted the reserve to record additional employee severance costs of $0.7 million associated with the termination of certain Mercator employees in both domestic and foreign locations and $2.9 million as a result of a change in the estimate of our remaining residual lease obligations. The Company may record additional expenses in the future due to changes in estimates arising from the size and quantity of Mercator facilities being exited and the volatility of the real estate markets in which the facilities are located. All adjustments made subsequent to September 2004 were charged against income rather than goodwill. As of December 31, 2004, barring unforeseen circumstances, the Company does not expect future charges related to undiscounted lease obligations and restoration costs, excluding estimated sublease income, to exceed $18.3 million, the maximum remaining unaccrued obligation under existing contractual lease terms.
F-46
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | Accrued in
Purchase
Accounting
September 12,
2003
| | Charges and Adjustments
| | Cash Payments
| | Accrual
Balance at
December 31,
2003
|
|---|
| Residual lease obligations | | $ | 27.9 | | $ | 1.8 | | $ | (1.3 | ) | $ | 28.4 |
| Severance costs | | | 14.4 | | | 0.6 | | | (6.6 | ) | | 8.4 |
| Other exit costs | | | 2.0 | | | (1.0 | ) | | (0.9 | ) | | 0.1 |
| | |
| |
| |
| |
|
| Total | | $ | 44.3 | | $ | 1.4 | | $ | (8.8 | ) | $ | 36.9 |
| | |
| |
| |
| |
|
During the period since the acquisition through December 31, 2003 the Company increased the Mercator merger reserve by a net amount of $1.4 million. The increase of $1.8 million in the facilities reserves was primarily due to the additional costs of tenant improvements in a domestic location, the closure of an additional foreign facility, and an increase in the reserves required due to fluctuations in foreign exchange rates, which resulted in a corresponding increase to the goodwill recorded in connection with the Mercator acquisition. The additional $0.6 million of severance costs is due to the termination of additional Mercator employees, which resulted in a corresponding increase to the goodwill recorded in connection with the Mercator acquisition. The $1.0 million decrease in other exit costs consists of a $0.5 million non-cash write-off of deferred financing charges related to the loan agreement that the Company repaid and $0.5 million of amortization of deferred compensation related to the acceleration of the vesting of certain options of employees when they were terminated (see Note 12 of Notes to Consolidated Financial Statements). The value of these options were recorded as part of purchase accounting. The Company may record additional adjustments or charges in the future due to changes in estimates arising from the size and quantity of its facilities that are being exited and the volatility of the real estate markets in which the Company's facilities are located. As of December 31, 2003, barring unforeseen circumstances, the Company does not expect future charges related to undiscounted lease obligations and restoration costs, excluding estimated sublease income, to exceed $22.6 million, the maximum remaining unaccrued obligation under existing contractual lease terms.
| |
| Other accrued Merger, realignment, and other charges During September
|
In addition to the actions described above, in prior periods we recorded various merger and realignment charges as a result of other actions initiated during 2003, 2002 and 2001.
The following table summarizes the activity related to accrued merger, realignment and other charges for the year ended December 31, 2004 (in millions):
| | | | | | | | | | | | | | | | | |
| | | Accrual | | | | | | | Accrual | |
| | | Balance at | | | | | | | Balance at | |
| | | December 31, | | | Charges/ | | | Cash | | | December 31, | |
| | | 2003 | | | Adjustments | | | Payments | | | 2004 | |
| | | | | | | | | | | | | |
Third Quarter 2003 Realignment | | | | | | | | | | | | | | | | |
| Severance and employment costs | | $ | 0.8 | | | $ | — | | | $ | (0.7 | ) | | $ | 0.1 | |
Third Quarter 2002 Realignment | | | | | | | | | | | | | | | | |
| Severance and employment costs | | | 0.1 | | | | (0.1 | ) | | | — | | | | 0.0 | |
| Other exit costs | | | 0.1 | | | | (0.1 | ) | | | — | | | | 0.0 | |
| | | | | | | | | | | | | |
| | | | 0.2 | | | | (0.2 | ) | | | — | | | | 0.0 | |
| | | | | | | | | | | | | |
| Total accrued other merger, realignment and other charges | | $ | 1.0 | | | $ | (0.2 | ) | | $ | (0.7 | ) | | $ | 0.1 | |
| | | | | | | | | | | | | |
The remaining severance balance of $0.1 million is expected to be substantially paid by March 31, 2005.
The following table sets forth the activity related to accrued merger, realignment and other charges for the year ended December 31, 2003 (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| | | Accrual | | | | | | | | | Accrual | |
| | | Balance at | | | | | | | | | Balance at | |
| | | December 31, | | | Charges/ | | | Non-Cash | | | Cash | | | December 31, | |
| | | 2002 | | | Adjustments | | | Charges | | | Payments | | | 2003 | |
| | | | | | | | | | | | | | | | |
Third Quarter 2003 Realignment | | | | | | | | | | | | | | | | | | | | |
| Severance and employment costs | | $ | — | | | $ | 2.0 | | | $ | (0.6 | ) | | $ | (0.6 | ) | | $ | 0.8 | |
Third Quarter 2002 Realignment | | | | | | | | | | | | | | | | | | | | |
| Severance and employment costs | | | 1.3 | | | | — | | | | — | | | | (1.2 | ) | | | 0.1 | |
| Other exit costs | | | 0.2 | | | | — | | | | — | | | | (0.1 | ) | | | 0.1 | |
| | | | | | | | | | | | | | | | |
| | | | 1.5 | | | | — | | | | — | | | | (1.3 | ) | | | 0.2 | |
| | | | | | | | | | | | | | | | |
2000 Strategic Realignment | | | | | | | | | | | | | | | | | | | | |
| Facilities and equipment costs | | | 0.7 | | | | (0.1 | ) | | | — | | | | (0.6 | ) | | | — | |
Ardent Merger & Other | | | | | | | | | | | | | | | | | | | | |
| Facilities lease costs | | | 0.5 | | | | (0.2 | ) | | | — | | | | (0.3 | ) | | | — | |
| | | | | | | | | | | | | | | | |
| Total accrued other merger, realignment and other charges | | $ | 2.7 | | | $ | 1.7 | | | $ | (0.6 | ) | | $ | (2.8 | ) | | $ | 1.0 | |
| | | | | | | | | | | | | | | | |
F-47
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth charges and activity related to Accrued other merger, realignment and other for the year ended December 31, 2002 (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| | | Accrual | | | | | | | | | Accrued | |
| | | Balance at | | | | | | | | | Balance at | |
| | | December 31, | | | Charges/ | | | Non-Cash | | | Cash | | | December 31, | |
| | | 2001 | | | Adjustments | | | Charges | | | Payments | | | 2002 | |
| | | | | | | | | | | | | | | | |
Third Quarter 2002 Realignment | | | | | | | | | | | | | | | | | | | | |
| Severance and employment costs | | $ | — | | | $ | 6.8 | | | $ | — | | | $ | (5.5 | ) | | $ | 1.3 | |
| Facility lease costs | | | — | | | | 0.3 | | | | (0.1 | ) | | | (0.2 | ) | | | — | |
| Other exit costs | | | — | | | | 0.3 | | | | — | | | | (0.1 | ) | | | 0.2 | |
| | | | | | | | | | | | | | | | |
| Total accrued merger realignment and other charges | | | — | | | | 7.4 | | | | (0.1 | ) | | | (5.8 | ) | | | 1.5 | |
| Abandoned fixed assets | | | — | | | | 2.7 | | | | (2.7 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | — | | | | 10.1 | | | | (2.8 | ) | | | (5.8 | ) | | | 1.5 | |
| | | | | | | | | | | | | | | | |
Second Quarter 2002 Realignment | | | | | | | | | | | | | | | | | | | | |
| Severance and employment costs | | | — | | | | 5.7 | | | | — | | | | (5.7 | ) | | | — | |
| Write-off computer equipment | | | — | | | | 0.8 | | | | (0.8 | ) | | | — | | | | — | |
| Facility lease costs | | | — | | | | 0.4 | | | | — | | | | (0.4 | ) | | | — | |
| Professional fees | | | — | | | | 0.4 | | | | — | | | | (0.4 | ) | | | — | |
| Other exit costs | | | — | | | | 0.4 | | | | — | | | | (0.4 | ) | | | — | |
| | | | | | | | | | | | | | | | |
| | | | — | | | | 7.7 | | | | (0.8 | ) | | | (6.9 | ) | | | — | |
| | | | | | | | | | | | | | | | |
First Quarter 2002 Realignment | | | | | | | | | | | | | | | | | | | | |
| Severance and employment costs | | | — | | | | 1.6 | | | | — | | | | (1.6 | ) | | | — | |
| Facility lease costs | | | — | | | | 0.8 | | | | — | | | | (0.8 | ) | | | — | |
| Other exit costs | | | — | | | | 0.1 | | | | — | | | | (0.1 | ) | | | — | |
| | | | | | | | | | | | | | | | |
| | | | — | | | | 2.5 | | | | — | | | | (2.5 | ) | | | — | |
| | | | | | | | | | | | | | | | |
Third Quarter 2001 Realignment | | | | | | | | | | | | | | | | | | | | |
| Severance and employment costs | | | 3.8 | | | | (0.4 | ) | | | — | | | | (3.4 | ) | | | — | |
| | | | | | | | | | | | | | | | |
2000 Strategic Realignment | | | | | | | | | | | | | | | | | | | | |
| Severance and employment-related costs | | | 0.1 | | | | — | | | | — | | | | (0.1 | ) | | | — | |
| Facilities and equipment costs | | | 2.1 | | | | 0.2 | | | | — | | | | (1.6 | ) | | | 0.7 | |
| Costs to exit various commitments and programs | | | 3.0 | | | | — | | | | — | | | | (3.0 | ) | | | — | |
| | | | | | | | | | | | | | | | |
| | | | 5.2 | | | | 0.2 | | | | — | | | | (4.7 | ) | | | 0.7 | |
| | | | | | | | | | | | | | | | |
Ardent Merger and Other | | | 1.1 | | | | (0.4 | ) | | | — | | | | (0.2 | ) | | | 0.5 | |
| | | | | | | | | | | | | | | | |
| Total other accrued merger, realignment and other charges | | $ | 10.1 | | | $ | 19.7 | | | $ | (3.6 | ) | | $ | (23.5 | ) | | $ | 2.7 | |
| | | | | | | | | | | | | | | | |
| |
| Third Quarter 2003 the Company approved plans to realign its infrastructure by reducing its workforce as a result of the acquisition of Mercator. In addition the Company made adjustments to certain existing facility reserves. As part of the integration of Mercator, 17 Ascential employees were terminated and a related charge of $1.1 million was recorded during the three months ended September 30, 2003. During the three months ended December 31, 2003, 5 additional Ascential employees were terminated as part of the aforementioned realignment plan and a related charge of $0.9 million was recorded, consisting of $0.3 million of severance, and $0.6 million of non-cash stock compensation associated with the amendment of a single terminated employee's existing stock option grants. The $0.6 million charge associated with the non-cash stock compensation was offset against "additional paid in capital". The unpaid severance of $0.8 million remaining at December 31, 2003 is expected to be paid by December 31, 2004. The Company also previously recorded various merger and realignment charges as a result of other actions initiated during 2001 and 2002, including the third quarter 2002 realignment, the 2000 strategic realignment, and the acquisition of Ardent Software, Inc. ("Ardent") and other charges. The
F-48
following table sets forth the activity related to those merger and realignment charges for the years ended December 31, 2003 (in millions):Realignment
|
During September 2003, the Company approved plans to realign its infrastructure by reducing its workforce as a result of the acquisition of Mercator. In addition the Company made adjustments to certain existing facility reserves. As part of the integration of Mercator, 17 Ascential employees were terminated and a
F-48
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
related charge of $1.1 million was recorded during the three months ended September 30, 2003. During the three months ended December 31, 2003, 5 additional Ascential employees were terminated as part of the aforementioned realignment plan and a related charge of $0.9 million was recorded, consisting of $0.3 million of severance, and $0.6 million of non-cash stock compensation associated with the amendment of a single terminated employee’s existing stock option grants. The $0.6 million charge associated with the non-cash stock compensation was offset against “additional paid in capital”. The preceding table sets forth the significant components of the charge recognized during 2003 and the activity occurring during the years ended December 31, 2004 and 2003, as well as the accrued balance remaining at December 31, 2004.
| | Accrual
Balance at
December 31,
2002
| | Charges/
Adjustments
| | Non-Cash
| | Cash
Payments
| | Accrual
Balance at
December 31,
2003
|
|---|
| Third Quarter 2003 Realignment | | | | | | | | | | | | |
| Severance and employment costs | | $ | — | | $ | 2.0 | | $ | (0.6 | ) | $ | (0.6 | ) | $ | 0.8 |
| Third Quarter 2002 Realignment | | | | | | | | | | | | |
| Severance and employment costs | | | 1.3 | | | — | | | — | | | (1.2 | ) | | 0.1 |
| Other exit costs | | | 0.2 | | | — | | | — | | | (0.1 | ) | | 0.1 |
| | |
| |
| |
| |
| |
|
| | | | 1.5 | | | — | | | — | | | (1.3 | ) | | 0.2 |
| | |
| |
| |
| |
| |
|
| 2000 Strategic Realignment | | | | | | | | | | | | | | | |
| Facilities and equipment costs | | | 0.7 | | | (0.1 | ) | | — | | | (0.6 | ) | | — |
Ardent Merger & Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Facilities lease costs | | | 0.5 | | | (0.2 | ) | | — | | | (0.3 | ) | | — |
| | |
| |
| |
| |
| |
|
| Total accrued other merger, realignment and other chares | | $ | 2.7 | | $ | 1.7 | | $ | (0.6 | ) | $ | (2.8 | ) | $ | 1.0 |
| | |
| |
| |
| |
| |
|
The remaining unpaid severance balance of $0.2 million as of December 31, 2003 is expected to be substantially paid by December 31, 2004.
The following table sets forth charges and activity related to Accrued other merger, realignment, and other for the year ended December 31, 2002 (in millions):
| | Accrual
Balance at
December 31,
2001
| | Charges/
Adjustments
| | Non-Cash
| | Cash
Payments
| | Accrued
Balance at
December 31,
2002
|
|---|
| Third Quarter 2002 Realignment | | | | | | | | | | | | |
| Severance and employment costs | | $ | — | | $ | 6.8 | | $ | — | | $ | (5.5 | ) | $ | 1.3 |
| Facility lease costs | | | — | | | 0.3 | | | (0.1 | ) | | (0.2 | ) | | — |
| Other exit costs | | | — | | | 0.3 | | | — | | | (0.1 | ) | | 0.2 |
| | |
| |
| |
| |
| |
|
| Total accrued merger realignment and other charges | | | — | | | 7.4 | | | (0.1 | ) | | (5.8 | ) | | 1.5 |
| Abandoned fixed assets | | | — | | | 2.7 | | | (2.7 | ) | | — | | | — |
| | |
| |
| |
| |
| |
|
| | | | — | | | 10.1 | | | (2.8 | ) | | (5.8 | ) | | 1.5 |
| | |
| |
| |
| |
| |
|
Second Quarter 2002 Realignment |
|
|
|
|
|
|
|
|
|
|
|
|
F-49
| Severance and employment costs | | | — | | | 5.7 | | | — | | | (5.7 | ) | | — |
| Write-off computer equipment | | | — | | | 0.8 | | | (0.8 | ) | | — | | | — |
| Facility lease costs | | | — | | | 0.4 | | | — | | | (0.4 | ) | | — |
| Professional fees | | | — | | | 0.4 | | | — | | | (0.4 | ) | | — |
| Other exit costs | | | — | | | 0.4 | | | — | | | (0.4 | ) | | — |
| | |
| |
| |
| |
| |
|
| | | | — | | | 7.7 | | | (0.8 | ) | | (6.9 | ) | | — |
| | |
| |
| |
| |
| |
|
First Quarter 2002 Realignment |
|
|
|
|
|
|
|
|
|
|
|
|
| Severance and employment costs | | | — | | | 1.6 | | | — | | | (1.6 | ) | | — |
| Facility lease costs | | | — | | | 0.8 | | | — | | | (0.8 | ) | | — |
| Other exit costs | | | — | | | 0.1 | | | — | | | (0.1 | ) | | — |
| | |
| |
| |
| |
| |
|
| | | | — | | | 2.5 | | | — | | | (2.5 | ) | | — |
| | |
| |
| |
| |
| |
|
| Third Quarter 2001 Realignment | | | | | | | | | | | | |
| Severance and employment costs | | | 3.8 | | | (0.4 | ) | | — | | | (3.4 | ) | | — |
| | |
| |
| |
| |
| |
|
| 2000 Strategic Realignment | | | | | | | | | | | | | | | |
| Severance and employment-related costs | | | 0.1 | | | — | | | — | | | (0.1 | ) | | — |
| Facilities and equipment costs | | | 2.1 | | | 0.2 | | | — | | | (1.6 | ) | | 0.7 |
| Costs to exit various commitments and programs | | | 3.0 | | | — | | | — | | | (3.0 | ) | | — |
| | |
| |
| |
| |
| |
|
| | | | 5.2 | | | 0.2 | | | — | | | (4.7 | ) | | 0.7 |
| | |
| |
| |
| |
| |
|
| Ardent Merger and Other | | | 1.1 | | | (0.4 | ) | | — | | | (0.2 | ) | | 0.5 |
|
|
|
|
|
|
|
|
|
|
|
| Total other accrued merger, realignment and other charges | | $ | 10.1 | | $ | 19.7 | | $ | (3.6 | ) | $ | (23.5 | ) | $ | 2.7 |
| | |
| |
| |
| |
| |
|
F-50
The following table sets forth charges and activity related to Accrued merger, realignment, and other for the year ended December 31, 2001 (in millions):
| | Accrual
Balance at
December 31,
2000
| | Charges/
Adjustments
| | Non-cash
| | Cash
Payments
| | Accrued
Balance at
December 31,
2001
|
|---|
| Third Quarter 2001 Realignment | | | | | | | | | | | | | | | |
| Severance and employment-related costs | | $ | — | | $ | 10.1 | | $ | — | | $ | (6.3 | ) | $ | 3.8 |
| Write-off of abandoned technology | | | — | | | 1.9 | | | (1.9 | ) | | — | | | — |
| | |
| |
| |
| |
| |
|
| | | | — | | | 12.0 | | | (1.9 | ) | | (6.3 | ) | | 3.8 |
| | |
| |
| |
| |
| |
|
| 2000 Strategic Realignment | | | | | | | | | | | | | | | |
| Severance and employment-related costs | | | 22.8 | | | 3.5 | | | — | | | (26.2 | ) | | 0.1 |
| Facilities and equipment costs | | | 3.6 | | | 2.0 | | | — | | | (3.5 | ) | | 2.1 |
| Costs to exit various commitments and programs | | | 2.3 | | | 1.2 | | | — | | | (0.5 | ) | | 3.0 |
| | |
| |
| |
| |
| |
|
| | | | 28.7 | | | 6.7 | | | — | | | (30.2 | ) | | 5.2 |
| | |
| | | | | | | | | | |
|
| | Accrual
Balance at
December 31,
2000
| |
| | Non-cash
| | Cash
Payments/
Charges
| | Accrued
Balance at
December 31,
2001
|
|---|
| Ardent Merger and Other | | | | | | | | | | | | |
| Financial advisor and other fees | | | 1.1 | | | | — | | (0.9 | ) | | 0.2 |
| Severance and employment-related costs | | | 1.0 | | | | — | | (1.0 | ) | | — |
| Facilities and equipment costs | | | 2.4 | | | | — | | (1.5 | ) | | 0.9 |
| | |
| | | |
| |
| |
|
| | | | 4.5 | | | | — | | (3.4 | ) | | 1.1 |
| | |
| | | |
| |
| |
|
Total Other Accrued Merger, Realignment and Other Charges |
|
$ |
33.2 |
|
|
|
|
|
|
|
$ |
10.1 |
| | |
| | | | | | | |
|
| |
| Third Quarter 2002 Realignment During the three months ended September 30, 2002, the Company approved a plan to further realign its infrastructure by reducing its workforce. The Company also identified certain assets associated with vacated facilities and headcount reductions that no longer had value at September 30, 2002. This plan related to a continuing effort to reduce the Company's infrastructure costs, the IBM Transaction (see Note 14 in these Notes to Consolidated Financial Statements), and the termination of its content management product line (see Note 15 in these Notes to Consolidated Financial Statements). As a result, the Company recorded $10.1 million of "Merger, realignment and other" charges during the six months ended December 31, 2002. This $10.1 million charge consisted of $6.6 million to reduce the Company's infrastructure costs, $3.0 million related to the IBM Transaction and $0.5 million related to the termination of its content management product line. The $6.6 million charge related to realigning the Company's infrastructure to reduce costs consisted of $6.5 million to terminate 142 employees and $0.1 million of other exit costs. The $3.0 million charge related to exiting facilities in connection with the IBM Transaction consisted of $2.7 million to write-off abandoned fixed assets, primarily at vacated facilities and $0.3 of additional facility lease costs. The $0.5 million charge related to the termination of the content management product line consisted of $0.3 million to terminate 17 employees and $0.2 million of other exit costs. The 159 employees being terminated as part of the third quarter 2002 realignment included approximately 98 sales and marketing employees, 17 general and administrative employees, 12 research and development employees, and 32 professional
F-51
services employees. The preceding table sets forth the significant components of the charge recognized during 2002 and the activity occurring during the years ended December 31, 2003, and 2002, as well as accrued balance remaining at December 31, 2003.
|
During the three months ended September 30, 2002, the Company approved a plan to further realign its infrastructure by reducing its workforce. The Company also identified certain assets associated with vacated facilities and headcount reductions that no longer had value at September 30, 2002. This plan related to a continuing effort to reduce the Company’s infrastructure costs, the IBM Transaction (see Note 13), and the termination of its content management product line (see Note 14). As a result, the Company recorded $10.1 million of “Merger, realignment and other” charges during the six months ended December 31, 2002. This $10.1 million charge consisted of $6.6 million to reduce the Company’s infrastructure costs, $3.0 million related to the IBM Transaction and $0.5 million related to the termination of its content management product line. The $6.6 million charge related to realigning the Company’s infrastructure to reduce costs consisted of $6.5 million to terminate 142 employees and $0.1 million of other exit costs. The $3.0 million charge related to exiting facilities in connection with the IBM Transaction consisted of $2.7 million to write-off abandoned fixed assets, primarily at vacated facilities and $0.3 of additional facility lease costs. The $0.5 million charge related to the termination of the content management product line consisted of $0.3 million to terminate 17 employees and $0.2 million of other exit costs. The 159 employees being terminated as part of the third quarter 2002 realignment included approximately 98 sales and marketing employees, 17 general and administrative employees, 12 research and development employees, and 32 professional services employees. The preceding table sets forth the significant components of the charge recognized during 2002 and the activity occurring during the years ended December 31, 2004, 2003 and 2002, as well as the accrued balance remaining at December 31, 2004.
| |
| Second Quarter 2002 Realignment During the three months ended June 30, 2002, the Company approved plans to terminate its content management product line (see Note 15 in these Notes to Consolidated Financial Statements), and realign its infrastructure by reducing its workforce and closing facilities in order to reduce costs. In addition, the Company terminated 91 employees subsequent to the April 3, 2002 acquisition of Vality. As a result, the Company recorded $7.7 million of "Merger, realignment and other" charges during three months ended June 30, 2002. This $7.7 million charge consisted of $4.1 million of charges during the period related to the integration of Vality, $2.8 million to terminate operations related to the Company's content management product line, and $0.8 of additional costs associated with the wind down of the database business. The $4.1 million charge to integrate Vality consisted of $4.0 million to terminate 91 Ascential employees and $0.1 million of other costs. The $2.8 million charge related to its content management product line consisted of $1.4 million in severance costs to terminate 52 employees, $0.8 million in computer equipment impairments, $0.4 million of professional fees incurred in the attempt to sell the product line and $0.2 million of other exit costs. The 143 employees terminated included 60 sales and marketing employees, nine general and administrative employees, 27 research and development employees, and 47 professional services employees. The $0.8 million of costs associated with the database business were comprised of $0.4 million of facilities costs, $0.3 million of severance costs, and $0.1 million of other costs. The preceding table sets forth the significant components of the charge recognized during 2002 and the activity occurring during the years ended December 31, 2003, and 2002.
|
During the three months ended June 30, 2002, the Company approved plans to terminate its content management product line (see Note 14), and realign its infrastructure by reducing its workforce and closing facilities in order to reduce costs. In addition, the Company terminated 91 employees subsequent to the April 3, 2002 acquisition of Vality. As a result, the Company recorded $7.7 million of “Merger, realignment and other” charges during three months ended June 30, 2002. This $7.7 million charge consisted of $4.1 million of charges during the period related to the integration of Vality, $2.8 million to terminate operations related to the Company’s content management product line, and $0.8 of additional costs associated with the wind down of the database business. The $4.1 million charge to integrate Vality consisted of $4.0 million to terminate 91 Ascential employees and $0.1 million of other costs. The $2.8 million charge related to its content management product line consisted of $1.4 million in severance costs to terminate 52 employees, $0.8 million in computer equipment impairments, $0.4 million of professional fees incurred in the attempt to sell the product line and $0.2 million of other exit costs. The 143 employees terminated included 60 sales and marketing employees, nine general and administrative employees, 27 research and development employees, and 47 professional services employees. The $0.8 million of costs associated with the database business were comprised of $0.4 million of facilities costs, $0.3 million of severance costs, and $0.1 million of other costs. The preceding table sets forth the significant components of the charge recognized during 2002 and the activity occurring during the years ended December 31, 2003 and 2002.
F-49
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| First Quarter 2002 Realignment During the three months ended March 31, 2002, the Company approved plans to continue to reduce costs from its Informix Software business due to the IBM Transaction and consolidate certain offices in Europe. As a result the Company recorded $2.5 million of "Merger, realignment and other" charges consisting of $1.6 million of severance and employment related costs to terminate 35 sales and marketing employees, $0.8 million for lease management and other lease obligation costs and $0.1 million of other exit costs. The preceding table sets forth the significant components of the charge recognized during 2002 and the activity occurring during the years ended December 31, 2003, and 2002.
|
During the three months ended March 31, 2002, the Company approved plans to continue to reduce costs from its Informix Software business due to the IBM Transaction and consolidate certain offices in Europe. As a result the Company recorded $2.5 million of “Merger, realignment and other” charges consisting of $1.6 million of severance and employment related costs to terminate 35 sales and marketing employees, $0.8 million for lease management and other lease obligation costs and $0.1 million of other exit costs. The preceding table sets forth the significant components of the charge recognized during 2002 and the activity occurring during the years ended December 31, 2003 and 2002.
| |
| Third Quarter 2001 Realignment During the quarter ended September 30, 2001, the Company approved plans to reduce its worldwide headcount and as a result recorded a $12.0 million charge to "Merger, realignment and other" in 2001. The worldwide workforce reduction started in the third quarter of 2001 and has included a reduction of approximately 180 sales and marketing employees, 20 general and administrative employees, 10 research and development employees and 50 professional services and manufacturing employees. As a result, the Company recorded realignment and other charges of $12.0 million during the three months ended September 30, 2001. The preceding table sets forth the significant components of the charge recognized during 2001 and the activity occurring during the years ended December 31, 2003, and 2002.
Severance and employment-related costs primarily consisted of termination compensation and related benefits for employees. During the quarter ended June 30, 2002, the Company reversed $0.4 million of the accrual related to approximately 18 employees, as it was no longer required. As of December 31, 2002, termination compensation and related benefits had been paid to terminate 242 employees.
F-52
The write-off of abandoned technology of $1.9 million related to the iDecide product, which was abandoned as a result of the sale of the database business.
|
During the quarter ended September 30, 2001, the Company approved plans to reduce its worldwide headcount and as a result recorded a $12.0 million charge to “Merger, realignment and other” in 2001. The worldwide workforce reduction started in the third quarter of 2001 and has included a reduction of approximately 180 sales and marketing employees, 20 general and administrative employees, 10 research and development employees and 50 professional services and manufacturing employees. As a result, the Company recorded realignment and other charges of $12.0 million during the three months ended September 30, 2001. The preceding table sets forth the activity occurring during the years ended December 31, 2003 and 2002.
Severance and employment-related costs primarily consisted of termination compensation and related benefits for employees. During the quarter ended June 30, 2002, the Company reversed $0.4 million of the accrual related to approximately 18 employees, as it was no longer required. As of December 31, 2002, termination compensation and related benefits had been paid to terminate 242 employees.
| |
| 2000 Strategic Realignment During the quarter ended September 30, 2000, the Company approved plans to realign its operations by establishing two operating businesses and as a result recorded a charge of $86.9 million to "Merger, realignment and other" in 2000. The strategic realignment included a refinement of the Company's product strategy, consolidation of facilities and operations to improve efficiency and a reduction in worldwide headcount of approximately 310 sales and marketing employees, 120 general and administrative employees, 260 research and development employees and 100 professional services and manufacturing employees. During 2002 the Company recorded $0.2 million of additional costs to exit a facility in the United States arising from negotiations to terminate the lease prior to the end of the lease term. The preceding table sets forth the significant components of the charge recognized during 2000 and the activity occurring during the years ended December 31, 2003, 2002, and 2001.
Severance and employment-related costs of $3.5 million included $5.1 million of retention and incentive bonuses for employees who management believed were critical to the successful outcome of the realignment and $0.8 million for payments to qualified employees related to the Company's decision to terminate its sabbatical plan, offset by reversing adjustments of $2.4 million to revise estimates for termination compensation and related benefits. As of December 31, 2001, termination compensation and related benefits had been paid to terminate approximately 790 employees.
Included in the $1.9 million charge for facilities and equipment costs was $0.5 million for the write-off of leasehold improvements, as these assets were no longer being used, and $1.4 million for lease obligations for redundant facilities. The remaining accrual balance at December 31, 2001 of $2.0 million were for lease obligations that extended through 2005 for redundant facilities.
Included in the $1.2 million charge for costs to exit various commitments and programs was an adjustment of $1.0 to revise estimates for the termination of contracted service commitments.
|
During the quarter ended September 30, 2000, the Company approved plans to realign its operations by establishing two operating businesses and as a result recorded a charge of $86.9 million to “Merger, realignment and other” in 2000. The strategic realignment included a refinement of the Company’s product strategy, consolidation of facilities and operations to improve efficiency and a reduction in worldwide headcount of approximately 310 sales and marketing employees, 120 general and administrative employees, 260 research and development employees and 100 professional services and manufacturing employees. As of December 31, 2001, termination compensation and related benefits had been paid to terminate approximately 790 employees. During 2002 the Company recorded $0.2 million of additional costs to exit a facility in the United States arising from negotiations to terminate the lease prior to the end of the lease term. The preceding table sets forth the activity occurring during the years ended December 31, 2003 and 2002.
| |
| Ardent Merger and Other As a result of the merger with Ardent Software, Inc. in March 2000 and various merger and realignment activities that occurred prior to 2000, the Company had recorded charges to "Merger, realignment and other" arising from decisions to exit certain facilities. During 2002 the Company reversed $0.4 million of other exit costs associated with the Ardent acquisition as they were no longer needed. As of December 31, 2002, approximately $0.5 million of facility exit costs remained unpaid. Of the $0.5 million in facility exist costs, $0.3 million were for residual lease obligations and $0.2 million for restoration costs on idle facilities.
F-53
|
As a result of the merger with Ardent Software, Inc. in March 2000 and various merger and realignment activities that occurred prior to 2000, the Company had recorded charges to “Merger, realignment and other” arising from decisions to exit certain facilities. During 2003 and 2002 the Company reversed $0.2 million and $0.4 million, respectively, of other exit costs associated with the Ardent acquisition as they were no longer needed.
F-50
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 1716 — | Quarterly Operating Results (unaudited) |
| | | | | | | | | | | | | | | | | | |
| | | First | | | Second | | | Third | | | Fourth | |
| | | Quarter | | | Quarter | | | Quarter | | | Quarter | |
| | | | | | | | | | | | | |
| | | (In thousands, except per share data) | |
| Year ended December 31, 2004 | | | | | | | | | | | | | | | | |
| Net revenues | | $ | 61,389 | | | $ | 64,734 | | | $ | 67,593 | | | $ | 78,163 | |
| Gross profit | | | 42,409 | | | | 43,333 | | | | 45,232 | | | | 53,974 | |
| Net income | | $ | 2,392 | | | $ | 1,212 | | | $ | 2,323 | | | $ | 9,024 | |
| Net income per common share(1): | | | | | | | | | | | | | | | | |
| | Basic | | $ | 0.04 | | | $ | 0.02 | | | $ | 0.04 | | | $ | 0.15 | |
| | Diluted | | $ | 0.04 | | | $ | 0.02 | | | $ | 0.04 | | | $ | 0.15 | |
| Year ended December 31, 2003 | | | | | | | | | | | | | | | | |
| Net revenues | | $ | 35,296 | | | $ | 39,929 | | | $ | 45,889 | | | $ | 64,472 | |
| Gross profit | | | 24,448 | | | | 27,748 | | | | 31,684 | | | | 46,365 | |
| Net income (loss) | | $ | (534 | ) | | $ | 695 | | | $ | (1,699 | ) | | $ | 17,343 | |
| Net income (loss) per common share(1): | | | | | | | | | | | | | | | | |
| | Basic | | $ | (0.01 | ) | | $ | 0.01 | | | $ | (0.03 | ) | | $ | 0.29 | |
| | Diluted | | $ | (0.01 | ) | | $ | 0.01 | | | $ | (0.03 | ) | | $ | 0.28 | |
| | First
Quarter
| | Second
Quarter
| | Third
Quarter
| | Fourth
Quarter
| |
|---|
| | (In thousands, except per share data)
| |
|---|
| Year ended December 31, 2003 | | | | | | | | | | | | | |
| | Net revenues | | $ | 35,296 | | $ | 39,929 | | $ | 45,889 | | $ | 64,472 | |
| | Gross profit | | | 24,448 | | | 27,748 | | | 31,684 | | | 46,365 | |
| | Net income (loss) | | $ | (534 | ) | $ | 695 | | $ | (1,699 | ) | $ | 17,343 | |
| | |
| |
| |
| |
| |
| | Net income (loss) per common share(1): | | | | | | | | | | | | | |
| | | Basic | | $ | (0.01 | ) | $ | 0.01 | | $ | (0.03 | ) | $ | 0.29 | |
| | |
| |
| |
| |
| |
| | | Diluted | | $ | (0.01 | ) | $ | 0.01 | | $ | (0.03 | ) | $ | 0.28 | |
| | |
| |
| |
| |
| |
| Year ended December 31, 2002 Net revenues | | $ | 20,793 | | $ | 27,962 | | $ | 30,212 | | $ | 34,051 | |
| | Gross profit | | | 9,634 | | | 11,474 | | | 17,473 | | | 22,998 | |
| | Net loss | | $ | (16,520 | ) | $ | (20,628 | ) | $ | (16,257 | ) | $ | (10,168 | ) |
| | |
| |
| |
| |
| |
| | Net loss per common share(1): | | | | | | | | | | | | | |
| | | Basic | | $ | (0.26 | ) | $ | (0.33 | ) | $ | (0.27 | ) | $ | (0.16 | ) |
| | |
| |
| |
| |
| |
| | | Diluted | | $ | (0.26 | ) | $ | (0.33 | ) | $ | (0.27 | ) | $ | (0.16 | ) |
| | |
| |
| |
| |
| |
| |
| (1) | Amounts may vary from annual totals due to rounding.
QuickLinks
|
Note 17 — Subsequent Event
On March 13, 2005, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with IBM and Ironbridge Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of IBM (“Sub”) pursuant to which IBM will acquire all the Company’s outstanding equity interests. In accordance with the Merger Agreement, the Company will merge (the “Merger”) with and into Sub, with the Company continuing as the surviving corporation. The merger consideration will consist of $18.50 in cash per share of the Company’s Common Stock, par value $0.01 per share, issued and outstanding immediately prior to the Effective Time (other than shares held by the Company or IBM which will be canceled and retired, Appraisal Shares and Restricted Shares, each as defined in the Merger Agreement).
The transaction has been approved by the Company’s board of directors and is subject to stockholder approval, regulatory approvals and other customary closing conditions. Following the merger, the Company will delist from the Nasdaq National Market and deregister, and no longer file reports, under the Securities Exchange Act of 1934, as amended. The Company expects the transaction to close in the second quarter of 2005.
F-51
ASCENTIAL SOFTWARE CORPORATION ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PART I
PART II
PART III
PART IV
SIGNATURES
POWER OF ATTORNEY
ASCENTIAL SOFTWARE CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors
REPORT OF INDEPENDENT AUDITORS
ASCENTIAL SOFTWARE CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
ASCENTIAL SOFTWARE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
ASCENTIAL SOFTWARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
ASCENTIAL SOFTWARE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands)
ASCENTIAL SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS