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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
/x/ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, 2001. |
OR
/ / | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from to . |
Commission File Number 0-15325
ASCENTIAL SOFTWARE CORPORATION
(Formerly known as Informix Corporation)
(Exact name of registrant as specified in its charter)
Delaware | 94-3011736 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
50 Washington Street, Westborough, MA | 01581 | |
(Address of principal executive office) | (zip code) |
Registrant's telephone number, including area code:(508) 366-3888
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /x/ NO / /
At October 31, 2001, 259,366,371 shares of the Registrant's Common Stock were outstanding.
ASCENTIAL SOFTWARE CORPORATION
FORM 10-Q
Quarterly Period Ended September 30, 2001
Table of Contents
| | Page | ||
---|---|---|---|---|
PART I. Financial Information | ||||
Item 1. | Financial Statements | |||
Unaudited Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2001 and 2000 | 3 | |||
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 | 4 | |||
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 | 5 | |||
Notes to Unaudited Condensed Consolidated Financial Statements | 6 | |||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 21 | ||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 45 | ||
PART II. Other Information | ||||
Item 1. | Legal Proceedings | 47 | ||
Item 2. | Changes in Securities and Use of Proceeds | 47 | ||
Item 3. | Defaults Upon Senior Securities | 47 | ||
Item 4. | Submission of Matters to a Vote of Security Holders | 47 | ||
Item 5. | Other Information | 47 | ||
Item 6. | Exhibits and Reports on Form 8-K | 47 | ||
Signatures | 48 |
FORWARD LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements as a result of certain factors described herein and in other documents. Readers should pay particular attention to the section of this Report entitled "Factors That May Affect Future Results" and should also carefully review the risk factors described in the other documents the Company files from time to time with the Securities and Exchange Commission.
Item 1. Unaudited Condensed Consolidated Financial Statements
ASCENTIAL SOFTWARE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | 2001 | 2000 | ||||||||||
NET REVENUES | ||||||||||||||
Licenses | $ | 13,023 | $ | 82,441 | $ | 197,428 | $ | 303,256 | ||||||
Services | 15,482 | 128,664 | 256,733 | 399,227 | ||||||||||
28,505 | 211,105 | 454,161 | 702,483 | |||||||||||
COSTS AND EXPENSES | ||||||||||||||
Cost of software | 4,289 | 11,275 | 30,110 | 37,338 | ||||||||||
Cost of services | 12,365 | 48,214 | 97,930 | 144,998 | ||||||||||
Sales and marketing | 23,343 | 99,896 | 187,411 | 306,703 | ||||||||||
Research and development | 7,903 | 39,878 | 79,758 | 126,940 | ||||||||||
General and administrative | 14,129 | 29,637 | 68,766 | 75,451 | ||||||||||
Merger, realignment and other charges | 6,826 | 62,136 | 12,432 | 112,170 | ||||||||||
68,855 | 291,036 | 476,407 | 803,600 | |||||||||||
Operating loss | (40,350 | ) | (79,931 | ) | (22,246 | ) | (101,117 | ) | ||||||
OTHER INCOME (EXPENSE) | ||||||||||||||
Interest income | 11,076 | 3,587 | 15,890 | 10,697 | ||||||||||
Interest expense | (40 | ) | (70 | ) | (128 | ) | (378 | ) | ||||||
Gain on sale of database business | 850,070 | — | 844,473 | — | ||||||||||
Impairment of long-term investments | (882 | ) | — | (10,190 | ) | — | ||||||||
Other, net | (3,380 | ) | (213 | ) | (2,133 | ) | 4,224 | |||||||
INCOME (LOSS) BEFORE INCOME TAXES | 816,494 | (76,627 | ) | 825,666 | (86,754 | ) | ||||||||
Income taxes | 165,069 | 4,000 | 169,471 | 12,018 | ||||||||||
NET INCOME (LOSS) | 651,425 | (80,627 | ) | 656,195 | (98,592 | ) | ||||||||
Preferred stock dividend | — | (15 | ) | — | (191 | ) | ||||||||
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS | $ | 651,425 | $ | (80,642 | ) | $ | 656,195 | $ | (98,783 | ) | ||||
NET INCOME (LOSS) PER COMMON SHARE | ||||||||||||||
Basic | $ | 2.34 | $ | (0.28 | ) | $ | 2.31 | $ | (0.35 | ) | ||||
Diluted | $ | 2.28 | $ | (0.28 | ) | $ | 2.24 | $ | (0.35 | ) | ||||
SHARES USED IN PER SHARE CALCULATIONS | ||||||||||||||
Basic | 278,345 | 288,189 | 283,844 | 286,265 | ||||||||||
Diluted | 286,024 | 288,189 | 293,538 | 286,265 | ||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
ASCENTIAL SOFTWARE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
| September 30, 2001 | December 31, 2000 | ||||||
---|---|---|---|---|---|---|---|---|
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 694,038 | $ | 128,420 | ||||
Short-term investments | 258,429 | 88,541 | ||||||
Accounts receivable, net | 33,075 | 235,429 | ||||||
Deferred income taxes | 13,881 | — | ||||||
Other current assets | 25,064 | 17,330 | ||||||
Total current assets | 1,024,487 | 469,720 | ||||||
PROPERTY AND EQUIPMENT, net | 12,589 | 67,617 | ||||||
SOFTWARE COSTS, net | 15,075 | 41,444 | ||||||
LONG-TERM INVESTMENTS | 3,351 | 11,185 | ||||||
INTANGIBLE ASSETS, net | 33,262 | 48,258 | ||||||
OTHER ASSETS | 14,268 | 17,657 | ||||||
RECEIVABLE FROM SALE OF DATABASE BUSINESS | 101,500 | — | ||||||
Total Assets | $ | 1,204,532 | $ | 655,881 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 11,369 | $ | 27,881 | ||||
Accrued expenses | 57,792 | 38,922 | ||||||
Accrued employee compensation | 25,472 | 66,167 | ||||||
Income taxes payable | 163,304 | 23,139 | ||||||
Deferred revenue | 11,352 | 141,735 | ||||||
Advances from customers | 3,584 | 10,492 | ||||||
Accrued merger, realignment and other charges | 24,795 | 28,210 | ||||||
Other current liabilities | 364 | 427 | ||||||
Total current liabilities | 298,032 | 336,973 | ||||||
OTHER NON-CURRENT LIABILITIES | 103 | 787 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Common stock | 2,632 | 2,804 | ||||||
Shares to be issued for litigation settlement | — | 61,228 | ||||||
Additional paid-in capital | 620,502 | 632,866 | ||||||
Retained earnings (accumulated deficit) | 297,062 | (359,132 | ) | |||||
Accumulated other comprehensive loss | (13,799 | ) | (19,645 | ) | ||||
Total stockholders' equity | 906,397 | 318,121 | ||||||
Total Liabilities and Stockholders' Equity | $ | 1,204,532 | $ | 655,881 | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
ASCENTIAL SOFTWARE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Nine Months Ended September 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||
Net income (loss) | $ | 656,195 | $ | (98,592 | ) | |||||
Adjustments to reconcile net income (loss) to net cash and cash equivalents provided by operating activities: | ||||||||||
License fees received in advance | (6,725 | ) | (27,601 | ) | ||||||
Depreciation and amortization | 22,820 | 44,191 | ||||||||
Amortization of capitalized software | 12,436 | 16,678 | ||||||||
Impairment of long-term investments | 10,190 | — | ||||||||
Foreign currency transaction losses (gains) | 3,504 | (110 | ) | |||||||
Gain on sales of marketable securities | — | (2,895 | ) | |||||||
Loss on disposal of property and equipment | 166 | 1,712 | ||||||||
Provisions for losses on accounts receivable | 11,219 | 4,545 | ||||||||
Merger, realignment and other charges | 12,433 | 115,611 | ||||||||
Gain on sale of database business | (844,473 | ) | — | |||||||
Stock-based employee compensation | 166 | 326 | ||||||||
Changes in operating assets and liabilities: | ||||||||||
Accounts receivable | 34,584 | 45,335 | ||||||||
Other current assets | (17,565 | ) | 8,380 | |||||||
Accounts payable, accrued expenses and other liabilities | 67,207 | (63,722 | ) | |||||||
Deferred revenue | 12,268 | (12,474 | ) | |||||||
Net cash and cash equivalents provided by (used in) operating activities | (25,575 | ) | 31,384 | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||
Investments of excess cash: | ||||||||||
Purchases of available-for-sale securities | (239,375 | ) | (104,927 | ) | ||||||
Maturities of available-for-sale securities | 50,659 | 59,094 | ||||||||
Sales of available-for-sale securities | 21,048 | 32,033 | ||||||||
Purchases of non-marketable equity securities | — | (5,500 | ) | |||||||
Proceeds from sales of marketable securities | — | 5,130 | ||||||||
Purchases of property and equipment | (16,932 | ) | (37,896 | ) | ||||||
Proceeds from sale of database business, net | 888,400 | — | ||||||||
Proceeds from disposal of property and equipment | 272 | — | ||||||||
Additions to software costs | (9,426 | ) | (28,843 | ) | ||||||
Other | 296 | 1,555 | ||||||||
Net cash and cash equivalents provided by (used in) investing activities | 694,942 | (79,354 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||
Advances from customers | 3,421 | 9,212 | ||||||||
Proceeds from issuance of common stock, net | 12,522 | 35,416 | ||||||||
Acquisition of common stock | (117,558 | ) | (33,725 | ) | ||||||
Payments for structured settlements with resellers | — | (129 | ) | |||||||
Principal payments on capital leases | (49 | ) | (1,675 | ) | ||||||
Net cash and cash equivalents provided by (used in) financing activities | (101,664 | ) | 9,099 | |||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (2,085 | ) | (5,640 | ) | ||||||
Increase (decrease) in cash and cash equivalents | 565,618 | (44,511 | ) | |||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 128,420 | 170,118 | ||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 694,038 | $ | 125,607 | ||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
ASCENTIAL SOFTWARE CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Note A—Presentation of Interim Financial Statements
In July 2001, the Company changed its name to Ascential Software Corporation from Informix Corporation.
The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements. In the opinion of management, all significant adjustments that are normal, recurring in nature and necessary for a fair presentation of the financial position and results of the operations of the Company, have been consistently recorded. The operating results for the interim periods presented are not necessarily indicative of expected performance for the entire year. Certain previously reported amounts have been reclassified to conform to the current presentation format. The unaudited information should be read in conjunction with the audited financial statements of the Company and the notes thereto for the year ended December 31, 2000 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (which was filed under the name of Informix Corporation).
Note B—Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141,Business Combinations, and SFAS No. 142,Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the guidance set forth in SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
In accordance with SFAS No. 141, the Company will account for all business combinations using the purchase method of accounting. The Company will adopt the remaining provisions of SFAS No. 141 and will adopt SFAS No. 142 on January 1, 2002. Furthermore, goodwill and intangible assets determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will be evaluated for impairment in accordance with SFAS No. 142. Goodwill and intangible assets acquired in business combinations completed before June 30, 2001 will continue to be amortized prior to the adoption of SFAS No. 142.
Upon adoption of SFAS No. 142, the Company will be required to reassess the useful lives and residual values of all intangible assets, having definite useful lives, acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation, SFAS No. 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. Any transitional impairment loss resulting from the goodwill impairment evaluation will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of operations.
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As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $29.7 million, and unamortized identifiable intangible assets in the amount of $2.1 million, both of which will be subjected to the transition provisions of SFAS No. 141 and No. 142. Amortization expense related to goodwill and identifiable intangible assets for the Company was $7.2 million and $16.3 million for the nine-months ended September 30, 2001 and year ended December 31, 2000, respectively. Included in these amounts is amortization expense related to goodwill for the database business of $2.6 million and $9.2 million for the nine-months ended September 30, 2001 and year ended December 31, 2000, respectively. As discussed in Note F in these Notes to Unaudited Condensed Consolidated Financial Statements, the Company completed the sale of its database business. As part of the transaction, the Company eliminated $5.2 million of goodwill relating to the database business when it recorded the transaction. Because of the extensive effort needed to comply with adopting SFAS No. 141, excluding the provisions that require that the purchase method of accounting be used for all business combinations, and SFAS No. 142, it is not practicable to reasonably estimate the impact of adopting these standards on the Company's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle.
In August 2001, the FASB issued SFAS No. 143,Accounting for Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The purpose of this Statement is to develop consistent accounting of asset retirement obligations and related costs in the financial statements and provide more information about future cash outflows, leverage and liquidity regarding retirement obligations and the gross investment in long-lived assets. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company will implement SFAS No. 143 on January 1, 2003. The impact of such adoption is not anticipated to have a material effect on the Company's financial statements.
In October 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30,Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in APB Opinion No. 30). This Statement also amends Accounting Research Board No. 51,Consolidated Financial Statements, to eliminate the exception to consolidation for subsidiaries for which control is likely to be temporary. The Company will adopt SFAS No. 144 beginning January 1, 2002. The impact of such adoption is not anticipated to have a material effect on the Company's financial statements.
7
Note C—Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income (loss) per common share (in thousands, except per share data):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | 2001 | 2000 | |||||||||||
Numerator: | |||||||||||||||
Net income (loss) | $ | 651,425 | $ | (80,627 | ) | $ | 656,195 | $ | (98,592 | ) | |||||
Preferred stock dividend | — | (15 | ) | — | (191 | ) | |||||||||
Numerator for basic and diluted net income (loss) per common share | $ | 651,425 | $ | (80,642 | ) | $ | 656,195 | $ | (98,783 | ) | |||||
Denominator: | |||||||||||||||
Denominator for basic net income (loss) per common share— | |||||||||||||||
Weighted-average shares outstanding | 278,345 | 282,133 | 281,759 | 280,209 | |||||||||||
Weighted-average shares to be issued for litigation settlement | — | 6,056 | 2,085 | 6,056 | |||||||||||
278,345 | 288,189 | 283,844 | 286,265 | ||||||||||||
Effect of dilutive securities: | |||||||||||||||
Employee stock options and restricted common stock | 3,138 | — | 5,151 | — | |||||||||||
Contingently issuable shares for litigation settlement | 4,529 | — | 4,529 | — | |||||||||||
Common stock warrants | 12 | — | 14 | — | |||||||||||
Denominator for diluted net income (loss) per common share— | |||||||||||||||
Adjusted weighted-average shares and assumed conversions | 286,024 | 288,189 | 293,538 | 286,265 | |||||||||||
Basic net income (loss) per common share | $ | 2.34 | $ | (0.28 | ) | $ | 2.31 | $ | (0.35 | ) | |||||
Diluted net income (loss) per common share | $ | 2.28 | $ | (0.28 | ) | $ | 2.24 | $ | (0.35 | ) | |||||
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 nine million shares ("settlement shares") of the Company's 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 Company's Common Stock averages at least $10.11 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 2.9 million settlement shares to the plaintiff's counsel. The stock price guarantee was satisfied with respect to the first distribution of settlement shares. In April 2001, the Company issued the remainder of the settlement shares. The Company ultimately elected to satisfy the stock price guarantee by making a payment of $26.2 million in cash in November 2001. At September 30, 2001, it was presumed that the Company 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.
8
The Company excluded potentially dilutive securities for each period presented from its diluted net income (loss) per share computation when either the exercise price of the securities exceeded the average fair value of the Company's Common Stock or the Company had net losses and, therefore, these securities were anti-dilutive. A summary of the excluded potential dilutive securities and the related exercise/conversion features for the quarter ended September 30, 2001 is as follows (in thousands):
Potential dilutive securities: | |||
Stock options | 31,301 | ||
Common stock warrants (Series B Warrants) | 2,303 |
The stock options have per share exercise prices ranging from $4.75 to $28.10 and are exercisable through June 2011.
The warrants to purchase shares of the Company's Common Stock (the "Series B Warrants") were issued in connection with the conversion of certain shares of the Company's Series B Preferred into shares of the Company's Common Stock. Upon conversion of the Series B Preferred, the holders received Series B Warrants to purchase a number of shares of the Company's Common Stock equal to 20% of the shares of the Company's Common Stock into which the Series B Preferred was converted. As of September 30, 2001, approximately 2,303,000 Series B Warrants were outstanding and exercisable through November 2002 at a per share exercise price of $7.84. As of September 30, 2001, there was no Series B Convertible Preferred Stock outstanding as all remaining shares were converted into shares of Common Stock in July 2000.
Note D—Comprehensive Income
The following table sets forth the calculation of comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2001 and 2000 (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | 2001 | 2000 | ||||||||||
Net income (loss) | $ | 651,425 | $ | (80,627 | ) | $ | 656,195 | $ | (98,592 | ) | ||||
Other comprehensive income (loss): | ||||||||||||||
Reclassification adjustment for realized losses (gains) included in net income (loss) | — | — | 3,808 | (2,895 | ) | |||||||||
Unrealized gains (losses) on available-for-sale securities, net of taxes | 523 | (306 | ) | 1,078 | (202 | ) | ||||||||
Change in accumulated foreign currency translation adjustment | 2,157 | (1,419 | ) | 960 | (5,562 | ) | ||||||||
$ | 654,105 | $ | (82,352 | ) | $ | 662,041 | $ | (107,251 | ) | |||||
9
Note E—Stockholders' Equity
Reconciliation of outstanding shares (in thousands): | ||||
Shares outstanding at December 31, 2000 | 280,363 | |||
Shares issued upon exercises of stock options | 2,339 | |||
Shares sold and issued to employees under ESPP | 1,288 | |||
Shares repurchased | (26,850 | ) | ||
Shares issued in litigation settlement | 6,057 | |||
Shares repurchased under Cloudscape repurchase agreements | (11 | ) | ||
Shares outstanding at September 30, 2001 | 263,186 | |||
On July 2, 2001, the Company announced that its Board of Directors authorized an increase in the size of its stock repurchase program to $350 million, from the previously announced level of $100 million. The Company intends, barring unforseen circumstances, to repurchase its outstanding shares from time to time in the open market and through privately negotiated transactions subject to market conditions. During the nine months ended September 30, 2001, the Company repurchased 26,850,000 shares of common stock for an aggregate purchase price of approximately $117.6 million.
Note F—Sale of the Database Business
On July 1, 2001, the Company completed the initial closing of the sale to International Business Machines Corporation ("IBM") of substantially all of the assets and certain liabilities of the database business for $1.0 billion in cash. The transaction with IBM was completed on August 1, 2001, upon the closing of the sale of the database business in the nine remaining countries that were not closed on July 1, 2001 ("the Phase 2 countries"). IBM has 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. IBM will retain the holdback until December 31, 2002, except for any funds necessary to provide for any claims made prior to that date. Beginning July 1, 2001, interest will accrue at 6% per annum on the amount of the holdback ultimately released to the Company. Accrued interest on the holdback was $1.5 million at September 30, 2001. The holdback and accrued interest are included in Receivable from Sale of Database Business on the accompanying Unaudited Condensed Consolidated Balance Sheets. In connection with the sale, the Company paid IBM $11.6 million, which is equal to 18% of certain deferred revenues of the database business for which the Company had received payment. In addition, the Company will pay IBM $13.2 million to fund the transfer of certain employee-related accruals during the quarter ending December 31, 2001.
As a result of the sale of database assets, the Company recorded a gain, after transaction costs and related charges, but excluding taxes, of $850.1 million and $844.5 million for the three-month and
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nine-month periods ended September 30, 2001, respectively. The following table sets forth the components of the gain (in millions):
| Three months ended September 30, 2001 | Nine months ended September 30, 2001 | |||||
---|---|---|---|---|---|---|---|
Cash proceeds received from IBM | $ | 900.0 | $ | 900.0 | |||
IBM holdback | 100.0 | 100.0 | |||||
Gross sale proceeds | 1,000.0 | 1,000.0 | |||||
Deferred revenue adjustment | (11.6 | ) | (11.6 | ) | |||
Employee-related accrual adjustment | (13.2 | ) | (13.2 | ) | |||
Adjusted sale proceeds | 975.2 | 975.2 | |||||
Net assets transferred to IBM | (67.6 | ) | (67.6 | ) | |||
Transaction costs and related charges | (57.5 | ) | (63.1 | ) | |||
Gain on sale | $ | 850.1 | $ | 844.5 | |||
The following table sets forth the components of the transaction costs and related charges incurred during the nine months ended September 30, 2001 (in millions):
| Charges | Payments/ non-cash charges | Due from IBM | Accrual balance September 30, 2001 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Professional fees | $ | 34.2 | $ | (30.1 | ) | $ | — | $ | 4.1 | ||||
Severance and employment-related charges | 24.3 | (11.2 | ) | — | 13.1 | ||||||||
Severance reimbursement from IBM | (21.3 | ) | — | 21.3 | — | ||||||||
Facilities and equipment charges | 21.4 | (5.8 | ) | — | 15.6 | ||||||||
Other charges | 4.4 | (1.8 | ) | — | 2.6 | ||||||||
$ | 63.0 | $ | (48.9 | ) | $ | 21.3 | $ | 35.4 | |||||
Less: Facilities and equipment charges included within Accrued merger, realignment and other charges | (15.6 | ) | |||||||||||
Accrued transaction costs and related charges included in Accrued expenses | $ | 19.8 | |||||||||||
Professional fees primarily consist of fees for investment bankers, attorneys and accountants for services provided related to the transaction. Severance and employment-related charges primarily consist of 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 transaction and also a $4.4 million charge that related to the modification of vesting and exercisability terms of stock options for certain severed executives and for database employees that joined IBM. As of September 30, 2001, severance payments and related taxes had been paid to terminate approximately 40 employees. The remaining accrual balance of $13.1 million will be paid to approximately 60 employees on various dates extending through March 2002. Under the terms of the agreement with IBM ("the Agreement"), IBM will reimburse the Company $21.3 million for severance-related costs. The $21.4 million charge for facilities and equipment costs consists of a $19.1 million charge for the residual lease obligations and restoration costs and a $2.3 million impairment charge related to leasehold improvements and other fixed assets at facilities that the Company no longer occupied as at
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September 30, 2001. The $19.1 million charge for residual lease obligations are based upon lease obligations that the Company estimates it will 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. If the Company did not exit the facility prior to September 30, 2001, the charge for residual lease obligations is based upon lease obligations that the Company expects to incur from the estimated date that the Company will exit the facility to the end of the lease term, net of rental payments from IBM or other sub-lessees. This charge also includes estimated restoration costs for facilities that the Company has either exited or finalized plans to exit as of September 30, 2001. The leases relating to facilities that the Company has exited or finalized plans to exit as of September 30, 2001 begin to expire in 2002 through 2008. Other charges consist primarily of non-recoverable transfer and sales taxes arising from the transaction and various other items.
Under the terms of the agreement, the Company was obligated to transfer $124.0 million of net working capital, as defined in the agreement, to IBM. If the net working capital transferred to IBM exceeded $124.0 million, IBM would pay the Company 50% of the excess over $124.0 million. If the net working capital transferred to IBM were less than $124.0 million, the Company would pay IBM an amount equal to the difference. As of September 30, 2001, the Company believes it has transferred more that $124.0 million of net working capital. The Company expects the net working capital adjustment will be finalized with IBM during the quarter ended December 31, 2001, at which time any such adjustment is not expected to be material to the financial position of the Company.
The Company and IBM are providing certain transition services to each other for a limited period of time following the closing of the sale of the database business. These services mainly consist of the performance of certain administrative functions and the provision of office space in shared facilities where one of the parties is the primary leaseholder. To facilitate the provision of these services, the Company has entered into transition service agreements with IBM, whereby both parties will provide and utilize transitional services at agreed upon rates that the Company believes represents the fair value of such services. The provision of shared administrative functions and office space in shared facilities are expected to continue through the middle of 2002.
The Company has a net receivable of $7.6 million included in Other current assets as of September 30, 2001. This balance primarily consists of a $21.3 million receivable from IBM for the reimbursement of severance related costs incurred by the Company and amounts due to and from both parties for transitional services that have been provided during the third quarter of 2001. These receivables are offset by a $13.2 million payable to IBM for certain employee-related accruals that were transferred to IBM.
The database business and the Company's ongoing operations both consist of providing information management software to medium-size to large businesses and organizations. As such, the sale of the database business to IBM does not constitute a disposal of a business segment. Accordingly, the results and net assets of the database business are not classified as discontinued operations.
Effective on the closing of the transaction, IBM and the Company entered into an agreement to settle existing outstanding patent infringement litigation for no consideration.
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Note G—Accrued Merger, Realignment and Other Charges
Third Quarter 2001 Realignment
During the quarter ended September 30, 2001, the Company approved plans to reduce its worldwide headcount by approximately 130 sales and marketing employees, 10 general and administrative employees, 10 research and development employees and 20 professional services and manufacturing employees. Accordingly, the Company recorded realignment and other charges of $6.8 million. The following analysis sets forth both the significant components of the charge recognized during the quarter ended September 30, 2001, and the accrual activity for the quarter ended September 30, 2001 (in millions):
| Charges | Payments/ Non-cash Charges | Balance at September 30, 2001 | ||||||
---|---|---|---|---|---|---|---|---|---|
Severance and employment costs | $ | 4.9 | $ | (2.3 | ) | $ | 2.6 | ||
Write-off of abandoned technology | 1.9 | (1.9 | ) | — | |||||
$ | 6.8 | $ | (4.2 | ) | $ | 2.6 | |||
Severance and employment-related costs primarily consisted of termination compensation and related benefits for employees. As of September 30, 2001, termination compensation and related benefits had been paid to terminate approximately 60 employees. The remaining accrual balance of $2.6 million to terminate approximately 110 employees will be paid on various dates extending through December 2001.
The write-off of abandoned technology of $1.9 million relates to the iDecide product, which was abandoned as a result of the sale of the database business.
Facility Accruals Related to Sale of the Database Business
In connection with the sale of the database business to IBM, the Company recorded a charge of $21.4 million, which was recorded against the gain on the sale of the database business, for the closure of facilities and equipment costs (see Note F, above, in these Notes to Unaudited Condensed Consolidated Financial Statements). The remaining accrual balance at September 30, 2001 of $15.6 million is for lease obligations that extend through 2005 for redundant facilities and is included in Accrued merger, realignment and other charges.
2000 Strategic Realignment
During the quarter ended September 30, 2000, the Company approved plans to realign its operations by establishing two operating businesses. 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. To date, the Company has recorded realignment and other charges of $92.5 million relating to its plans to realign its operations by establishing two operating businesses, of which $5.6 million was recorded during the nine-month period ended September 30, 2001. The following analysis sets forth both the significant components of the charge recognized during the
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nine-month period ended September 30, 2001, and the accrual activity for the nine-month period ended September 30, 2001 (in millions):
| Accrual Balance at December 31, 2000 | Charges/ Adjustments | Payments | Accrual Balance at September 30, 2001 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Severance and employment costs | $ | 22.8 | $ | 3.5 | $ | (26.1 | ) | $ | 0.2 | |||
Facility and equipment costs | 3.6 | 1.9 | (2.7 | ) | 2.8 | |||||||
Costs to exit various commitments and programs and other charges | 2.3 | 0.2 | (0.3 | ) | 2.2 | |||||||
$ | 28.7 | $ | 5.6 | $ | (29.1 | ) | $ | 5.2 | ||||
Amount included in Accrued employee compensation | (5.0 | ) | — | |||||||||
Amount included in Accrued merger, realignment and other charges | $ | 23.7 | $ | 5.2 | ||||||||
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 September 30, 2001, termination compensation and related benefits had been paid to terminate approximately 790 employees. The remaining accrual balance of $0.2 million will be paid on various dates extending through December 2001.
Included in the $1.9 million charge for facility and equipment costs was $0.5 million for the write-off of leasehold improvements, as these assets are no longer being used, and $1.4 million for lease obligations for redundant facilities. The remaining accrual balance at September 30, 2001 of $2.8 million is for lease obligations that extend through 2005 for redundant facilities.
The remaining accrual of $2.2 million for costs to exit various commitments and programs should be settled by the end of 2001.
Ardent Merger and Other
In addition to the foregoing, as a result of the merger with Ardent Software, Inc. ("Ardent") in March 2000 as well as other merger and realignment activities that took place prior to 2000, the Company recorded charges arising from transaction related professional fees, and decisions to reduce workforce and exit certain facilities. As of September 30, 2001, approximately $1.4 million remains unpaid and relates primarily to future rental obligations on idle facilities that expire at various dates through 2004.
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Summary of Accrued Merger, Realignment and Other Charges
At September 30, 2001, the total Accrued merger, realignment and other charges include the following items described above (in millions):
| September 30, 2001 | ||
---|---|---|---|
Third quarter 2001 realignment | $ | 2.6 | |
Facility accruals related to sale of the database business | 15.6 | ||
2000 strategic realignment | 5.2 | ||
Ardent merger and other | 1.4 | ||
$ | 24.8 | ||
Note H—Business Segments
In recent years, the Company has operated under four reportable operating segments which report to the Company's chief executive officer, (the "Chief Operating Decision Maker"). These reportable operating segments, North America, Europe, Asia/Pacific and Latin America, are organized, managed and analyzed geographically and operate in one industry segment: the development and marketing of information asset management software and related services. The Company has evaluated operating segment performance based primarily on net revenues and certain operating expenses. The Company's products are marketed internationally through the Company's subsidiaries and through application resellers, OEMs and distributors.
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Financial information for the Company's North America, Europe, Asia/Pacific and Latin America operating segments is summarized below for the three-month and nine-month periods ended September 30, 2001 and 2000:
Three months ended September 30, | North America | Europe | Asia Pacific | Latin America | Eliminations | Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | ||||||||||||||||||
2001: | |||||||||||||||||||
Net revenues from unaffiliated customers | $ | 14,031 | $ | 9,175 | $ | 3,369 | $ | 1,930 | $ | — | $ | 28,505 | |||||||
Transfers between segments | (285 | ) | 285 | — | — | — | — | ||||||||||||
Total net revenues | 13,746 | 9,460 | 3,369 | 1,930 | — | 28,505 | |||||||||||||
Operating loss | (21,766 | ) | (13,755 | ) | (3,923 | ) | (852 | ) | (54 | ) | (40,350 | ) | |||||||
Net income (loss) | 616,835 | 193,468 | 7,971 | 4,634 | (171,483 | ) | 651,425 | ||||||||||||
Identifiable assets at September 30 | 1,083,634 | 319,462 | 20,550 | 782 | (219,896 | ) | 1,204,532 | ||||||||||||
Depreciation and amortization expense | 2,576 | 380 | 108 | 113 | — | 3,177 | |||||||||||||
Capital expenditures | 331 | 410 | 19 | 10 | — | 770 | |||||||||||||
2000: | |||||||||||||||||||
Net revenues from unaffiliated customers | $ | 107,618 | $ | 61,635 | $ | 25,058 | $ | 16,794 | $ | — | $ | 211,105 | |||||||
Transfers between segments | (5,632 | ) | 2,655 | 956 | 2,021 | — | — | ||||||||||||
Total net revenues | 101,986 | 64,290 | 26,014 | 18,815 | — | 211,105 | |||||||||||||
Operating income (loss) | (89,706 | ) | 14,932 | (3,002 | ) | (1,986 | ) | (169 | ) | (79,931 | ) | ||||||||
Net income (loss) | (82,944 | ) | 12,788 | (4,139 | ) | (1,898 | ) | (4,434 | ) | (80,627 | ) | ||||||||
Identifiable assets at December 31 | 653,565 | 177,003 | 32,018 | 13,348 | (220,053 | ) | 655,881 | ||||||||||||
Depreciation and amortization expense | 10,252 | 3,598 | 745 | 304 | — | 14,899 | |||||||||||||
Capital expenditures | 7,487 | 4,997 | 539 | 155 | — | 13,178 |
Nine months ended September 30, | North America | Europe | Asia Pacific | Latin America | Eliminations | Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | ||||||||||||||||||
2001: | |||||||||||||||||||
Net revenues from unaffiliated customers | $ | 245,952 | $ | 132,336 | $ | 43,210 | $ | 32,663 | $ | — | $ | 454,161 | |||||||
Transfers between segments | (11,323 | ) | 6,215 | 1,994 | 3,114 | — | — | ||||||||||||
Total net revenues | 234,629 | 138,551 | 45,204 | 35,777 | — | 454,161 | |||||||||||||
Operating income (loss) | (17,093 | ) | (3,982 | ) | 392 | (1,585 | ) | 22 | (22,246 | ) | |||||||||
Net income (loss) | 597,690 | 197,139 | 11,871 | 2,052 | (152,557 | ) | 656,195 | ||||||||||||
Identifiable assets at September 30 | 1,083,634 | 319,462 | 20,550 | 782 | (219,896 | ) | 1,204,532 | ||||||||||||
Depreciation and amortization expense | 18,443 | 2,340 | 1,389 | 648 | — | 22,820 | |||||||||||||
Capital expenditures | 14,266 | 2,135 | 204 | 327 | — | 16,932 | |||||||||||||
2000: | |||||||||||||||||||
Net revenues from unaffiliated customers | $ | 367,660 | $ | 208,808 | $ | 76,671 | $ | 49,344 | $ | — | $ | 702,483 | |||||||
Transfers between segments | (21,103 | ) | 7,753 | 8,343 | 5,007 | — | — | ||||||||||||
Total net revenues | 346,557 | 216,561 | 85,014 | 54,351 | — | 702,483 | |||||||||||||
Operating income (loss) | (156,634 | ) | 52,464 | 2,693 | 379 | (19 | ) | (101,117 | ) | ||||||||||
Net income (loss) | (141,534 | ) | 45,817 | 846 | 3,735 | (7,456 | ) | (98,592 | ) | ||||||||||
Identifiable assets at December 31 | 653,565 | 177,003 | 32,018 | 13,348 | (220,053 | ) | 655,881 | ||||||||||||
Depreciation and amortization expense | 34,656 | 6,217 | 2,267 | 1,051 | — | 44,191 | |||||||||||||
Capital expenditures | 27,181 | 8,374 | 1,418 | 923 | — | 37,896 |
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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 (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | 2001 | 2000 | |||||||||
Operating income (loss) of reportable | |||||||||||||
operating segments | $ | (40,296 | ) | $ | (79,762 | ) | $ | (22,268 | ) | $ | (101,098 | ) | |
Consolidating adjustments | (54 | ) | (169 | ) | 22 | (19 | ) | ||||||
Other income | 856,844 | 3,304 | 847,912 | 14,543 | |||||||||
Income (loss) before income taxes | $ | 816,494 | $ | (76,627 | ) | $ | 825,666 | $ | (86,574 | ) | |||
On September 19, 2000, the Company announced organizational changes as part of its strategic realignment, including the establishment of two operating businesses; Ascential Software and Informix Software. Informix Software focused on providing database management systems for data warehousing, transaction processing, and e-Business applications. As discussed in Note F, above, in these Notes to Unaudited Condensed Consolidated Financial Statements, the Company completed the sale of its database business to IBM during the third quarter of 2001. Ascential Software is a newly established information asset management company providing content management, data integration infrastructure and enterprise portal software solutions to organizations worldwide. Revenues from external customers for each group of similar products and services offered by Informix Software and Ascential Software, respectively, are summarized below for the three-month and nine-month periods ended September 30, 2001 and 2000 (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | 2001 | 2000 | ||||||||||
Informix Software | ||||||||||||||
License revenues | $ | 0.1 | $ | 67.2 | $ | 149.3 | $ | 255.2 | ||||||
Service revenues | ||||||||||||||
Maintenance revenues | 1.3 | 97.0 | 183.8 | 296.8 | ||||||||||
Consulting and education revenues | 0.1 | 17.8 | 24.3 | 62.5 | ||||||||||
Total service revenues | 1.4 | 114.8 | 208.1 | 359.3 | ||||||||||
Total revenues—Informix Software | $ | 1.5 | $ | 182.0 | $ | 357.4 | $ | 614.5 | ||||||
Ascential Software | ||||||||||||||
License revenues | $ | 12.9 | $ | 15.3 | $ | 48.1 | $ | 48.1 | ||||||
Service revenues | ||||||||||||||
Maintenance revenues | 6.8 | 5.6 | 22.6 | 14.5 | ||||||||||
Consulting and education revenues | 7.3 | 8.2 | 26.1 | 25.4 | ||||||||||
Total service revenues | 14.1 | 13.8 | 48.7 | 39.9 | ||||||||||
Total revenues—Ascential Software | $ | 27.0 | $ | 29.1 | $ | 96.8 | $ | 88.0 | ||||||
Ascential Software Corporation (Combined total of Informix Software and Ascential Software) | ||||||||||||||
License revenues | $ | 13.0 | $ | 82.5 | $ | 197.4 | $ | 303.3 | ||||||
Service revenues | ||||||||||||||
Maintenance revenues | 8.1 | 102.6 | 206.4 | 311.3 | ||||||||||
Consulting and education revenues | 7.4 | 26.0 | 50.4 | 87.9 | ||||||||||
Total service revenues | 15.5 | 128.6 | 256.8 | 399.2 | ||||||||||
Total revenues | $ | 28.5 | $ | 211.1 | $ | 454.2 | $ | 702.5 | ||||||
As discussed above, the Company undertook a strategic realignment to transition from five former business units into the two operating businesses during the second half of 2000. By December 31, 2000,
17
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. Accordingly, although separate revenue information is disclosed for the two operating businesses on a historical basis, there is no disclosure of separate historical operating results for periods prior to December 31, 2000. Below is a summary of the results of operations based on the two operating businesses for the three-month and nine-month periods ended September 30, 2001:
Three months ended September 30, 2001 | Informix Software | Ascential Software | Ascential Software Corporation | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(In millions) | | | | |||||||
Total net revenues | $ | 1.5 | $ | 27.0 | $ | 28.5 | ||||
Operating loss* | (6.3 | ) | (34.0 | ) | (40.3 | ) |
Nine months ended September 30, 2001 | Informix Software | Ascential Software | Ascential Software Corporation | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(In millions) | | | | |||||||
Total net revenues | $ | 357.4 | $ | 96.8 | $ | 454.2 | ||||
Operating income (loss)* | 52.7 | (74.9 | ) | (22.2 | ) |
- *
- Operating income (loss) includes amortization of goodwill and purchased intangibles of $2.6 million for the nine months ended September 30, 2001 for Informix Software. Operating income (loss) includes amortization of goodwill and purchased intangibles of $1.5 million and $4.6 million for the three-month and nine-month periods ended September 30, 2001, respectively, for Ascential Software.
The revenue and expenses for Informix Software for the three-month period ended September 30, 2001 result primarily from the operations of the database business during the month of July 2001 for the Phase 2 countries and transitional costs related to the database business which will not recur on an ongoing basis.
Note I—Litigation
Commencing in April 1997, a series of class action lawsuits purported to be by or on behalf of stockholders and a separate but related stockholder action were filed in the United States District Court for the Northern District of California. These actions named as defendants the Company, certain of its present and former officers and directors and, in some cases, its former independent auditors. The complaints alleged various violations of the federal securities laws and sought unspecified but potentially significant damages. Similar actions were also filed in California state court and in Newfoundland, Canada.
Stockholder derivative actions, purported on behalf of the Company and naming virtually the same individual defendants and the Company's former independent auditors, were also filed, commencing in August 1997, in California state court.
In October and November 1999, state and federal courts granted final approval of a settlement agreed to by the Company and the other parties to the various private securities and related litigation against the Company (the "Settlement"). The Settlement resolved all material litigation arising out of the restatement of the Company's financial statements that was publicly announced in November 1997. In accordance with the terms of the Settlement, the Company paid approximately $3.2 million in cash during the second quarter of 1999 and an additional amount of approximately $13.8 million of insurance proceeds was contributed directly by certain insurance carriers on behalf of certain of the Company's current and former officers and directors. The Company agreed to contribute a minimum of 9.0 million shares of the Company's common stock, which will have a guaranteed value of $91.0 million
18
for a maximum term of one year from the date of the final approval of the Settlement by the courts. The first distribution of shares of the Company's common stock occurred in November and December 1999 when the Company issued approximately 2.9 million shares to the plaintiff's counsel. The stock price guarantee was satisfied with respect to the first distributions of settlement shares. In April 2001, the Company issued the remaining 6.1 million of the minimum 9.0 million shares to be issued under the Settlement. Pursuant to the terms of the Settlement, the Company paid an additional amount of $26.2 million in cash in November 2001 to satisfy the stock price guarantee with respect to the remaining 6.1 million shares issued under the Settlement. At September 30, 2001, it was presumed that the Company would satisfy the stock price guarantee by issuing the contingently issuable shares. Accordingly, the settlement amount for the contingently issuable shares is included in Stockholders' Equity in the balance sheet at September 30, 2001. The Company's former independent auditors, Ernst & Young LLP, paid $34.0 million in cash. The total amount of the Settlement was $142.0 million.
EXPO 2000 filed an action against Informix Software GmbH (the Company's German subsidiary) in the Hanover (Germany) district court in September 1998 seeking recovery of approximately $6.0 million, plus interest, for breach of a sponsorship contract signed in 1997. Informix Software GmbH filed a counterclaim for breach of contract and seeks recovery of approximately $3.1 million. In August 1999, the court entered a judgment against Informix Software GmbH in the amount of approximately $6.0 million, although approximately $2.1 million of the judgment is conditioned upon the return of certain software by EXPO 2000. The Company filed an appeal and reserved approximately $3.0 million for the expected outcome of the appeal. In April 2001, the German appellate court set aside the lower court's judgment and issued a judgment in favor of Informix Software GmbH in the amount of approximately $2.5 million. During the quarter ended September 2001, EXPO 2000 filed an appeal against the decision with the German appellate court. Consideration of this final appeal has been deferred until December 2001. Accordingly, the Company continues to have a reserve of approximately $3.0 million for the estimated outcome.
The Company is a defendant in actions filed against Unidata prior to its merger with Ardent (prior to its merger with the Company), one in May 1996 in the U.S. District Court for the Western District of Washington, and one in September 1996 in the U.S. District Court for the District of Colorado. The plaintiff, a company controlled by a former stockholder of Unidata and a distributor of its products in certain parts of Asia, alleges in both actions the improper distribution of certain Unidata products in the plaintiff's exclusive territory and asserts damages of approximately $30.0 million under claims for fraud, breach of contract, unfair competition, racketeering and corruption, and a trademark and copyright infringement, among other relief. Unidata denied the allegations against it in its answers to the complaints. In the Colorado action, Unidata moved that the matter be resolved by arbitration in accordance with its distribution agreement with the plaintiff. In May 1999, the U.S. District Court for the District of Colorado issued an order compelling arbitration and in September 2000, the arbitrator issued an award against Ardent for $3.5 million plus attorneys' fees and expenses estimated to be approximately $0.8 million. The Company, as successor-in-interest to Unidata, has been joined as a party in an action in China filed by the same plaintiff in the U.S actions and a related company against Unidata, its former distributor and a customer arising out of the same facts at issue in the U.S actions. The Company and the plaintiff have agreed in principle to a settlement pursuant to which, among other things, the Company would pay the plaintiff approximately $11.2 million to settle all claims in all pending litigation, with the exception of potential claims for indemnity between the Company and other co-defendants relating to attorneys fees and any amounts paid in settlement, which are not estimable at September 30, 2001. The Company has reserved $11.2 million for this settlement as of September 30, 2001. The settlement, however, is not yet finalized.
From time to time, in the ordinary course of business, the Company is involved in various legal proceedings and claims. The Company does not believe that any of these proceedings and claims will have a material adverse effect on the Company's business or financial condition.
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Note J—Derivative Financial Instruments
On January 1, 2001, the Company adopted SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended. SFAS No. 133 establishes new standards for recognizing all derivatives as either assets or liabilities, and measuring those instruments at fair value. If the derivative is designated as a fair value hedge, the change in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in accumulated other comprehensive income (loss) and are recognized in income when the hedged item effects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.
The Company uses derivative financial instruments principally in the management of its foreign currency price exposures. The Company enters into forward foreign exchange contracts to hedge the risk from forecasted settlement in local currencies of inter-company sales and purchases. These transactions and other forward foreign exchange contracts do not meet the accounting rules established under SFAS 133 of recording the unrecognized after-tax gain or loss portion of the fair value of the contracts in other comprehensive income (loss). Therefore, the related fair value of the derivative hedge contract is recognized in earnings. The adoption of SFAS 133 did not have a significant impact on the Company's financial condition or results of operations.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements relating to future events or the Company's future financial performance, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Factors That May Affect Future Results," and elsewhere in this quarterly report on Form 10-Q.
References to or comparisons between the same "period" in this Form 10-Q refer to the Company's quarterly and/or nine-month periods of the relevant fiscal year.
OVERVIEW
Ascential Software ("Ascential") is a leading global provider of Information Asset Management solutions. Customers use Ascential products to turn vast amounts of disparate, unrefined data into reliable, reusable information assets that drive business success. Ascential provides the information infrastructure which gives organizations the ability to collect, validate, organize, administer and deliver information from anywhere to anywhere across the enterprise, to deliver economic value.
Information Asset Management, or IAM, is a new category, and is the confluence of market drivers in three areas: data integration, digital content management, and enterprise portal infrastructure. Ascential's IAM offerings are infrastructure solutions for data integration, digital content management and portal infrastructure for data warehouses. The combination of these solutions enables customers today and into the future to manage all their information assets.
Data integration is the extraction of data from legacy mainframes, servers, databases, flat files and other disparate systems throughout the organization, transformation of that data into a compatible format, and its delivery to a target system, such as a server. Digital content management is the collection, validation, organization, administration, delivery and management of unstructured data such as XML files, video, audio, images, desktop publishing and text files. Portal infrastructure software provides sophisticated XML-based Business Information Directories, or BIDs, to allow users to find all the information, whether structured or unstructured, that is available throughout the enterprise, and deliver it to their data warehouse.
Headquartered in Westboro, MA, Ascential has offices worldwide and supports more than 1,800 customers in such industries as telecommunications, insurance, financial services, healthcare, media/entertainment, government and retail. Ascential has approximately 830 employees and will build from a revenue base of $122 million, which was the revenue generated in 2000 by the Ascential business operations (including the i.Sell product, which was discontinued in the first quarter of 2001).
During the third quarter of 2001, we completed the sale of our database business to International Business Machines Corporation ("IBM") (See Note F to the Notes to Unaudited Condensed Consolidated Financial Statements). In order to reflect the resulting change in our business structure, we changed our name from "Informix Corporation" to "Ascential Software Corporation" and our ticker symbol to "ASCL." These changes became effective in July 2001.
Ascential Software Products and Services
The DataStage Product Family is a leading data integration platform. It offers an enterprise a single integration platform for any style of structured data using a unified meta data backbone. At its core, the DataStage family provides enterprises with components for data integration, the movement and transformation of data from diverse sources, combined with tools for meta data integration and data quality assurance. Extending this capability, DataStage allows the customer to take data from diverse sources including: legacy mainframe systems; Enterprise Applications such as SAP, Siebel, and PeopleSoft; Message-based Middleware and complex file structures such as XML and web logs. The
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data is then transformed so that it can be made available to end use applications such as Customer Relationship Management, Decision Support, e-business, or other applications. Lastly, its web-based components enable remote administration of a corporation's warehouse investment, and the reuse of an organization's business intelligence investments in analytic application tools such as those provided by Business Objects, Hyperion and Cognos.
Media360 is a complete Digital Asset Management solution for loading, digitizing, indexing, retrieving, playing, protecting, distributing, and archiving any type of content. Media360 is tightly integrated with video and audio catalogers, newsgathering, editing, Web publishing, eCommerce, digital content distribution, and analytic systems. Media360 also helps distribute content over the Web, enabling inexperienced users to prepare and publish content inside and outside an organization.
Ascential products combine the management of structured data, with the DataStage family, and unstructured data, with the Media360 solution, for customers and turns data into reliable, reusable information assets to improve operational efficiency and customer centricity by facilitating the ability to predict, act, analyze, collaborate and re-use all information assets.
Ascential offers a full range of consulting, educational and support services to assist customers through all phases of a project. Based on proven methodologies, these services represent years of accumulated knowledge and experience, gained through hundreds of successful engagements in a wide range of industry and government installations.
As part of the sale of the database business, we entered into a strategic alliance with IBM, which became effective upon the closing of the sale, to jointly promote and market information asset management solutions based on Ascential's DataStage and Media360 product lines.
Sale of the Database Business
During the third quarter of 2001, we completed the closing of the sale to IBM of substantially all of the assets and certain liabilities of the database business, for $1.0 billion in cash. IBM has retained $100.0 million of the sale proceeds as a holdback to satisfy any indemnification obligations that might arise in respect of any representations or warranties made by us. IBM will retain the holdback until December 31, 2002, except for any funds necessary to provide for any claims made prior to that date. Beginning July 1, 2001, interest will accrue at 6% per annum on the amount of the holdback ultimately released us. Accrued interest on the holdback was $1.5 million at September 30, 2001. In connection with the sale, we paid IBM $11.6 million, which is equal to 18% of certain deferred revenues of the database business for which we had received payment. In addition, we will pay IBM $13.2 million to fund the transfer of certain employee-related accruals during the quarter ended December 31, 2001.
As a result of the sale of database assets, we recorded a gain, after transaction costs and related charges, but excluding taxes, of $850.1 million and $844.5 million for the three-month and nine-month
22
periods ended September 30, 2001, respectively. The following table sets forth the components of the gain (in millions):
| Three months ended September 30, 2001 | Nine months ended September 30, 2001 | |||||
---|---|---|---|---|---|---|---|
Cash proceeds received from IBM | $ | 900.0 | $ | 900.0 | |||
IBM retention holdback | 100.0 | 100.0 | |||||
Gross sale proceeds | 1,000.0 | 1,000.0 | |||||
Deferred revenue adjustment | (11.6 | ) | (11.6 | ) | |||
Employee related accrual adjustment | (13.2 | ) | (13.2 | ) | |||
Adjusted sale proceeds | 975.2 | 975.2 | |||||
Net assets transferred to IBM | (67.6 | ) | (67.6 | ) | |||
Transaction costs and related charges | (57.5 | ) | (63.1 | ) | |||
Gain on sale | $ | 850.1 | $ | 844.5 | |||
See Note F to the Notes to Unaudited Condensed Consolidated Financial Statements for discussion of components of the gain and other items related to the sale of the database business.
We intend to apply part of the proceeds from the transaction to fund Ascential's business, including any strategic acquisitions that we may under take. We also intend to return a substantial portion of the proceeds to our stockholders in the form of a $350 million stock repurchase program (see Note E to the Notes to Unaudited Condensed Consolidated Financial Statements).
Strategic Realignment
During the second half of 2000, we undertook a strategic realignment to transition from five former business units into the two operating businesses. By December 31, 2000, we defined and allocated personnel among the management, selling, marketing, research and development and service organizations for the two operating businesses. However, our core infrastructure groups (operations, finance and administration) were retained by Informix Software and these groups provided services to both operating businesses through the first half of 2001.
Prior to December 31, 2000, we 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. Accordingly, although separate revenue information is disclosed for the two operating businesses on a historical basis, we do not present separate historical expense or operating income information for periods prior to December 31, 2000. As a result of this, our discussion and analysis of costs and expenses, as compared to 2000, is presented on a combined basis for the two operating businesses. Our discussion and analysis of costs and expenses for Ascential Software is based on a comparison of the results for quarters ending September 30, 2001 and June 30, 2001. We do not provide a corresponding discussion and analysis of costs and expenses for Informix Software in 2001, due to the sale of the database business to IBM.
During the period from January 1, 2000 to September 30, 2001, we have recorded merger, realignment and other charges of $139.2 million, of which $46.3 million related to non-cash charges. During the first nine months of 2001, we have recorded merger, realignment and other charges of $12.4 million, of which $1.9 million related to non-cash charges. As of September 30, 2001, we had made cash payments of $84.0 million related to the $139.2 million charge. During the first nine months of 2001, we have made cash payments of $34.7 million related to the $139.2 million charge and expect to make additional cash payments of approximately $8.9 million during the remainder of 2001. In addition, we expect to make future cash payments of $0.3 million in respect to charges recorded prior to January 1, 2000.
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These realignment and other charges are subject to continuing review and adjustment as we implement the separation of the businesses and finalize the sale of the database business.
RESULTS OF OPERATIONS
The discussion and analysis of our results of operations for the three-month and nine-month periods ended September 30, 2001, is structured to take account of the following events:
- •
- The sale of the database business at the beginning of the quarter ended September 30, 2001. The database business had accounted for 84% of our revenue during the first half of 2001.
- •
- The strategic realignment that we undertook during the second half of 2000. This realignment led to a transition from five former business units into the two operating businesses—Ascential Software and Informix Software (or the database business).
As discussed above, we present separate revenue information for the two operating businesses, Ascential Software and Informix Software, on a historical basis, but we do not present separate historical expense or operating income information for periods prior to December 31, 2000. Accordingly, 2001 revenues for Ascential Software and Informix Software operating businesses are compared to the corresponding periods in 2000. However, our discussion and analysis of costs and expenses, as compared to 2000, is presented on a combined basis for the two operating businesses. Our discussion and analysis of costs and expenses for Ascential Software is based on a comparison of the results for quarters ending September 30, 2001 and June 30, 2001. We do not provide a corresponding discussion and analysis of costs and expenses for Informix Software in 2001, due to the sale of the database business to IBM.
Comparisons of revenue and expenses for the nine-month periods ended September 30, 2001, and 2000, respectively, provide little insight as a result of the sale of the database business during the most recent quarter. Accordingly, the discussion and analysis our results of operations is broken down as follows:
- I.
- Overview of results of operations—Ascential Software Corporation
Revenues and expenses are presented as a percentage of revenues for the six-month period ended June 30, 2001 and for the three-month and nine-month periods ended September 30, 2001 (with each as compared to the corresponding periods in 2000). - II.
- Revenues—Ascential Software and Informix Software
Discussion and analysis of revenues, including: (1) table of revenues by type for Ascential Software and Informix Software for the six-month period ended June 30, 2001 and for the three-month and nine-month periods ended September 30, 2001 (with each as compared to the corresponding periods in 2000); (2) description of revenues by type; (3) discussion and analysis of Ascential Software revenues for the three-month and nine-month periods ended September 30, 2001 (with each as compared to the corresponding periods in 2000); and (4) discussion and analysis of Informix Software revenues for the six-month period ended June 30, 2001 and for the three-month period ended September 30, 2001 (with each as compared to the corresponding periods in 2000). - III.
- Costs and expenses—Ascential Software Corporation
This consists of (1) discussion and analysis of total costs and expenses for Ascential Software Corporation for the six months ended June 30, 2001 and 2000, respectively; (2) analysis of costs and expenses for Ascential Software Corporation (being the combined total of Informix Software and Ascential Software) for the three months ended September 30, 2001, as segmented between Ascential Software and Informix Software. This analysis includes a discussion of Merger, Realignment and Other Charges for the six months ended June 30, 2001, and the nine months ended September 30, 2001.
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- IV.
- Results of operations—Ascential Software
Discussion and analysis of the results of operations of Ascential Software, the operating business. This provides a comparison of the revenues and expenses for quarters ending September 30, 2001 and June 30, 2001. - V.
- Other Income (Expense)—Ascential Software Corporation
Discussion and analysis of Other Income (Expense) for the three-month and nine-month periods ended September 30, 2001. - VI.
- Income Taxes—Ascential Software Corporation
Discussion and analysis of Income Taxes for the three-month and nine-month periods ended September 30, 2001.
The gain resulting from the sale of the database business is discussed above and therefore is excluded from this discussion and analysis of the results of operations.
I. Overview of Results of Operations—Ascential Software Corporation
The following table and discussion compares the results of operations for the three-month and nine-month periods ended September 30, 2001 and 2000, respectively, together with the six-month periods ended June 30, 2001 and 2000, respectively. This presentation accommodates a discussion of our results of operations for 2001, given the sale of the database business during the three-month period ended September 30, 2001.
| Percent of Net Revenues | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
| 2001 | 2000 | 2001 | 2000 | 2001 | 2000 | |||||||||
Net revenues: | |||||||||||||||
Licenses | 43 | % | 45 | % | 46 | % | 39 | % | 43 | % | 43 | % | |||
Services | 57 | 55 | 54 | 61 | 57 | 57 | |||||||||
Total net revenues | 100 | 100 | 100 | 100 | 100 | 100 | |||||||||
Cost and expenses: | |||||||||||||||
Cost of software | 6 | 5 | 15 | 5 | 7 | 5 | |||||||||
Cost of services | 20 | 20 | 43 | 23 | 21 | 20 | |||||||||
Sales and marketing | 39 | 42 | 82 | 47 | 41 | 44 | |||||||||
Research and development | 17 | 18 | 28 | 19 | 18 | 18 | |||||||||
General and administrative | 13 | 9 | 50 | 14 | 15 | 11 | |||||||||
Merger, realignment and other charges | 1 | 10 | 24 | 30 | 3 | 16 | |||||||||
Total cost and expenses | 96 | 104 | 242 | 138 | 105 | 114 | |||||||||
Operating income (loss) | 4 | % | (4 | )% | (142 | )% | (38 | )% | (5 | )% | (14 | )% |
II. Revenues—Ascential Software and Informix Software
The following table compares the revenues for the businesses of Ascential Software and Informix Software for the three-month and nine-month periods ended September 30, 2001 and 2000,
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respectively, together with the six-month periods ended June 30, 2001 and 2000, respectively (in millions).
| Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | 2001 | 2000 | 2001 | 2000 | |||||||||||||||
Ascential Software | |||||||||||||||||||||
License revenues | $ | 35.2 | $ | 32.8 | $ | 12.9 | $ | 15.3 | $ | 48.1 | $ | 48.1 | |||||||||
Service revenues | |||||||||||||||||||||
Maintenance revenues | 15.8 | 9.0 | 6.8 | 5.6 | 22.6 | 14.5 | |||||||||||||||
Consulting and education revenues | 18.8 | 17.2 | 7.3 | 8.2 | 26.1 | 25.4 | |||||||||||||||
Total service revenues | 34.6 | 26.2 | 14.1 | 13.8 | 48.7 | 39.9 | |||||||||||||||
Total revenues—Ascential Software | $ | 69.8 | $ | 59.0 | $ | 27.0 | $ | 29.1 | $ | 96.8 | $ | 88.0 | |||||||||
License revenues as a percent of total revenues | 50 | % | 56 | % | 48 | % | 53 | % | 50 | % | 55 | % | |||||||||
Service revenues as a percent of total revenues | 50 | % | 44 | % | 52 | % | 47 | % | 50 | % | 45 | % | |||||||||
Informix Software | |||||||||||||||||||||
License revenues | $ | 149.2 | $ | 188.0 | $ | 0.1 | $ | 67.2 | $ | 149.3 | $ | 255.2 | |||||||||
Service revenues | |||||||||||||||||||||
Maintenance revenues | 182.5 | 199.8 | 1.3 | 97.0 | 183.8 | 296.8 | |||||||||||||||
Consulting and education revenues | 24.2 | 44.6 | 0.1 | 17.8 | 24.3 | 62.4 | |||||||||||||||
Total service revenues | 206.7 | 244.4 | 1.4 | 114.8 | 208.1 | 359.2 | |||||||||||||||
Total revenues—Informix Software | $ | 355.9 | $ | 432.4 | $ | 1.5 | $ | 182.0 | $ | 357.4 | $ | 614.4 | |||||||||
License revenues as a percent of total revenues | 42 | % | 43 | % | 7 | % | 37 | % | 42 | % | 42 | % | |||||||||
Service revenues as a percent of total revenues | 58 | % | 57 | % | 93 | % | 63 | % | 58 | % | 58 | % | |||||||||
Ascential Software Corporation (Combined total of Ascential Software and Informix Software) | |||||||||||||||||||||
License revenues | $ | 184.4 | $ | 220.8 | $ | 13.0 | $ | 82.5 | $ | 197.4 | $ | 303.3 | |||||||||
Service revenues | |||||||||||||||||||||
Maintenance revenues | 198.3 | 208.8 | 8.1 | 102.6 | 206.4 | 311.3 | |||||||||||||||
Consulting and education revenues | 43.0 | 61.8 | 7.4 | 26.1 | 50.4 | 87.9 | |||||||||||||||
Total service revenues | 241.3 | 270.6 | 15.5 | 128.7 | 256.8 | 399.2 | |||||||||||||||
Total revenues | $ | 425.7 | $ | 491.4 | $ | 28.5 | $ | 211.1 | $ | 454.2 | $ | 702.5 | |||||||||
License revenues as a percent of total revenues | 43 | % | 45 | % | 46 | % | 39 | % | 43 | % | 43 | % | |||||||||
Service revenues as a percent of total revenues | 57 | % | 55 | % | 54 | % | 61 | % | 57 | % | 57 | % |
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We derive revenues from licensing software and providing post-license technical product support and updates to customers and from consulting and education services.
License Revenues. License revenues may involve the shipment of product by us or the granting of a license to a customer to manufacture products. Our products are sold directly to end-user customers or through resellers, including OEMs, distributors and value added resellers (VAR's). Revenue from license agreements with resellers is recognized as earned by us, generally, when the licenses are resold or utilized by the reseller and all of our related obligations have been satisfied. Accordingly, amounts received from customers in advance of revenue being recognized are recorded as a liability in "advances from customers" in our financial statements. Advances in the amount of $3.6 million and $10.5 million as of September 30, 2001 and December 31, 2000, respectively, had not been recognized as earned revenue. During the three months ended September 30, 2001, we did not recognize revenue from resellers with previously recorded customer advances. During the first nine months of 2001, we recognized revenue from resellers with previously recorded customer advances of $6.7 million. Included in the $6.7 million recognized were $6.5 million of licenses that were resold or utilized by the reseller and $0.2 million related to contractual reductions in customer advances, which typically arise when a reseller agreement expires before the advance balance is fully utilized.
Our license transactions can be relatively large in size and difficult to forecast both in timing and dollar value. As a result, license transactions have caused fluctuations in net revenues and net income (loss) because of the relatively high gross margin on such revenues. As is common in the software industry, a disproportionate amount of our license revenue is derived from transactions that close in the last weeks or days of a quarter. The timing of closing large license agreements also increases the risk of quarter-to-quarter fluctuations. We expect that these types of transactions and the resulting fluctuations in revenue will continue.
Service Revenues. Service revenues are comprised of maintenance, consulting and education revenues. Maintenance contracts generally call for us to provide technical support and software updates to customers.
Ascential Software—Revenues
License revenues. License revenues for the quarter ended September 30, 2001, decreased 16% to $12.9 million from $15.3 million for the same period in 2000. During the first nine months of 2001, license revenues were $48.1 million, the same as the corresponding period in 2000. Excluding revenue from the discontinued i.Sell product, license revenues increased 9% from $11.8 million to $12.9 million and 31% from $35.2 million to $46.0 million for the three-month and nine-months ended September 30, 2001, respectively, as compared to the same periods in 2000. License revenues for the i.Sell product decreased from $3.5 million to zero and from $12.8 million to $2.1 million for the three-month and nine-months ended September 30, 2001, respectively, as compared to the same periods in 2000. We experienced a slowing of license revenue growth during the most recent part of 2001. This decrease in the rate of growth is due to the effect of the economic downturn being experienced, which led us to experience a lower close rate for revenue transactions during the quarter ended September 30, 2001, as the downturn has caused certain customers to defer spending on information technology
During the second quarter of 2001, we entered into agreements with Hewlett-Packard, IBM, Business Objects and SAP that will allow these companies to resell Ascential products. We expect that these arrangements will begin to generate revenue in the fourth quarter of 2001. As a result of these and other reseller agreements, we expect that our distribution model will change from being one that is primarily based on a direct sales force to a more balanced model with a significant amount of indirect-or reseller-influenced business.
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Service revenues. Service revenues for the quarter ended September 30, 2001 increased 2% to $14.1 million from $13.8 million for the same period in 2000. During the first nine months of 2001, service revenues increased 22% to $48.7 million from $39.9 million for the same period in 2000. Service revenues accounted for 52% and 47% of total revenues for the third quarters of 2001 and 2000, respectively, and accounted for 50% and 45% of total revenues during the first nine months of 2001 and 2000, respectively. Maintenance revenues for the quarter ended September 30, 2001 increased 20% to $6.7 million from $5.6 million for the same period in 2000. During the first nine months of 2001, maintenance revenues increased 55% to $22.6 million from $14.6 million for the same period in 2000. Maintenance revenues are increasing for Ascential as we continue to build our installed customer base. Maintenance revenues will flatten slightly in future periods until maintenance on the discontinued i.Sell product is replaced by maintenance revenue on new business. Consulting and education revenues for the quarter ended September 30, 2001 decreased 10% to $7.4 million from $8.2 million for the same period in 2000. During the first nine months of 2001, consulting and education revenues increased 3% to $26.1 million from $25.4 million for the same period in 2000. The changes in consulting and education revenues in 2001, when compared to the same periods in 2000, are primarily a result of the relative performance of license revenues experienced during the same periods, as consulting and education revenues are typically driven by engagements and projects associated with new license revenues.
Informix Software—Revenues
Due to the sale of the database business during the quarter ended September 30, 2001, we separately discuss the revenue of Informix Software for the first half of 2001 and the third quarter of 2001, compared to the corresponding periods in 2000, respectively.
License revenues—six months ended June 30, 2001 and 2000, respectively. License revenues decreased 21% to $149.2 million for the first half of 2001 from $188.0 million for the same period in 2000. The decline was primarily a result of a decrease in license revenues from the traditional client-server products of the database business and also from a decrease in large enterprise transactions. These trends resulted from us being unsuccessful in attracting new database customers and in securing additional business from our existing database customers. Our principal competitors in the database business, Oracle, IBM and Microsoft, were much larger, much better financed, and continued to invest substantially in their database businesses. Strategic partners in the database business (including the major enterprise software application providers) therefore promoted our competitors' products more than they promoted our database products. As a result, we were not successful in attracting significant new database customers. In addition, most of our database customers who had invested in our traditional client-server and tools products were in the process of replacing those products and purchasing newer products. Because of our competitive position described above, some of our database customers chose to purchase our newer database products, but many chose to purchase newer database products from our competitors. We also believe that the prevailing economic slowdown had led to a deferral by some potential customers of their decisions to enter into large enterprise transactions. Additional, during the second quarter of 2001, we believe the impending sale of the database business to IBM may have impaired our ability to close certain transactions.
Service revenues—six months ended June 30, 2001 and 2000, respectively. Service revenues for the first half of 2001 decreased 15% to $206.7 million from $244.4 million for the same period in 2000. Service revenues accounted for 58% and 57% of total revenues during the first half of 2001 and 2000, respectively. The decrease in service revenues in 2001 was attributable primarily to a decline in consulting revenue in our database business. The increase in service revenues, as a percentage of total revenues in 2001, was attributable primarily to the decline in the license revenue of our database business. Maintenance revenues decreased 9% to $182.5 million for the first half of 2001 from $199.8 million for the same period in 2000. The decrease in maintenance revenues in 2001 was attributable primarily to our inability to maintain maintenance revenue levels from our installed base in
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a climate of decreasing license revenues. Consulting and education revenues for the first half of 2001 decreased 46% to $24.2 million from $44.6 for the same period in 2000. The decrease in consulting and education revenues in 2001 was primarily due to the decline in license revenues experienced during the first half of 2001, as consulting and education revenues are typically driven by engagements and projects associated with new license revenues.
License and Service revenues—three months ended September 30, 2001 and 2000, respectively. License revenues of $0.1 million and service revenues of $1.4 million for the three months ended September 30, 2001 arose from the database operations during July 2001 for the nine remaining countries that were not closed as part of the IBM transaction until August 1, 2001 ("the Phase 2 countries"). For the corresponding three-month period ended September 30, 2000, license and service revenues for Informix Software were $67.2 million and $114.8 million, respectively.
III. Costs and Expenses—Ascential Software Corporation
The following table compares the costs and expenses for Ascential Software Corporation (as the combined total of Informix Software and Ascential Software) for the three-month and nine-month periods ended September 30, 2001 and 2000, respectively, together with the six-month periods ended June 30, 2001 and 2000, respectively (in millions):
| Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | 2001 | 2000 | 2001 | 2000 | ||||||||||||
Cost of software | $ | 25.8 | $ | 26.0 | $ | 4.3 | $ | 11.3 | $ | 30.1 | $ | 37.3 | ||||||
Cost of services | 85.5 | 96.8 | 12.4 | 48.2 | 97.9 | 145.0 | ||||||||||||
Sales and marketing | 164.1 | 206.8 | 23.3 | 99.9 | 187.4 | 306.7 | ||||||||||||
Research and development | 71.9 | 87.0 | 7.9 | 39.9 | 79.8 | 126.9 | ||||||||||||
General and administrative | 54.6 | 45.9 | 14.2 | 29.6 | 68.8 | 75.5 | ||||||||||||
Merger, realignment and other charges | 5.6 | 50.1 | 6.8 | 62.1 | 12.4 | 112.2 | ||||||||||||
Total costs and expenses | $ | 407.5 | $ | 512.6 | $ | 68.9 | $ | 291.0 | $ | 476.4 | $ | 803.6 |
Costs and Expenses Ascential Software Corporation (Combined total of Informix Software and Ascential Software)—six months ended June 30, 2001 and 2000, respectively
Cost of software. Cost of software consists primarily of: (1) manufacturing personnel costs, (2) third-party royalties, and (3) amortization of previously capitalized software development costs and any write-offs of previously capitalized software. During the first half of 2001, cost of software decreased 1% to $25.8 million from $26.0 million for the same period in 2000. The decrease in 2001 was primarily due to a decrease in capitalized software amortization as certain database products became fully amortized during 2000. This decrease was partially offset by an increase in third-party royalties associated with increased license revenue from certain Ascential product offerings.
Cost of services. Cost of services consists primarily of maintenance, consulting and training personnel expenses. Cost of services decreased 12% to $85.5 million for the first half of 2001 when compared to the corresponding period in 2000. Service margins remained fairly consistent at 64%-65% during the six-month periods ended June 30, 2001 and 2000. The absolute dollar decrease in cost of services in 2001 was primarily due to cost containment actions that included headcount reductions as a result of the realignment.
Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries, commissions, marketing and communications programs and related overhead costs. Sales and marketing expenses decreased 21% to $164.1 million for the first half of 2001 when compared to the same period in 2000. The decrease in 2001 was due primarily to a reduction in headcount and related overhead costs, as we have reduced our cost profile in line with the reduction in revenue that we are experiencing. This cost reduction resulted from the realignment activities that we undertook during the
29
second half of 2000. The decrease was also attributable to a significant reduction in advertising expenditures compared to the corresponding period in 2000. Sales and marketing expense declined as a percentage of revenue to 39% as compared to 42% in the corresponding period in 2000.
Research and development expenses. Research and development expenses consist primarily of salaries, project consulting and related overhead costs for product development. Research and development expenses for the six-month periods ended June 30, 2001 were $71.9 million, or 17% of net revenues, compared to $87.0 million, or 18% of net revenues, for the corresponding period in 2000. As a percentage of net revenues, research and development expenses have remained fairly consistent at 17-18% due to the realization of cost containment efforts employed during 2001, which included headcount and overhead reductions resulting from the realignment.
General and administrative expenses. General and administrative expenses consist primarily of finance, legal, information systems, human resources, bad debt expense and related overhead costs. General and administrative expenses increased 19% to $54.6 million for the first half of 2001 when compared to the same period in 2000. The increase in 2001, was caused by increased bad debt and litigation related expenses offset by a decrease in employee-related costs. Bad debt expense was $5.3 million during the first half of 2001, as a result of increased reserves against defaults by technology start-up companies and other companies experiencing the downturn in the general economic environment and also as a result of the reserves required due to the discontinuation of our i. Sell product during the first quarter of 2001. Litigation related expenses increased to $6.9 million in the first half of fiscal 2001 primarily as a result of the charge that was recognized during the quarter in connection with the tentative settlement of the actions filed against the Unidata operations in Asia. (See Note I to the Notes to Unaudited Condensed Consolidated Financial Statements). During the first half of 2001, general and administrative expense increased as a percentage of revenue to 13% compared to 9% for the corresponding period in 2000.
Merger, realignment and other charges (for the six months ended June 30, 2001 and three months ended September 30, 2001). During the six-months ended June 30, 2001, we recorded realignment charges of $5.6 million net of reversing adjustments in the amount of $2.0 million to revise estimates for termination compensation and related benefits and $0.4 million to revise estimates for lease obligations on redundant facilities. The net recorded realignment charges primarily consisted of a $3.5 million charge for severance and employment related costs, $1.7 million charge for facility and equipment costs, and $0.4 million of ongoing professional fees related to the realignment.
During the three-months ended September 30, 2001, we recorded further realignment charges of $6.8 million. Included in this charge was $4.9 million for severance and employment related costs and $1.9 million for the write-off of abandoned technology. The severance and employment related costs were incurred as a result of a downsizing of headcount for Ascential Software. The write-off of abandoned technology relates to the iDecide product, which was abandoned as a result of the sale of the database business. The iDecide product contained various elements of database intellectual property that were sold to IBM and, as a result, the iDecide product was discontinued by Ascential Software.
As a result of the realignment actions taken to realign our operational structure into two separate operating businesses and to refine our product strategy, we have recorded charges of $99.3 million during the 15-month period ended September 30, 2001. Included in this charge was $49.3 million for severance and employment related costs, $33.9 million for the write-off of goodwill, abandoned technology and intangible assets, $9.4 million for the closure of facilities and equipment costs, $3.9 million for costs to exit various commitments and programs, $2.8 million of miscellaneous other charges. See Note G to the Notes to Unaudited Condensed Consolidated Financial Statements.
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Costs and Expenses Ascential Software Corporation (Combined total of Informix Software and Ascential Software)—three months ended September 30, 2001 and 2000, respectively
The following table presents the costs and expenses of Ascential Software, Informix Software and Ascential Software Corporation for the three-month period ended September 30, 2001 and of Ascential Software Corporation for the three-month period ended September 30, 2000 (in millions):
| Three Months Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2001 | September 30, 2000 | ||||||||||
| Ascential Software | Informix Software | Ascential Software Corporation | Ascential Software Corporation | ||||||||
Cost of software | $ | 3.5 | $ | 0.8 | $ | 4.3 | $ | 11.3 | ||||
Cost of services | 11.3 | 1.1 | 12.4 | 48.2 | ||||||||
Sales and marketing | 21.3 | 2.0 | 23.3 | 99.9 | ||||||||
Research and development | 7.4 | 0.5 | 7.9 | 39.9 | ||||||||
General and administrative | 10.7 | 3.5 | 14.2 | 29.6 | ||||||||
Merger, realignment and other charges | 6.8 | — | 6.8 | 62.1 | ||||||||
Total costs and expenses | $ | 61.0 | $ | 7.9 | $ | 68.9 | $ | 291.0 |
As described above, our analysis of costs and expenses is presented on a combined basis for the two operating businesses for 2000. The costs and expenses for Ascential Software for the three-month period ended September 30, 2001 are discussed below—seeResults Of Operations—Ascential Software.
The costs and expenses for Informix Software for the three-month period ended September 30, 2001 consist primarily of expenses resulting from the database operations in July 2001 for the Phase 2 countries and transitional database costs that will not recur.
IV. Results of Operations—Ascential Software
As discussed above, our discussion and analysis of costs and expenses for Ascential Software is based on a comparison of the results for the quarters ending September 30, 2001, and June 30, 2001.
The following table and discussion compares the results of operations of Ascential Software for the three-month periods ending September 30, 2001, and June 30, 2001.
Ascential Software
Unaudited Condensed Consolidated Statements Of Operations
(In thousands)
| Three Months Ended September 30, 2001 | Three Months Ended June 30, 2001 | ||||||
---|---|---|---|---|---|---|---|---|
NET REVENUES | ||||||||
Licenses | $ | 12,888 | $ | 18,372 | ||||
Services | 14,132 | 18,163 | ||||||
27,020 | 36,535 | |||||||
COSTS AND EXPENSES | ||||||||
Cost of software | 3,508 | 3,524 | ||||||
Cost of services | 11,289 | 12,847 | ||||||
Sales and marketing | 21,348 | 24,793 | ||||||
Research and development | 7,394 | 9,188 | ||||||
General and administrative | 10,697 | 5,343 | ||||||
Merger, realignment and other charges | 6,826 | — | ||||||
61,062 | 55,695 | |||||||
Operating loss * | $ | (34,042 | ) | $ | (19,160 | ) | ||
- *
- Operating loss includes amortization of goodwill and purchased intangibles of $1.5 million and $1.6 million for the quarters ended September 30, 2001 and June 30, 2001, respectively.
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Costs and Expenses—Ascential Software
Cost of software. During the quarter ended September 30, 2001, cost of software remained consistent at $3.5 million. Cost of software consists primarily of amortization of previously capitalized software, which remained relatively static, and third-party royalties, which was impacted by payments made to IBM for the use of products sold to IBM as part of the sale of the database business.
Cost of services. The cost of services decreased 12% to $11.3 million for the quarter ended September 30, 2001, from $12.8 million for the second quarter of 2001. Service margins decreased to 20% during the quarter ended September 30, 2001 from 29% during the quarter ended June 30, 2001. Cost of services decreased during the quarter ended September 30, 2001 as we adjusted our delivery capacity to meet lower demand levels. Service margins decreased in the third quarter as revenue dropped more quickly than we could adjust capacity.
Sales and marketing expenses. Sales and marketing expenses decreased 14% to $21.3 million for the quarter ended September 30, 2001, from $24.8 million for the quarter ended June 30, 2001. The decrease was driven by a reduction in force to reduce headcount during the most recent quarter.
Research and development expenses. Research and development expenses decreased 20% to $7.4 million for the quarter ended September 30, 2001, from $9.2 million for the quarter ended June 30, 2001. The decrease from second quarter levels was due to the consolidation and reduction of facilities and headcount in order to streamline and focus on our research and development effort to our core strategy and products
General and administrative expenses. General and administrative expenses increased by $5.4 million to $10.7 million for the quarter ended September 30, 2001, from $5.3 million for the quarter ended June 30, 2001. The increase primarily resulted from a $2.6 million increase to bad debt expense, a $0.8 million for litigation settlement costs and a $0.7 million expense arising in connection with a sales tax audit. The additional bad debt expense resulted primarily from (1) our inability to collect receivables on discontinued products; and (2) an increase in the overall aging of receivables that resulted from a combination of the downturn in the economy in the third quarter together and operational delays we experienced as a result of segmenting our receivables, which were combined with database receivables prior to the IBM transaction.
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Merger, realignment and other charges. Merger, realignment and other charges for Ascential Software for the three-month period ended September 30, 2001 are discussed above—seeCosts and Expenses—Ascential Software Corporation.
V. Other Income (Expense)—Ascential Software Corporation
Interest income. Interest income increased 209% to $11.1 million for the quarter ended September 30, 2001 and increased 49% to $15.9 million for the first nine months of 2001 when compared to the same periods in 2000. The increase in 2001, when compared to the same periods in 2000, was due to an increase in the average interest-bearing cash and short-term investment balances as a result of the proceeds received from the sale of the database business.
Interest expense. Interest expense decreased 43% to $40,000 for the quarter ended September 30, 2001 and decreased 66% to $128,000 for the first nine months of 2001 when compared to the same periods in 2000. The decrease in 2001, when compared to the same periods in 2001, was due primarily to a decrease in interest charges on capital lease payments. Interest charges related to payments on capital leases have been declining each year, as we have not been entering into new capital lease arrangements.
Impairment of long-term investments. We recorded impairment losses on our strategic investments of $0.9 million during the quarter ended September 30, 2001 and $10.2 million for the first nine months of 2001. Impairment losses are recognized on strategic investments when we determine that there has been a decline in the carrying amount of the investment that is other than temporary. The impairment losses relate to both publicly traded and non-marketable investments.
Other, net. During the quarter ended September 30, 2001, other expense, net increased to $3.4 million from $0.2 million for the same period in 2000. The other expense, net for the quarter ended September 30, 2001, primarily consisted of a of net foreign currency transaction loss of $4.3 million. During the first nine months of 2001, we recorded other expense, net of $2.1 million compared to other income, net of $4.2 million for the corresponding period in 2000. During the first nine months of 2001, other expense, net included approximately $5.3 million of net foreign currency transaction losses offset primarily by $1.6 million of excess rent on subleased facilities. During the first nine months of 2000, other income, net included approximately $2.9 million of net realized gains on the sale of long-term investments and $0.5 million of net foreign currency transaction gains.
VI. Income Taxes—Ascential Software Corporation
Income tax expense of $169.5 million for the first nine months of 2001 consists of $162.0 million resulting from the gain on the sale of the database business to IBM and $7.5 million resulting from foreign withholding taxes and taxable earnings in certain foreign jurisdictions. The income tax expense on the gain from the sale of the database business is calculated after the utilization of net operating loss carry forwards that were previously fully reserved. The income tax expense of $12.0 million for the first nine months of 2000 resulted primarily from foreign withholding taxes and taxable earnings in certain foreign jurisdictions.
Liquidity and Capital Resources—Ascential Software Corporation
Our cash, cash equivalents and short-term investments totaled $952.5 million at September 30, 2001. The increase of $735.5 million from $217.0 million at December 31, 2000, was primarily the result of proceeds received from the sale of the database business of $888.4 million offset by stock repurchases of $117.6 million during the nine months ended September 30, 2001.
We will continue to invest in research and development activities as well as sales and marketing and product support for the Ascential Software business. Our investment in property and equipment
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will continue as we purchase computer systems for research and development, sales and marketing, support and administrative staff. During the first nine months of 2001, capital expenditures totaled $16.9 million.
As of September 30, 2001, we did not have any significant long-term debt or significant commitments for capital expenditures. During November 2001, we made a cash payment of $26.2 million in connection with the settlement of our private securities litigation (see Note I to the Notes to Unaudited Condensed Consolidated Financial Statements). We believe that the proceeds from the sale of the database business to IBM, together with our current cash, cash equivalents and short-term investments balances and cash generated from operations will be sufficient to meet our working capital requirements for at least the next 12 months. We also believe that we will have sufficient resources to fund the announced $350 million stock repurchase program (see Note E to the Notes to Unaudited Condensed Consolidated Financial Statements), and any strategic acquisitions that we may undertake.
Recent Accounting Pronouncements
See Note B to the Notes to Unaudited Condensed Consolidated Financial Statements.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
RISKS RELATED TO OUR SALE OF THE DATABASE BUSINESS TO IBM
Now that the sale to IBM is completed, we will have a more narrowed focus of business and will lose a substantial portion of our historical license and service revenue.
As a result of the sale of the database business to IBM, we lose a substantial portion of our historical license and service revenue. After the sale to IBM, all of our revenue will be generated from the license and service revenue of Ascential Software. Historically, the license and service revenue of Ascential Software has represented a relatively small portion of our total revenue. As a result of the sale to IBM, we will lose the benefit of any future revenue growth that could have been generated by our association with the database business and our future financial results could be materially adversely affected. In addition, we cannot ensure that the future revenue from Ascential Software's information asset management business will equal or exceed either the historical revenue generated by Ascential Software or the revenue resulting from the database business that we have sold to IBM.
The sale to IBM exposes us to potential contingent liabilities and we retain some pre-closing liabilities of the database business.
As part of the sale to IBM, we agreed to indemnify IBM for a number of contingent liabilities. Indemnification claims by IBM, should they be made, could materially adversely affect our financial results. In addition, IBM assumed only certain current liabilities of the database business at closing. As a result, we continue to be responsible for some liabilities of the database business, particularly contractual obligations that were not assumed by IBM declines to assume. If we were required to perform under a large number of these contracts, it would materially adversely affect our financial results.
If we are unable to successfully increase revenue from, and expand the market share of, Ascential Software, our financial results could be materially adversely affected.
The market for information asset management products and services, including data integration and content management, may not continue to grow or grow rapidly, and our customers may not increase their purchases of information asset management products and services. In addition, we cannot ensure that our efforts to market and increase sales of Ascential Software's products and services, compete effectively in the information asset management market, and generate increased revenue will be successful. Although demand for information asset management products and services has grown in recent years, the market is still emerging. If we are unable to increase our future revenue and expand our market share in the information asset management business, our financial results could be materially adversely affected.
If we fail to manage growth effectively, our business could suffer.
We anticipate that Ascential Software will realize revenue growth in the future. This growth could strain our resources. Our ability to manage anticipated future growth will depend upon our implementation and expansion of operational and financial systems and the recruitment and training of new employees and executives. Our future success depends in large part upon our ability to attract and retain qualified employees and executives. We face intense competition for these employees and executives from other companies, academic institutions, government entities and other organizations. We cannot ensure that we will be successful in recruiting and retaining the employees and executives that will be required to enable us to conduct our business. If we are unable to manage future growth
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and recruit and retain qualified employees and executives, our financial results could be materially adversely affected.
As a result of the sale to IBM, we have lost, and will have to replace, much of our infrastructure.
As part of the IBM transaction, we have sold to IBM, and therefore will have to replace, significant portions of our infrastructure, including financial and other business processes, product and services order administration, and information technology. Also as part of the sale to IBM, we have entered into agreements with IBM to provide and purchase some of these services for a transitional period not to exceed 18 months. If the transitional services agreements with IBM are not effective, or if we are not able to establish our own infrastructure prior to the expiration of the transitional services agreements, our financial results will be adversely affected. In addition, we anticipate that there will be substantial costs associated with establishing our own infrastructure.
RISKS RELATING TO OUR INFORMATION ASSET MANAGEMENT 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 businesses.
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.
The competition for experienced, well-qualified personnel in the software industry is intense, including in the San Francisco and Boston metropolitan areas. If we fail to retain, attract and motivate key employees, we may be unable to develop, market and sell new products and services, which could materially adversely affect our operating and 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 described below and elsewhere in this "Management's Discussion and Analysis of Financial Conditions and Results of Operations" section, many of which are beyond our control. Any one or more of the factors listed below or other factors could cause us to fail to achieve our revenue or profitability expectations. In particular, the failure to meet market expectations could cause a sharp drop in our stock price. 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 information asset management business
- •
- The size, timing and contractual terms of large orders for our software products and services
- •
- The budgeting cycles of our customers and potential customers
- •
- The reaction of our customers and potential customers to the completion of the sale of our database business to IBM
- •
- Any downturn in our customers' businesses, in the domestic economy or in international economies where our customers do substantial business
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- •
- 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
- •
- Changes in the mix of revenues attributable to domestic and international sales
- •
- Seasonal buying patterns which tend to peak in the fourth quarter.
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 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' businesses or financial results. This market volatility, as well as general domestic or international economic, market and political conditions, 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. The market price of our common stock has fluctuated significantly in the past and may continue to fluctuate significantly because of:
- •
- Market uncertainty about our business prospects as a result of the sale of our database business to IBM
- •
- Market uncertainty about our business prospects or the prospects for the information asset management business 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
- •
- General business conditions in the software industry or in the domestic or international economies
- •
- Uncertainty resulting from terrorist acts and other acts of violence or war
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. 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 rates movements and our implementation of a revised pricing structure.
The result is 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 implemented a foreign exchange hedging program consisting principally of the purchase of forward foreign exchange contracts in the primary European and Asian currencies. This
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program 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. Additionally, uncertainties related to the Euro conversion could adversely affect our hedging activities.
If the information asset management 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 our information asset management business decline for any reason, there will be less demand for our products and services, which would have a materially adverse effect on our financial results. Declining demand our products and services could threaten our ability to sustain our present level of operations and meet our expectations for future growth.
Delays in market acceptance of our products and services also could result in fewer product sales. In recent years, the types and quantities of data required to be stored and managed has grown increasingly complex and includes, in addition to conventional character data, audio, video, text and three-dimensional graphics in a high-performance scaleable environment. We have invested substantial resources in developing our database and information asset management products and services. The market for these products and services is evolving, and its growth depends upon a growing need to store and manage complex data and upon broader market acceptance of our products as a solution for this need.
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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 and such inability could impair our ability to sell our products. The market for our products and services is highly competitive, diverse and is 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.
We currently face intense competition from a number of sources, including several large vendors that develop and market applications, development tools, decision support products, consulting services and/or complete database-driven solutions for the Internet. Our principal competitors in the information asset management business include Informatica, Bulldog, Hummingbird, Sagent, Cognos and Artesia and small, highly-focused companies offering single products or services that we include as part of an overall solution. As a result, these competitors may be able to respond more quickly to new or emerging technologies, evolving markets and changes in customer requirements than we can.
Competition may affect the pricing of our products or services, and changes in product mix may occur, either of which may reduce our 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 training, could materially adversely affect our operating results for future quarters. In addition, the pricing strategies of competitors in the software database industry have historically been characterized by aggressive price discounting to 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.
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, sales of 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 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 sell as many products and services and our position in existing, emerging or potential markets could be eroded rapidly by 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.
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. 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.
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 reduced.
Our software license revenue in any quarter often depends on orders booked and shipped in the last month, weeks or days of that quarter. At the end of each quarter, we typically have either minimal
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or no backlog of orders for the subsequent quarter. If a large number of orders or several large orders do not occur or are deferred, revenue in that quarter could be substantially reduced.
Seasonal trends in sales of our software products could adversely affect our quarterly operating results and lengthy sales cycles for products makes 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 quarter ending December 31 are typically higher relative to other quarters because many customers make purchase decisions based on their calendar year-end budgeting requirements and because we measure our sales incentive plans for sales personnel on a calendar year basis.
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 third party distributors.
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 additional products or services. Our services revenue and maintenance revenue also depends upon the continued use of these services by our installed customer base. Any downturn in software license revenue could result in lower services revenue in future quarters.
Our financial success depends upon our ability to maintain and increase relationships with strategic partners.
Our ability to increase the sales of our products and our future success depends in part upon maintaining and increasing 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 internationally. Our strategic partners may offer products of several different companies, including, in some cases, products 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.
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. In particular, if our strategic partners do not devote adequate resources for implementation of our products and services, we will 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 significant resources used to develop these relationships.
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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 40% to 50% of our total revenue for Ascential Software. 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
- •
- 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 foreign economies
- •
- Increases in tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers imposed by foreign countries
If we fail to protect our intellectual property rights, competitors may be able to use our technology or trademarks and this 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 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" basis under a license that restricts the use of the products for the customer's internal business purposes. We also rely on "shrink-wrap" and "click-wrap" licenses, which include a notice informing the end-user that by opening the product packaging, or in the case of a click-on license by clicking on an acceptance icon and downloading the product, the end-user agrees to be bound by the license agreement.
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 is regarded 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 source code to the customer in the event the company enters bankruptcy or liquidation proceedings or otherwise ceases to conduct business. 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
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- •
- "Shrink-wrap" and/or "click-wrap" licenses may be wholly or partially unenforceable under the laws of certain jurisdictions
- •
- 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
In the future, third parties could, for competitive or other reasons, assert that our products infringe their intellectual property rights.
In the future, third parties could, for competitive or other reasons, assert that our products infringe their intellectual property rights. Any such claims 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 as the number of products and competitors in the software industry segment grows and the functionality of products in different industry segments overlaps.
Our inability to rely on the statutory "safe harbor" as a result of the settlement of the SEC investigation could harm our business.
Effective January 11, 2000, the SEC and we entered into a settlement of the investigation against us. Pursuant to the settlement, we 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, we 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 will not, for a period of three years from the date of the issuance of the order, be 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, 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.
Provisions in our charter documents may discourage potential acquisition bids and prevent changes in our management that our stockholders may favor. This could adversely effect 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
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- •
- Certain procedures for nominating directors and submitting proposals for consideration at stockholder meetings
- •
- 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 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 and this 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.
Delaware law may inhibit potential acquisition bids, which may adversely affect the market price for our common stock and prevent changes in its 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, under certain circumstances, in a "business combination" with any "interested stockholder" for three years following the date that the stockholder became an interested stockholder. For purposes of Delaware law, a "business combination" would include, among other things, a merger 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" 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" of the anti-takeover provisions. We do not intend to "opt out" of these anti-takeover provisions of Delaware law.
Our current strategy contemplates future acquisitions, which will require us to incur substantial cost and potential benefits for which we may never realize the anticipated benefits.
Our business strategy contemplates future acquisitions of complementary companies or technologies.
We cannot assure you that we will be able to implement our growth strategy, or that this strategy will ultimately be successful. 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.
Achieving the benefits of any acquisitions will depend in part on our ability to integrate those businesses with our business in an 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
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results for any acquired business. We cannot assure you 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.
In addition, we may not be able to identify suitable acquisition candidates in the future or consummate any future acquisitions.
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 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, the United States may enter into an armed conflict which could have a further impact on our sales and our ability to deliver product to our customers. Political and economic instability in some regions of the world may also result and could negatively impact our business. 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.
More generally, any of these events could cause customer confidence and purchases of our products and services to decrease or result in increased volatility in the United States and worldwide financing markets and economies, and could result in significant fluctuations in the value of foreign currencies. They could also result in economic recession in the United States or abroad. Any of these occurrences could have a significant adverse impact on our operating results, revenues and costs and may result in volatility in the price and trading volumes of our common stock.
Provisions in our charter documents with respect to undesignated preferred stock may discourage potential acquisition bids for Ascential Software Corporation.
Our board of directors is authorized to issue up to approximately 4,000,000 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 its 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 control to others.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Disclosures About Market Rate Risk
Market Rate Risk. The following discussion about our market rate risk involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates, foreign currency exchange rates and equity security price risk. We do not use derivative financial instruments for speculative trading purposes.
Interest Rate Risk. Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We maintain a short-term investment portfolio consisting mainly of debt securities with an average maturity of less than two years. We do not use derivative financial instruments in our investment portfolio and we place our investments with high quality issuers and, by policy, limit the amount of credit exposure to any one issuer. We are averse to principal loss and ensure the safety and preservation of our invested funds by limiting default, market and reinvestment risk. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels at September 30, 2001, the fair value of the portfolio would decline by an immaterial amount. We have the ability to hold our fixed income investments until maturity and believe that the effect, if any, of reasonably possible near-term changes in interest rates on our financial position, results of operations and cash flows would not be material.
Equity Security Price Risk. We hold a small portfolio of marketable-equity traded securities that are subject to market price volatility. Equity price fluctuations of plus or minus 10% would have had a $0.3 million impact on the value of these securities in 2001.
Foreign Currency Exchange Rate Risk. We enter into foreign currency forward exchange contracts to reduce exposure to foreign currency risk due to fluctuations in exchange rates underlying the value of intercompany accounts receivable and payable denominated in foreign currencies (primarily European and Asian currencies) until such receivables are collected and payables are disbursed. A foreign currency forward exchange contract obligates us 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 these contracts are not designated and effective as hedges, discounts or premiums (the difference between the spot exchange rate and the forward exchange rate at inception of the contract) are recorded in earnings to other income (expense), net at the time of purchase, and changes in market value of the underlying contract are recorded in earnings as foreign exchange gains or losses in the period in which they occur. We operate in certain countries in Latin America, Eastern Europe, and Asia/Pacific where there are limited forward foreign currency exchange markets and thus we have unhedged exposures in these currencies.
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 over time in our pricing strategy, we do so only on a periodic basis, resulting in substantial pricing exposure as a result of foreign exchange volatility during the period between annual pricing reviews. In addition, the sales cycle for our products is relatively long, depending on a number of factors including the level of competition and the size of the transaction. Notwithstanding our efforts to manage foreign exchange risk, there can be no assurances that our hedging activities will adequately protect us against the risks associated with foreign currency fluctuations.
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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), the weighted average contractual foreign currency exchange rates and fair value. Fair value represents the difference in value of the contracts at the spot rate at September 30, 2001 and the forward rate. All contracts mature within twelve months.
Forward Contracts
At September 30, 2001 | Contract Amount | Weighted- Average Contract Rate | Fair Value | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | | (In thousands) | |||||||
Foreign currency to be sold under contract: | ||||||||||
Japanese Yen | $ | 1,316 | 117.07 | $ | 10 | |||||
Australian Dollar | 5,970 | 2.05 | (37 | ) | ||||||
New Taiwan Dollar | 4,298 | 34.90 | (37 | ) | ||||||
Korean Won | 2,917 | 1320.00 | (34 | ) | ||||||
Swiss Franc | 2,596 | 1.60 | 6 | |||||||
South African Rand | 2,484 | 9.03 | (53 | ) | ||||||
Thailand Bhat | 2,920 | 44.8 | (31 | ) | ||||||
Singapore Dollar | 1,302 | 1.77 | 1 | |||||||
Other (individually less than $1 million) | 1,627 | * | (15 | ) | ||||||
Total | $ | 25,430 | $ | (190 | ) | |||||
Foreign currency to be purchased under contract: | ||||||||||
British Pound | $ | 20,657 | 1.47 | $ | 57 | |||||
Euro | 2,304 | 1.09 | (1 | ) | ||||||
Other (individually less than $1 million) | 886 | * | 2 | |||||||
Total | $ | 23,847 | $ | 58 | ||||||
Grand Total | $ | 49,277 | $ | (132 | ) | |||||
- *
- Not meaningful
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Not applicable.
Item 2. Changes In Securities And Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters To A Vote of Security Holders
Not applicable.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
- (a)
- Exhibits
Exhibit 2.1 Master Purchase Agreement, dated as of April 24, 2001, among Informix Corporation, Informix Software, Inc. and International Business Machines Corporation (filed as Annex A to the definitive Proxy Statement on Schedule 14A filed on May 10, 2001, file No. 000-15325, and incorporated by reference herein)
- (b)
- Reports on Form 8-K.
On July 2, 2001, Ascential Software Corporations filed a Current Report on Form 8-K under "Item 9. Regulation FD Disclosure." No financial statements were filed with this Form 8-K.
On July 11, 2001, Ascential Software Corporations filed a Current Report on Form 8-K under "Item 2. Acquisition or Disposition of Assets." No financial statements were filed with this Form 8-K.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ASCENTIAL SOFTWARE CORPORATION | ||||
Dated: November 14, 2001 | By: | /s/ ROBERT C. McBRIDE Robert C. McBride Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
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ASCENTIAL SOFTWARE CORPORATION FORM 10-Q Quarterly Period Ended September 30, 2001 Table of Contents
ASCENTIAL SOFTWARE CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
ASCENTIAL SOFTWARE CORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
ASCENTIAL SOFTWARE CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
ASCENTIAL SOFTWARE CORPORATION Notes to Unaudited Condensed Consolidated Financial Statements