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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-20059
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ARDENT SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2818132
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 WASHINGTON STREET 01581-1021
WESTBORO, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 366-3888
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
The number of shares outstanding of each of the registrant's classes of
common stock as of:
DATE CLASS OUTSTANDING SHARES
September 30, 1998 Common stock, $.01 par value 15,124,014
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ARDENT SOFTWARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PAGE NUMBERING
IN SEQUENTIAL
NUMBERING SYSTEM
----------------
PART I FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
for the three and nine months ended
September 30, 1998 and September 28, 1997 4
Condensed Consolidated Statement of Comprehensive
Income (Loss) for the three and nine months ended
September 30, 1998 and September 28, 1997 5
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and
September 28, 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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PART I FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Ardent Software, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
ASSETS September 30, 1998 December 31, 1997
------------------ -----------------
Current assets:
Cash and equivalents $ 22,218 $ 24,155
Accounts receivable - net 20,424 21,161
Prepaid expenses and other current assets 4,014 6,101
Deferred income taxes 4,206 1,885
-------- --------
Total current assets 50,862 53,302
-------- --------
Property and equipment - net 6,520 15,916
-------- --------
Long-term assets:
Intangible assets - net 9,358 10,616
Other long-term assets 4,814 2,743
Deferred income taxes 5,619 4,837
-------- --------
Total long-term assets 19,791 18,196
-------- --------
Total assets $ 77,173 $ 87,414
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ -- $ 7,357
Accounts payable 4,971 4,995
Accrued expenses and other current liabilities 19,423 14,103
Accrued merger and restructuring costs 3,037 1,068
Deferred revenue 16,095 13,248
-------- --------
Total current liabilities 43,526 40,771
-------- --------
Long-term liabilities:
Non-current debt and other long-term liabilities 4,900 21,190
-------- --------
Stockholders' equity 31,703 28,409
Cost of treasury stock (2,956) (2,956)
-------- --------
Total stockholders' equity 28,747 25,453
-------- --------
Total liabilities and stockholders' equity $ 77,173 $ 87,414
======== ========
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Ardent Software, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
Three Months Ended Nine Months Ended
---------------------- -----------------------
Sept. 30, Sept. 28, Sept. 30, Sept. 28,
1998 1997 1998 1997
-------- -------- -------- --------
Revenue:
Software $17,127 $14,937 $49,379 $44,431
Services and other 12,607 11,132 35,302 33,144
------- ------- ------- -------
Total revenue 29,734 26,069 84,681 77,575
------- ------- ------- -------
Costs and expenses:
Cost of software 1,762 2,055 5,317 6,008
Cost of services and other 5,724 5,903 16,676 18,186
Selling and marketing 10,516 8,956 29,729 28,208
Product development 4,311 4,081 13,094 11,970
General and administrative 2,353 2,967 7,559 9,205
Merger costs -- -- 14,895 --
------- ------- ------- -------
Total costs and expenses 24,666 23,962 87,270 73,577
------- ------- ------- -------
Income (loss) from operations 5,068 2,107 (2,589) 3,998
Other income (expense) - net 42 (450) 120 (1,399)
------- ------- ------- -------
Income (loss) before provision for income taxes 5,110 1,657 (2,469) 2,599
Provision for income taxes 1,789 634 599 1,168
------- ------- ------- -------
Net income (loss) $ 3,321 $ 1,023 $(3,068) $ 1,431
======= ======= ======= =======
Basic income (loss) per common share $ 0.22 $ 0.08 $ (0.21) $ 0.11
======= ======= ======= =======
Basic shares used in calculation 14,987 13,640 14,604 13,580
======= ======= ======= =======
Diluted income (loss) per common share $ 0.20 $ 0.07 $ (0.21) $ 0.10
======= ======= ======= =======
Diluted shares used in calculation 16,875 14,594 14,604 14,310
======= ======= ======= =======
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Ardent Software, Inc. and Subsidiaries
Condensed Consolidated Statement of Comprehensive Income (Loss)
(In thousands)
Three months ended Nine months ended
------------------------------- -------------------------------
Sept. 30, 1998 Sept. 28, 1997 Sept. 30, 1998 Sept. 28, 1997
-------------- -------------- -------------- --------------
Net income (loss) $3,321 $1,023 $(3,068) $1,431
Change in translation adjustment (332) (478) (178) (529)
------ ------ ------- ------
Comprehensive net income (loss) $2,989 $ 545 $(3,246) $ 902
====== ====== ======= ======
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Ardent Software, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
----------------------
Sept. 30, Sept. 28,
1998 1997
-------- --------
Cash flows from operating activities:
Net income (loss) $ (3,068) $ 1,431
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 5,137 6,300
Amortization of restricted stock awards 21 21
Loss on disposal of assets 1,093 88
Deferred income taxes (3,103) 234
Increase (decrease)in cash from:
Current assets 2,191 5,444
Current liabilities 10,578 (3,169)
-------- --------
Cash provided by operating activities 12,849 10,349
-------- --------
Cash flows from investing activities:
Expenditures for property and equipment-net (1,987) (1,458)
Expenditures for capitalized software costs (2,242) (1,606)
Increase in cash surrender value of officers' life
insurance and deposits and other (2,121) (1,043)
-------- --------
Cash used in investing activities (6,350) (4,107)
-------- --------
Cash flows from financing activities:
Borrowings under line-of-credit arrangements 12,620 1,000
Repayments under line-of-credit arrangements (15,077) (2,762)
Sale of common stock 6,516 1,500
Repayments under capital lease and other obligations (12,352) (379)
-------- --------
Cash used in financing activities (8,293) (641)
-------- --------
Effect of exchange rate changes on cash (143) (392)
-------- --------
Increase (decrease) in cash and equivalents (1,937) 5,209
Cash and equivalents, beginning of period 24,155 15,545
-------- --------
Cash and equivalents, end of period $ 22,218 $ 20,754
======== ========
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements and should be read in conjunction with the audited financial
statements included in the Company's Annual Report to Stockholders for the
year ended December 31, 1997 and the Company's Registration Statement on
Form S-4, filed on December 31, 1997, related to the merger with Unidata,
Inc. ("Unidata").
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as
the audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the interim periods presented. The operating results for
the interim periods presented are not necessarily indicative of the results
which would be expected for the full year.
On February 10, 1998, the Company merged with Unidata. The merger was
accounted for as a pooling-of-interests and, accordingly, the consolidated
financial statements have been restated to include the accounts of Unidata
for all fiscal periods presented.
2. Income (Loss) Per Common Share
Basic income (loss) per common share is computed using the weighted average
number of common shares outstanding during each period presented. Diluted
income (loss) per common share reflects the effect of the Company's
outstanding options, except where such items would be anti-dilutive.
3. Income Taxes
The Company provides for income taxes at the end of each interim period
based on the estimated effective tax rate for the full fiscal year,
adjusted for significant non-deductible costs. Cumulative adjustments to
the tax provision are recorded in the interim period in which a change in
the estimated annual effective rate is determined.
4. Litigation
The Company is a defendant in a proceeding in the U.S. District Court in
the District of Massachusetts. The plaintiffs allege that the Company and
certain of its officers, during July through October 1995, made certain
untrue statements and failed to disclose certain information regarding the
Company's prospective financial performance in violation of Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and that
such statements and omissions artificially inflated the market prices of
the Company's stock. The Company denied the allegations. Following
completion of all discovery, the defendants and their insurance carrier
reached, in September 1998, an agreement in principle with the plaintiffs
to settle the action subject to final approval by the court. The Company
has recorded its contribution to the agreed settlement which was not
material to the financial position or results of operations of the Company
for the three and nine months ended September 30, 1998.
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The Company is a defendant in two actions filed against Unidata prior to
its merger into the Company, one in May 1996 in the U.S. District Court for
the Western District of Washington and one in September 1996 in the U.S.
District Court for the District of Colorado. The plaintiff, a company
controlled by a former stockholder of Unidata and a distributor of its
products in certain parts of Asia, alleges in both actions the improper
distribution of certain Unidata products in the plaintiff's exclusive
territory and asserts damages of approximately $30,000,000 under claims for
fraud, breach of contract, unfair competition, RICO violations, and
trademark and copyright infringement, among other relief. Unidata denied
the allegations against it in its answers to the complaints and the
proceedings are currently in their early stages. Management of the Company
believes that the actions against the Company are without merit and plans
to continue to oppose them vigorously.
The Company is a defendant in an action filed in July 1998 in the U.S.
District Court for the Southern District of Ohio. The plaintiff, with whom
the Company entered into a joint venture in 1996 to develop the Object
Studio product, alleges in its complaint that the Company is obligated to
support the joint venture in amounts up to $1,400,000 per year for an
aggregate present value liability of up to $8,000,000. The Company believes
the allegations are without merit and has denied its alleged liability and
filed certain counterclaims against the plaintiff seeking an amount in
excess of $9,000,000.
5. Acquisition Costs
In connection with the merger with Unidata, the Company recorded a one-time
charge for merger costs of $14,895,000 in the quarter ended March, 1998.
Included in these costs were $3,910,000 for financial advisor, legal and
accounting fees related to the merger and $10,985,000 for costs associated
with the combining operations of the two companies including expenditures
of $6,209,000 for severance, benefits and other, $2,170,000 for closure of
facilities and $2,606,000 for the write-off of redundant assets. As of
September 30, 1998, $2,193,000 remains unpaid, comprised principally of
severance and facility costs.
6. Comprehensive Income (Loss)
Effective January 1, 1998, the Company adopted the Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which requires the presentation of an additional primary financial
statement providing a prominent display of the components of items of other
comprehensive income. The only item that the Company currently records as
other comprehensive income is the change in cumulative translation
adjustment resulting from the changes in exchange rates and the effect of
those changes upon translation of the financial statements of the Company's
foreign operations. As of September 30, 1998 and December 31, 1997 the
cumulative translation adjustment was ($333,000) and ($155,000),
respectively.
7. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) released
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure
About Segments of an Enterprise and Related Information," which was
adopted by the Company in the first quarter of 1998. SFAS 131 requires the
Company to provide information about segments of its business based upon
discrete components of its businesses. Such information will be provided in
the Company's Annual Report on Form 10-K.
In June 1998, the FASB released FSAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which the Company will be required to
adopt effective January 1, 2000. SFAS No. 133 establishes standards for
reporting and accounting for derivative instruments, and conforms the
requirements for treatment of hedging activities across the different types
of exposures hedged. The Company has not yet completed its evaluation of
SFAS No. 133, but does not expect it to significantly affect the accounting
and reporting of its current hedging program.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
ARDENT SOFTWARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
On February 10, 1998, the Company completed the merger with Unidata, Inc. The
merger was accounted for as a pooling-of-interests, and the accompanying
financial statements have been restated to include the accounts of Unidata, Inc.
with those of the Company for all fiscal periods presented.
The discussion which follows analyzes the combined results of operations for the
three and nine months ended September 30, 1998 and the comparable fiscal periods
in 1997.
RESULTS OF OPERATIONS
The following table sets forth certain data as a percentage of total revenue for
the three and nine months ended September 30, 1998 and the comparable fiscal
periods in 1997.
Three Months Ended Nine Months Ended
--------------------- --------------------
Sept. 30, Sept. 28, Sept. 30, Sept. 28,
1998 1997 1998 1997
-------- -------- -------- --------
Revenue:
Software 57.6% 57.3% 58.3% 57.3%
Services and other 42.4 42.7 41.7 42.7
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs and expenses:
Costs of software 5.9 7.9 6.3 7.7
Costs of services and other 19.3 22.6 19.7 23.4
Selling and marketing 35.4 34.4 35.1 36.4
Product development 14.5 15.7 15.5 15.4
General and administrative 7.9 11.3 8.9 11.9
Merger costs -- -- 17.6 --
----- ----- ----- -----
Total costs and expenses 83.0 91.9 103.1 94.8
----- ----- ----- ------
Income (loss) from operations 17.0% 8.1% (3.1)% 5.2%
===== ===== ===== =====
REVENUE
The Company's total revenue increased 14% to $29,734,000 in the third quarter of
1998 from $26,069,000 in the third quarter of 1997 and increased 9% to
$84,681,000 for the first nine months of 1998 from $77,575,000 for the first
nine months of 1997. This increase in revenue is primarily due to the increase
in sales of the Company's data warehouse products and embedded database
licenses. This increase was offset by the decline in revenues associated with
the migration of legacy systems to client server UNIX and NT environments.
Software revenue for the third quarter and first nine months of 1998 increased
by 15% and 11%, respectively, from the comparable periods in 1997. This increase
is due principally to the increase in DataStage revenue which represented
approximately 22% and 17% of license revenue for the three and nine months ended
September 30, 1998, compared to 6% and 5% for the three and nine months ended
September 28, 1997. Revenue from
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relational database products also contributed to the increase in software
revenue. The increase in sales of the Company's object database product, O2
Systems, also contributed to the increase in software revenue. The object
database product was acquired through the acquisition of O2 Technology on
December 31, 1997, and therefore was not included in the 1997 results of
operations.
Software revenue increased to 58% of total revenue for both the third quarter
and first nine months of 1998 compared to 57% for the same fiscal periods in
1997.
Services and other revenue, consisting of consulting, training, and software
maintenance increased 13% and 7% for the quarter and nine months ended September
30, 1998, as compared to the quarter and nine months ended September 28, 1997.
This increase is due primarily to the services revenue associated with the
DataStage and O2 System products. The combined service revenue attributable to
these two products represented 11% and 10% for the three and nine months ended
September 30, 1998, respectively, compared to 3% and 2% for the comparable
periods in the prior year.
Services and other revenue decreased to 42% of total revenue for both the three
and nine months ended September 30, 1998, compared to 43% for the same fiscal
periods in 1997.
COSTS OF SOFTWARE
Costs of software, which consist of amortization of technology licenses and
capitalized software, product royalties, product documentation, packaging, media
and production costs, decreased 14% to $1,762,000 for the third quarter of 1998
as compared to $2,055,000 for the comparable period in the prior year, and
decreased 12% to $5,317,000 for the nine months ended September 30, 1998 from
$6,008,000 for the nine months ended September 28, 1997. This decrease in cost
of software is due to a reduction in amortization costs related to software and
other capitalized costs that have been fully amortized. Cost of software as a
percentage of total revenue decreased for the quarter and nine months ended to
6% from 8% for the same periods in 1997.
COSTS OF SERVICES AND OTHER
Costs of services and other, which consist of consulting, training, and other
customer support service costs decreased 3% to $5,724,000 for the third quarter
1998 and decreased 8% to $16,676,000 for the nine months ended September 30,
1998 as compared to the same periods of the prior year. The profit margin
associated with services and other revenue increased to 53% from 45% for the
first nine months of 1998 as compared to the first nine months of 1997 and
increased to 55% for the third quarter of 1998 from 47% for the third quarter of
1997. The decrease in costs, and the resulting increase to profit margins, is
due to a higher percentage of customer maintenance support revenue in 1998 which
typically has a higher profit margin than training and consulting services
revenue. Maintenance represented approximately 67% of services and other revenue
in the nine months ended September 30, 1998 compared to 60% in the nine months
ended September 28, 1997.
SELLING AND MARKETING
Selling and marketing expenses, which consist primarily of sales operating costs
and marketing programs, represented 35% of total revenue or $10,516,000 and
$29,729,000 in the quarter and nine months ended September 30, 1998,
respectively, as compared to 34% and 36% of total revenue or $8,956,000 and
$28,208,000 in the comparable periods of the prior year. The increase in
spending year over year is due to the increase in the investment in the
DataStage product offset by the decrease in selling and marketing programs for
the relational database technology and tools products. The selling and marketing
resources have been reallocated
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to this new technology, which represented 54% of spending for selling and
marketing in the first nine months of 1998 as compared to 8% for the same
comparable period in 1997.
PRODUCT DEVELOPMENT
Product development expenses, which consist primarily of salaries and related
benefits of development personnel and facility costs, increased 6% to $4,311,000
in the third quarter of 1998 and increased 9% to $13,094,000 in the first nine
months of 1998, as compared to the same fiscal periods of the prior year.
Product development expenses as a percentage of revenue were 15% and 16% for the
third quarter and the first nine months of 1998, respectively, as compared to
16% and 15% for the same fiscal periods in 1997, respectively. The increase in
spending is due primarily to the development efforts dedicated to the DataStage
and O2 System products. The Company allocated 58% of its research and
development funds into these new technologies in the first nine months of 1998
compared to 9% in the first nine months of 1997. Relational database technology
and tools development represented 42% of research and development costs in the
first nine months on 1998 as compared to 91% in 1997.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include the costs of finance, human
resources, legal, information systems, and administrative departments of the
Company. General and administrative expenses decreased 21% in the third quarter
of 1998 to $2,353,000 from $2,967,000 in the comparable period of 1997. General
and administrative expenses decreased 18% to $7,559,000 in the first nine months
of 1998 from $9,205,000 for the nine months ended September 28, 1997. This
decrease is due to the elimination of duplicate positions and facilities in
conjunction with the merger of the Company and Unidata.
ACQUISITION COSTS
The Company recorded a one time charge of $14,895,000 associated with the merger
with Unidata in the quarter ended March 31, 1998. This amount included
$3,910,000 for financial advisor, legal, and accounting fees related to the
merger and $10,985,000 for costs associated with the combining operations of the
two companies including expenditures of $6,209,000 for severance, benefits and
other, $2,170,000 for closure of facilities and $2,606,000 for the write-off of
redundant assets. As of September 30, 1998, $2,193,000 remains unpaid comprised
principally of severance and facility costs.
INCOME TAXES
The Company recorded a provision for income taxes of $1,789,000 and $599,000 for
the third quarter and the first nine months of 1998, respectively. This
represents an annual effective income tax rate of 36%, excluding the impact of
non-deductible merger charges. The 1997 annual effective income tax rate of 45%
was substantially higher than 1998 due to an increase in the valuation
allowance during 1997 attributed to foreign loss carryforwards.
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COMMITMENTS
In the quarter ended March 1998, the Company renegotiated the lease of its
principal operating facility. The lease had been classified as a capital lease.
As a result of this renegotiation, the term of the lease was modified and
reduced from 20 years to 14 years. As a result of this modification, the lease
no longer qualifies as a capital lease and has been reclassified as operating.
In connection with this reclassification, the Company removed the asset and
liability from the balance sheet and recorded a net gain of approximately
$600,000 in the quarter ended March 31, 1998.
FOREIGN CURRENCY TRANSLATION
The Company hedges its exposure to foreign currency fluctuations through foreign
exchange forward contracts. As of December 31, 1997, the Company had foreign
exchange forward contracts outstanding used to hedge foreign exchange exposure
on intercompany balances of certain of its international subsidiaries. These
contracts are comprised of contracts to sell foreign currency aggregating
$5,236,000 of notional amount (principally British pounds and French francs).
These contracts are short-term in duration (typically 90 days) and have limited
market risk, since decreases or increases in the unrealized gain or loss on any
position is generally fully offset by corresponding increases or decreases in
gains and losses on the intercompany balances being hedged. Credit risk is
limited to the risk that counterparties to these contracts fail to deliver at
maturity. The Company deals only with reputable financial institutions in
entering into these contracts and therefore believes that credit risk is
insignificant. Currency forward contracts are used only to hedge identified
foreign currency commitments and are never held for speculative purposes. The
gains and losses associated with currency rate changes on these contracts, net
of the corresponding gains and losses on the hedged intercompany accounts, are
recorded as a component of other income/expense in the period the change occurs.
Foreign exchange gains or losses were not material in any period presented. As
of September 30, 1998 the Company had foreign exchange contracts outstanding
aggregating $8,690,000 of notional amount (principally British pounds and French
francs).
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through sales of equity
securities and positive cash flow from operations. At September 30, 1998 the
Company had $22,218,000 in cash and cash equivalents and $7,336,000 ($23,431,000
excluding deferred revenue, the satisfaction of which will have no significant
cash impact) in working capital. The Company has a working capital line of
credit with a bank under which the Company may borrow, on a secured basis, up to
the lesser of $12,500,000 or 70-80% of eligible domestic and foreign accounts
receivable, conditioned upon meeting certain financial covenants, including
maintaining specified levels of quarterly earnings, tangible net worth and
liquidity. The line of credit also limits the Company's ability to pay
dividends. At September 30, 1998, there was $4,900,000 outstanding under the
Company's line of credit which has been classified under long-term liabilities
as the line of credit expires in March 2000. There was approximately $3,768,000
available for borrowing under the line of credit at September 30, 1998.
The Company believes that its available cash, anticipated cash generated from
operations based upon its operating plan and amounts available under its credit
facility will be sufficient to finance the Company's operations and meet its
foreseeable cash requirements at least for the next twelve months.
During the quarter, the Company transferred its rights to certain accounts
receivable to finance companies in exchange for cash payments from the finance
companies. Total cash received by the Company in the quarter ended September 30,
1998 under these arrangements totaled approximately $3,211,000.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) released Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," and SFAS 131, "Disclosure About Segments of an Enterprise and Related
Information," both of which were adopted by the Company in the first quarter of
1998. SFAS 130 requires the Company to provide a prominent display of the
components of items of other comprehensive income. SFAS 131 requires the Company
to provide information about segments of its business based upon discrete
components of its businesses; such information will be provided in the Company's
Annual Report on Form 10-K.
In June 1998, the FASB released SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which the Company will be required to adopt
effective January 1, 2000. SFAS No. 133 establishes standards for reporting and
accounting for derivatives instruments, and conforms the requirements for
treatment of hedging activities across the different types of exposures hedged.
The Company has not yet completed its evaluation of SFAS No. 133, but does not
expect it to significantly affect the accounting and reporting of its current
hedging program.
EUROPEAN UNION CURRENCY CONVERSION
On January 1, 1999, certain member nations of the European Economic and Monetary
Union ("EMU") will adopt a common currency, the Euro. For a three-year
transition period, both the Euro and the individual participants' currencies
will remain in circulation. After June 30, 2002, the Euro will be the sole legal
tender for EMU countries. The adoption of the Euro will affect a multitude of
financial systems and business applications as the commerce of these nations
will be transacted in the Euro and the existing national currency during the
transition period. Of the eleven of the fifteen member countries currently
admitted into the EMU, the Company has subsidiary operations in two of these
countries and distributor relationships in the remaining nine.
The Company has begun to assess the potential impact that may result from the
Euro conversion. In addition to tax and accounting considerations, the Company
is assessing the potential impact from the Euro conversion in a number of areas,
including the technological challenges to adapt information technology, the
competitive impact of cross-border price transparency, the impact on currency
exchange costs and currency exchange rate risk, and the impact on existing
contracts. At this early stage of its assessment, the Company cannot yet
predict the anticipated impact of the Euro conversion on the Company.
YEAR 2000
The Company has deployed financial, technical and management resources to
review and identify those areas that could be affected by the "Year 2000" issue
of its computer systems, product offerings, all inclusive of layered products,
and the "Year 2000" readiness of third parties with which the Company has a
material relationship. The Company presently believes that with modification to
the existing software being utilized the "Year 2000" issue will not pose
significant operational problems and costs to complete this process are not
anticipated to be material to its financial position or results of operations in
any given year. Ardent's product offering contains date handling functions that,
if used consistently, will provide customers with the necessary support for
proper date manipulation well beyond the year 2000. The Company recommends that
all users of the Company's products review the date handling logic of the
applications and user extensions that they currently have in use. Lastly, there
have been no identified issues regarding the "Year 2000" readiness for third
parties with which the Company has a material relationship.
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CAUTIONARY STATEMENT
When used anywhere in this Form 10-Q and in future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases and in
oral statements made with the approval of an authorized executive officer of the
Company, the words or phrases "will likely result", "are expected to", "will
continue", "is anticipated", "estimated", "project", "outlook" or similar
expressions (including confirmations by an authorized executive officer of the
Company of any such expressions made by a third party with respect to the
Company) are intended to identify "forward-looking statements," which speak only
as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Certain of
such risks and uncertainties are set forth below and in Part II of the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. The Company
specifically declines any obligation to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
FACTORS AFFECTING FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a number of
risks, many of which are beyond the Company's control. The following discussion
highlights some of these risks.
The Company's future operating results may vary substantially from period to
period. The timing and amount of the Company's license fee revenues are subject
to a number of factors that make estimation of revenues and operating results
prior to the end of the quarter extremely uncertain. Quarterly fluctuations may
be caused by several factors including but not limited to timing of customer
orders, adjustments of delivery schedules to accommodate customer or regulatory
requirements, timing and level of international sales, mix of products sold, and
timing of level of expenditures for sales, marketing and new product
development. The Company generally ships its products upon receipt of orders and
maintains no significant backlog. The Company has experienced a pattern of
recording 60 percent to 80 percent of its quarterly revenues in the third month
of the quarter, with a concentration of such revenues in the last two weeks of
that third month. The Company's operating expenses are based on projected annual
and quarterly revenue levels and a substantial portion of the Company's costs
and expenses, including costs of personnel and facilities, cannot be easily
reduced. As a result, if projected revenues are not achieved in the expected
time frame, the Company's results of operations for that quarter would be
adversely affected. Accordingly, the results of any one period may not be
indicative of the operating results for future periods.
The market price of the Company's common stock is highly volatile. Failure to
achieve revenue, earnings, and other operating and financial results as
forecasted or anticipated by analysts could result in an immediate adverse
effect on the market price of the Company's stock.
The Company currently derives a substantial portion of its total revenue from
its core database products, UniVerse and Unidata. The Company's future results
will depend, to a significant extent, on continued market acceptance of this
product as well as market acceptance of new products, such as DataStage and O2
System. Any factor adversely affecting the market for these products would have
a material adverse effect of the Company's business and financial results.
The market for the Company's products is characterized by ongoing technological
developments and changes in customer requirements and industry standards. If the
Company is unable to develop and introduce new products or enhancements in a
timely manner in response to changing market conditions or customer requirements
or if
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errors are found in products after commercial shipments, the Company's business
and results of operations will be adversely affected.
Approximately 36% of the Company's total revenue for the nine months ended
September 30, 1998 was attributable to international sales made through
international subsidiaries. Because a substantial portion of the Company's total
revenue is derived from such international operations, which are conducted in
foreign currencies, changes in the value of those currencies relative to the
United States dollar may affect the Company's results of operations and
financial position. If, for any reason, exchange or price controls or other
restrictions on the conversion of foreign currencies were imposed, the Company's
business could be adversely affected. Other potential risks inherent in the
Company's international business generally include longer payment cycles,
disruptions caused by the conversion of the Euro, greater difficulties in
accounts receivable collection and the burdens of complying with a wide variety
of foreign laws and regulations.
The market for application development software is intensely competitive. The
Company competes with many companies offering alternative solutions to the needs
addressed by the Company's products. Many of these competitors may have greater
financial, marketing, or technical resources than the Company and may be able to
adapt more quickly to new or emerging technologies and standards or changes in
customer requirements or to devote greater resources to the promotion and sale
of their products than the Company.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ARDENT SOFTWARE, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. In
addition, the Company's working capital line of credit agreement provides for
borrowings which bear interest at a variable rate based on a prime rate. As of
September 30, 1998 the Company had $4,900,000 outstanding pursuant to the credit
agreement. The Company believes that the effect, if any, of reasonably possible
near-term changes in interest rates on the Company's financial position, results
of operations and cash flows should not be material.
The Company is exposed to changes in foreign currency exchange primarily in its
cash and foreign currency transactions. The Company holds forward foreign
currency contracts. Derivative instruments used by the Company in its hedging
activities are viewed as risk management tools and are not used for trading or
speculative purposes. Analytic techniques are used to manage and monitor foreign
exchange risk and include market valuation. The Company believes that it is
managing the foreign exchange exposure through its cash management and hedging
policies. This exposure is not considered material to the Company's financial
position, results of operations and cash flows.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in a proceeding in the U.S. District Court in
the District of Massachusetts. The plaintiffs allege that the Company and
certain of its officers, during July through October 1995, made certain
untrue statements and failed to disclose certain information regarding the
Company's prospective financial performance in violation of Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and that
such statements and omissions artificially inflated the market prices of
the Company's stock. The Company denied the allegations. Following
completion of all discovery, the defendants and their insurance carrier
reached, in September 1998, an agreement in principle with the plaintiffs
to settle the action subject to final approval by the court. The Company
has recorded its contribution to the agreed settlement which was not
material to the financial position or results of operations of the Company
for the three and nine months ended September 30, 1998.
The Company is a defendant in two actions filed against Unidata prior
to its merger into the Company, one in May 1996 in the U.S. District Court
for the Western District of Washington and one in September 1996 in the
U.S. District Court for the District of Colorado. The plaintiff, a company
controlled by a former stockholder of Unidata and a distributor of its
products in certain parts of Asia, alleges in both actions the improper
distribution of certain Unidata products in the plaintiff's exclusive
territory and asserts damages of approximately $30,000,000 under claims for
fraud, breach of contract, unfair competition, RICO violations, and
trademark and copyright infringement, among other relief. Unidata denied
the allegations against it in its answers to the complaints and the
proceedings are currently in their early stages. Management of the Company
believes that the actions against the Company are without merit and plans
to continue to oppose them vigorously.
The Company is a defendant in an action filed in July 1998 in the U.S.
District Court for the Southern District of Ohio. The plaintiff, with whom
the Company entered into a joint venture in 1996 to develop the Object
Studio product, alleges in its complaint that the Company is obligated to
support the joint venture in amounts up to $1,400,000 per year for an
aggregate present value liability of up to $8,000,000. The Company believes
the allegations are without merit and has denied its alleged liability and
filed certain counterclaims against the plaintiff seeking an amount in
excess of $9,000,000.
ITEMS 2-5 NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) The Company did not file a report on Form 8-K during the quarter
ended September 30, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Ardent Software, Inc.
(Registrant)
Dated: November 16, 1998 /s/ Peter Gyenes
------------------------------------------
Peter Gyenes
Chairman of the Board, President and
Chief Executive Officer (principal
executive officer)
Dated: November 16, 1998 /s/ Charles F. Kane
------------------------------------------
Charles F. Kane
Vice President, Finance
and Chief Financial Officer
(principal finance and accounting officer)
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