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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 MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-20059
ARDENT SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2818132
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 WASHINGTON STREET 01581-1021
WESTBORO, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 366-3888
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The number of shares outstanding of each of the registrant's classes of common
stock as of:
DATE CLASS OUTSTANDING SHARES
April 25, 1999 Common stock, $.01 par value 15,924,827
The index to the Exhibits appears on page 14.
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ARDENT SOFTWARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
PAGE NUMBERING
IN SEQUENTIAL
NUMBERING SYSTEM
----------------
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Comprehensive
Income (Loss) for the three months ended March 31,
1999 and 1998 5
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
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PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ARDENT SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1999 1998
---------- -----------
ASSETS
Current assets:
Cash and equivalents $28,676 $24,167
Accounts receivable - net 22,019 21,238
Prepaid expenses and other current assets 6,374 5,062
Deferred income taxes 1,634 1,634
------- -------
Total current assets 58,703 52,101
------- -------
Property and equipment - net 6,694 6,587
Long-term assets: ------- -------
Intangible assets - net 14,370 14,633
Other long-term assets 5,246 5,085
Deferred income taxes 4,258 4,398
------- -------
Total long-term assets 23,874 24,116
------- -------
Total assets $89,271 $82,804
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,828 $ 5,476
Accrued expenses and other current liabilities 15,378 17,390
Accrued merger and restructuring costs 1,385 2,112
Deferred revenue 17,178 14,036
------- -------
Total current liabilities 38,769 39,014
------- -------
Stockholders' equity 53,458 46,746
Treasury stock, at cost (2,956) (2,956)
------- -------
Total stockholders' equity 50,502 43,790
------- -------
Total liabilities and stockholders' equity $89,271 $82,804
======= =======
See notes to condensed consolidated financial statements.
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ARDENT SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
March 31,
--------------------
1999 1998
------- --------
Revenue:
Software $17,917 $ 14,792
Services and other 13,304 10,918
------- --------
Total revenue 31,221 25,710
------- --------
Costs and expenses:
Cost of software 1,469 1,457
Cost of services and other 6,184 5,355
Selling and marketing 11,896 9,289
Product development 4,301 4,240
General and administrative 2,620 2,842
Merger costs -- 14,895
------- --------
Total costs and expenses 26,470 38,078
------- --------
Income (loss) from operations 4,751 (12,368)
Other income (expense)-net 254 154
------- --------
Income (loss) before provision for income taxes 5,005 (12,214)
Income tax provision (benefit) 1,752 (2,857)
------- --------
Net income (loss) $ 3,253 $ (9,357)
======= ========
Basic income (loss) per common share $ 0.21 $ (0.66)
======= ========
Shares used for basic computation 15,789 14,206
======= ========
Diluted income (loss) per common share $ 0.18 $ (0.66)
======= ========
Shares used for diluted computation 18,526 14,206
======= ========
See notes to condensed consolidated financial statements.
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ARDENT SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
Three Months Ended
March 31,
------------------
1999 1998
------ -------
Net income (loss) $3,253 $(9,357)
Change in translation adjustment 47 (91)
------ -------
Comprehensive net income (loss) $3,300 $(9,448)
====== =======
See notes to condensed consolidated financial statements.
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ARDENT SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended
March 31,
------------------
1999 1998
------ -------
Cash flows from operating activities:
Net income (loss) $ 3,253 $ (9,357)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation and amortization 2,149 1,733
Stock compensation 7 7
Loss on disposal of assets 107 889
Change in deferred income taxes 140 (3,961)
Increase (decrease) in cash from:
Current assets (1,934) 2,334
Current liabilities (90) 9,877
------- --------
Cash provided by operations 3,632 1,522
------- --------
Cash flows from investing activities:
Expenditures for property and equipment (1,010) (345)
Expenditures for intangible assets (1,137) (604)
Increase in cash surrender value of
officers' life insurance and deposits and other (180) (273)
Other assets 19 (1,500)
------- --------
Cash used in investing activities (2,308) (2,722)
------- --------
Cash flows from financing activities:
Sale of common stock 3,404 2,641
Borrowings under line of credit -- 7,330
Repayments of line of credit -- (7,357)
Repayments under long-term debt -- (10,000)
------- --------
Cash provided by (used in) financing activities 3,404 (7,386)
------- --------
Effect of exchange rate changes on cash (219) (43)
------- --------
Increase (decrease) in cash and equivalents 4,509 (8,629)
Cash and equivalents, beginning of period 24,167 24,155
------- --------
Cash and equivalents, end of period $28,676 $ 15,526
======= ========
See notes to condensed consolidated financial statements.
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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 and Form 10-K for the year ended December 31, 1998.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect 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
could be expected for the full year.
Certain prior year amounts have been reclassified to conform with current
year presentation.
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 year. Diluted
income (loss) per common share reflects the effect of the Company's
outstanding options (using the treasury stock method), except where such
items would be anti-dilutive.
3. Income Taxes
The Company provides for income taxes at the end of each interim period
based on the estimated effective tax rate for the full fiscal year,
adjusted for significant non-deductible costs. Cumulative adjustments to
the tax provision are recorded in the interim period in which a change in
the estimated annual effective rate is determined.
4. Litigation
The Company 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,
racketeering and corruption, and 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. The motion regarding arbitration has been
under the Court's consideration for approximately two years. No discovery
or other activities in either action has occurred pending the Court's
decision on the motion for arbitration. While the outcome cannot be
predicted with certainty, 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. While
the outcome cannot be predicted with certainty, 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.
The Company is also subject to various other legal proceedings and
claims, either asserted or unasserted, which arise in the ordinary course
of business. While the outcome of these claims cannot be predicted with
certainty, management does not believe that the outcome of any of these
legal matters will have a material adverse effect on the Company's
consolidated financial position or results of operations.
5. Acquisition Costs
In connection with the merger with Unidata, the Company recorded a charge
of $14,895,000 for the quarter ended March 31, 1998. The charge included
$3,910,000 for financial advisor, legal and accounting fees, $6,209,000
for severance and related costs, $2,170,000 for closure of facilities,
and $2,606,000 for the write-off of redundant assets. As of March 31,
1999, approximately $625,000 remains unpaid, comprised principally of
future rental obligations on idle facilities and severance associated
with longer term arrangements with senior executives, all of which is
expected to be paid in 1999. Remaining amounts recorded at March 31, 1999
consist primarily of future rental obligations on idle facilities
recorded as part of prior restructurings.
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6. Comprehensive Income (Loss)
The only item that the Company currently records as other comprehensive
income or loss is the change in cumulative translation adjustment
resulting from the changes in exchange rates and the effect of those
changes upon translation of the financial statements of the Company's
foreign operations. As of March 31, 1999 and December 31, 1998, the
cumulative translation adjustment was $(197,000) and $(244,000),
respectively.
7. New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) which establishes
standards for derivative instruments and hedging activities. It requires
an entity to recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair
value. It requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met and that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 1999 and
the Company will adopt SFAS 133 in the first quarter of fiscal 2000. The
Company is currently evaluating this statement, but does not expect it to
significantly affect the accounting and reporting of its current hedging
program.
In December 1998, the American Institute of Certified Public Accountants
(AICPA) released Statement of Position 98-9, or SOP 98-9, Modification of
SOP 97-2, "Software Revenue Recognition," with Respect to Certain
Transactions. SOP 98-9 amends SOP 97-2 to require that an entity
recognize revenue for multiple element arrangements by means of the
"residual method" when the following conditions exist: (1) there is
vendor-specific objective evidence, or VSOE, of the fair values of all
the undelivered elements that are not accounted for by means of long-term
contract accounting; (2) VSOE of fair value does not exist for one or
more of the delivered elements; and (3) all revenue recognition criteria
of SOP 97-2, other than the requirement for VSOE of the fair value of
each delivered element, are satisfied.
The provisions of SOP 98-9 that extend the deferral of certain paragraphs
of SOP 97-2 became effective December 15, 1998. These paragraphs of SOP
97-2 and SOP 98-9 will be effective for transactions that are entered
into in fiscal years beginning after March 15, 1999. Retroactive
application is prohibited. Ardent does not expect the adoption of SOP
98-9 to have a material effect on its consolidated financial position or
results of operations.
8. Segment Information
The Company has identified two distinct and reportable segments: the
Database segment and the Data warehouse segment. The Company considers
these two segments reportable under SFAS No. 131 criteria as they are
managed separately and the operating results of each segment are
regularly reviewed and evaluated separately by the Company's chief
decision maker and Board of Directors. Evaluations of each segment are
done on the basis of revenue and income (loss) from operations excluding
any tax effects, interest income or interest expense.
The accounting policies of each segment are the same as those described
in Note 1 of the Company's Annual Report filed on form 10-K for the year
ended December 31, 1998. There are no intercompany transactions between
the two business segments. The following table presents information about
the Company's operating segments for the quarters ended March 31,
Total
1999 Database Data Warehouse Consolidated
-------- -------------- ------------
Revenue from external customers $24,650 $6,571 $31,221
Income from operations 4,694 57 4,751
Total
1998 Database Data Warehouse Consolidated
-------- -------------- ------------
Revenue from external customers $23,219 $2,491 $25,710
Income (Loss) from operations* 2,797 (270) 2,527
* Excludes non-recurring merger charge of $14,895. See note 5 for
additional information.
9. Subsequent Event
On April 26, 1999, the Company acquired Prism Solutions, Inc. ("Prism"),
a provider of tools and solutions to the data warehousing market, in a
stock-for-stock transaction. The agreement provided for Prism
shareholders to receive 0.13124 shares of Ardent common stock for each
share of Prism common stock. Prism stock options were assumed using
the same ratio as for common shares. Total consideration is estimated at
approximately $48,000,000. The acquisition will be accounted for as a
purchase.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
ARDENT SOFTWARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
The following table sets forth certain data as a percentage of total revenue for
the three months ended March 31, 1999 and 1998.
Three Months Ended
March 31,
------------------
1999 1998
----- -----
Revenue:
Software 57.4% 57.5%
Services and other 42.6 42.5
----- -----
Total revenue 100.0 100.0
----- -----
Costs and expenses:
Cost of software 4.7 5.7
Cost of services and other 19.8 20.8
Selling and marketing 38.1 36.1
Product development 13.8 16.5
General and administrative 8.4 11.0
Merger costs -- 58.0
----- -----
Total costs and expenses 84.8 148.1
----- -----
Income (loss) from operations 15.2% (48.1)%
===== =====
REVENUE
The Company's total revenue increased 21% to $31,221,000 in the first quarter of
1999 from $25,710,000 in the first quarter of 1998.
Software license revenue for the first quarter of 1999 increased 21% to
$17,917,000 from $14,792,000 in the first quarter of 1998. The increase in
license revenue was primarily a result of continued growth of the Company's
customer base due to increased demand for its data warehouse and embedded
database products. Data warehouse license revenue increased 91% from the
same period a year ago and represented approximately 25% of license revenue in
the quarter ended March 31, 1999 compared to 14% of license revenue in the same
period of the prior year. Embedded database and tools license revenue increased
approximately 8% from the same period a year ago despite a decline in sales of
the O2 product line, which represented 2% of license revenue for 1999 compared
to 7% for the same period in 1998. Software license revenue represented 57% and
58% of total revenue for the quarters ended March 31, 1999 and 1998,
respectively.
Services and other revenue, consisting of consulting, training and software
maintenance, increased 22% to $13,304,000 in the first quarter of 1999 from
$10,918,000 in the first quarter of 1998. Consulting revenue increased 57% from
the first quarter of 1998 principally due to increased demand for data warehouse
services. Maintenance revenue increased 14% from the same period in 1998 due to
continued growth in the Company's installed customer base as well as improved
maintenance capture rates. Services and other revenue represented 43% and 42% of
total revenue for the first quarter of 1999 and 1998, respectively.
COST OF SOFTWARE
Cost of software, which consists of amortization of technology licenses and
capitalized software, product royalties, product documentation, packaging, media
and production costs were flat for the first quarter of 1999 at $1,469,000
compared to $1,457,000 for the same period of the prior year. The consistency is
primarily due to the relatively fixed nature of the expenses. Cost of software
as a percentage of license revenue was 8% and 10% for the first quarter of 1999
and 1998, respectively.
COST OF SERVICES AND OTHER
Cost of services and other, which consist of consulting, training, and other
customer support service costs increased 15% to $6,184,000 for the first quarter
of 1999 as compared to $5,355,000 in the same period of the prior year. Costs of
services represented 46% and 49% of services revenue for the quarters ended
March 31, 1999 and 1998, respectively. Gross margins on services improved from
the first quarter of 1998 due to an increase in maintenance revenue, which has
marginal incremental costs, as well as improved utilization of consulting
personnel.
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SELLING AND MARKETING
Selling and marketing expenses, which consist primarily of sales organization
costs and marketing programs, represented 38% of total revenue or $11,896,000 in
the first quarter of 1999 compared to 36% of total revenue or $9,289,000 in the
same period of the prior year. The increase in spending is principally due to
increased sales and marketing costs associated with the data warehouse product
lines.
PRODUCT DEVELOPMENT
Product development expenses, which consist primarily of salaries and related
benefits of development personnel and facility costs, were flat for the first
quarter of 1999 at $4,301,000, compared to $4,240,000 for the first quarter of
1998. Product development expenses represented 14% and 16% of total revenue for
the quarter ended March 31, 1999 and 1988, respectively.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 8% to $2,620,000 for the first
quarter of 1999 from $2,842,000 for the same period year a year ago. The first
quarter decrease was due, in part, to cost synergies realized through the
elimination of duplicate positions and facilities in conjunction with the merger
of the Company and Unidata. Although the Company has undergone significant
growth, Ardent continues to experience significant leverage of the general and
administrative function through optimal utilization of its employees. General
and administrative expenses represented 8% and 11% of total revenue for 1999 and
1998, respectively.
MERGER COSTS
In connection with the merger with Unidata, the Company recorded a one time
charge of $14,895,000 in the quarter ended March 31, 1998. The amount included
$3,910,000 for financial advisor, legal and accounting fees related to the
merger and $10,985,000, for costs associated with combining the operations of
the two companies including $6,209,000 for severance and related costs,
$2,170,000 for closure of facilities, and $2,606,000 for the write-off of
redundant assets. As of March 31, 1999, approximately $625,000 remains unpaid,
comprised principally of future rental obligations on idle facilities and
severance associated with longer term arrangements with senior executives, all
of which is expected to be paid in 1999. Remaining amounts recorded at March 31,
1999 consist primarily of future rental obligations on idle facilities recorded
as part of prior restructurings.
INCOME TAXES
The Company recorded a provision for income taxes of $1,752,000 for the first
quarter of 1999 compared to a benefit from income taxes of $2,857,000 for the
first quarter of 1998. This represents effective tax rates of 35% and 23% for
1999 and 1998, respectively. The effective tax rate for 1999 is substantially
higher than that of 1998 due to certain non-deductible merger charges incurred
in the first quarter of 1998.
FOREIGN CURRENCY TRANSLATION
The Company hedges its exposure to foreign currency fluctuations on
inter-company balances of certain of its international subsidiaries through
foreign exchange forward contracts. These contracts are comprised of contracts
to sell foreign currency aggregating $6,148,000 and $9,302,000 at March 31, 1999
and December 31, 1998, respectively, 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 inter-company
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
inter-company 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.
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 March 31, 1999 the Company
had $28,676,000 in cash and cash equivalents and $19,934,000 in working capital
($37,112,000 excluding deferred revenue, the satisfaction of which will have no
cash impact). The Company has a working capital line of credit with a bank under
which the Company may borrow, on an unsecured basis, up to the lesser of
$12,500,000 or 70-80% of eligible domestic and foreign accounts receivable,
conditioned upon meeting 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 March 31, 1999 and
December 31, 1998, there were no borrowings outstanding under the line of credit
facility; as of each date, $9,400,000 and $10,200,000, respectively, were
available to the Company under the line of credit.
The Company believes that its available cash, anticipated cash generated from
operations based upon its operating plan and future amounts available under its
credit facility, if any, will be sufficient to finance the Company's operations
and meet its foreseeable cash requirements at least for the next twelve months.
During the quarter, the Company transferred its rights to certain accounts
receivable to a finance company in exchange for cash payments from the finance
company. Total cash received by the Company in the first quarter of 1999 under
these arrangements was approximately $2,400,000.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) which establishes standards for
derivative instruments and hedging activities. It requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. It requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met and that a company must
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting. SFAS 133 is effective for fiscal years beginning after
June 15, 1999 and the Company will adopt SFAS 133 in the first quarter of fiscal
2000. The Company is currently evaluating this statement, but does not expect it
to significantly affect the accounting and reporting of its current hedging
program.
In December 1998, the AICPA released Statement of Position 98-9, or SOP 98-9,
Modification of SOP 97-2, "Software Revenue Recognition," with Respect to
Certain Transactions. SOP 98-9 amends SOP 97-2 to require that an entity
recognize revenue for multiple element arrangements by means of the "residual
method" when the following conditions exist: (1) there is vendor-specific
objective evidence, or VSOE, of the fair values of all the undelivered elements
that are not accounted for by means of long-term contract accounting; (2) VSOE
of fair value does not exist for one or more of the delivered elements; and (3)
all revenue recognition criteria of SOP 97-2, other than the requirement for
VSOE of the fair value of each delivered element, are satisfied.
The provisions of SOP 98-9 that extend the deferral of certain paragraphs of SOP
97-2 became effective December 15, 1998. These paragraphs of SOP 97-2 and SOP
98-9 will be effective for transactions that are entered into in fiscal years
beginning after March 15, 1999. Retroactive application is prohibited. Ardent
does not expect the adoption of SOP 98-9 to have a material effect on its
consolidated financial position or results of operations.
EUROPEAN UNION CURRENCY CONVERSION
On January 1, 1999, eleven member nations of the European Economic and Monetary
Union began using a common currency, the Euro. For a three-year transition
period ending on June 30, 2002, both the Euro and each of the currencies for
those member nations will remain in circulation. After June 30, 2002, the Euro
will be the sole legal tender for those countries. The adoption of the Euro will
affect many financial systems and business applications as the commerce of those
countries will be transacted in both the Euro and the existing national currency
during the transition period. Of the eleven countries currently using the Euro,
the Company has subsidiary operations in two and distributor relationships in
the other nine.
The Company has assessed the potential impact of the Euro conversion in a number
of areas, particularly including marketing and product development. For
instance, the Company has considered whether the common currency will adversely
affect its pricing strategies for individual European countries. Although the
Company does not currently expect that the conversion, either during or after
the transition period, will adversely affect its operations or financial
condition, the conversion has only recently been implemented and there can be no
assurance that it will not have some unexpected adverse impact.
PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
The Company regards certain of its technologies as proprietary and relies on a
combination of patent, copyright, trademark and trade secret laws and
contractual provisions to establish and protect its proprietary rights. These
steps may not be sufficient to prevent or deter others from copying or stealing
such proprietary rights and do not prevent competitors from independently
developing technology that is equivalent or superior to the Company's
technology. In addition, while the Company does not believe that its products,
trademarks, or other proprietary rights infringe upon the proprietary rights of
others, it is possible that others will assert that they do. The cost of
responding to such an assertion may be significant, even if the assertion is
false. The software market has traditionally experienced widespread unauthorized
reproduction of products in violation of intellectual property rights. Such
activity is difficult to detect and legal proceedings to enforce intellectual
property rights are often burdensome and involve a high degree of uncertainty
and costs.
YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and/or
software used by many companies and governmental agencies may need to be
upgraded to comply with such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
State of Readiness -- The Company has made assessments of the Year 2000
readiness of its internal information technology systems, system services
provided by third-party software and the software solutions that the Company
provides to its customers. These assessments include:
- quality assurance testing of the Company's internally developed
proprietary software;
- contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly related to
the Company's business;
- contacting third-party suppliers of material systems; and
- assessment and implementation of repair or replacement requirements.
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The Company has prepared and made available to its customers a Year 2000
readiness statement addressing its products. The Company has been informed by
most of its vendors of material hardware and software components that the
products of these vendors used by the Company are currently Year 2000 compliant.
The Company has also performed testing on its internally developed systems and
expects to complete all such testing and assessment by May 31, 1999.
Costs -- To date, the Company has not incurred material incremental expenditures
in connection with identifying or evaluating Year 2000 compliance issues. Most
of the expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters. At this time, the Company does not
possess the information necessary to estimate the potential costs of the
replacement of third-party software, hardware or services that are determined
not to be Year 2000 compliant. Based on testing to date, the Company does not
anticipate that such expenses will be material. Such expenses, if higher than
anticipated, could have a material adverse effect on the Company's business,
results of operations and financial condition.
Risks -- The Company is not aware of any Year 2000 compliance problems relating
to its proprietary products or systems that would, despite efforts to avoid or
fix such problems, have a material adverse effect on the Company's business,
results of operations and financial condition. There can be no assurance that
the Company will not discover Year 2000 compliance problems in its proprietary
products that will require substantial revisions. In addition, there can be no
assurance that third-party software, hardware or services incorporated into its
material systems will not need to be revised or replaced, all of which could be
time consuming and expensive. The failure of the Company to fix its proprietary
products, if necessary, or to fix or replace third-party software, hardware or
services on a timely basis could result in lost revenues, increased operating
costs, the loss of customers and other business interruptions, any of which
could have a material adverse effect on the Company's business, results of
operations and financial condition. Moreover, failure to adequately address Year
2000 compliance issues in its products and its systems could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend.
Contingency Plans -- Pending completion of its testing and assessment
procedures, the Company has not developed any plans for likely scenarios
involving Year 2000 failures. If, when its testing and assessment is complete,
it appears reasonably likely that such a failure may occur, the Company intends
to develop appropriate plans to deal with such contingencies.
CAUTIONARY STATEMENT
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward looking statements. 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", or "outlook" or similar expressions
(including confirmations by an authorized executive officer of the Company or
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. The Company cautions readers not to
place undue reliance on any such forward-looking statements. The Company
advises readers that the various risk factors described below and in Part II of
the Company's Annual Report on Form 10-K could cause the Company's actual
results for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements. 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 events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
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 45% to 55% 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.
Technological developments, customer requirements and industry standards change
frequently in the computer software database market. As a result, the Company's
success will depend upon our ability to enhance current products and to develop
or acquire new products which meet customer needs and comply with industry
standards. The possibility exists that the Company's products will be rendered
obsolete by technological advances, or that the Company will not be able to
develop and market the products required to continue to be competitive. Certain
of the Company's planned products are in various stages of development. It is
possible that such products will prove not to be commercially viable or that we
will experience operational problems with such products after commercial
introduction that could delay or defeat the ability of such products to
generate revenue. The product lines that the Company intends to devote
substantial resources in the foreseeable future are data warehouse and database
management. There is no assurance that products in either of these two areas
will continue to be commercially successful.
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The Company has experienced product delays and undetected errors or bugs in
certain products in the past. Although these delays and bugs have not
materially affected the Company's results in the past, these types of problems
may materially affect the Company in the future.
Approximately 41% of the Company's total revenue in the first quarter of 1999
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. The
Company engages in certain currency-hedging transactions intended to reduce the
effect of fluctuations of foreign currency exchange rates on the Company's
results of operations. However, there can be no assurance that such hedging
transactions will materially reduce the effect of fluctuations on such results.
If, for any reason, exchange or price controls or other restrictions on the
conversion of foreign currencies were imposed, the Company's business could be
adversely affected. Other potential risks inherent in the Company's
international business generally include longer payment cycles, greater
difficulties in accounts receivable collection and the burdens of complying with
a wide variety of foreign laws and regulations.
The market for application development software is intensely competitive. The
Company competes with many companies offering alternative solutions to the needs
addressed by the Company's products. Many of these competitors may have greater
financial, marketing, or technical resources than the Company and may be able to
adapt more quickly to new or emerging technologies and standards or changes in
customer requirements or to devote greater resources to the promotion and sale
of their products than the Company.
The Company's business is led by a number of key, highly skilled technical,
managerial and marketing personnel, the loss of which could adversely affect the
Company. Competition of such personnel in the software industry is intense. The
success of the Company depends in large part on the ability to hire and retain
such personnel.
ITEM 3. 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
March 31, 1999, the Company had no borrowings outstanding pursuant to the credit
agreement. The Company believes that the effect, if any, of reasonably possible
near-term changes in interest rates on its 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 foreign exchange
forward contracts. Derivative instruments used by the Company in its hedging
activities are viewed as risk management tools and are not used for trading or
speculative purposes. Analytic techniques are used to manage and monitor
foreign exchange risk and include market valuation. The Company believes that
it is managing the foreign exchange exposure through its cash management and
hedging policies. This exposure is not considered material to the Company's
financial position, results of operations and cash flows.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in 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, racketeering and corruption, and 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. The motion regarding arbitration has been under the Court's
consideration for approximately two years. No discovery or other activities in
either action has occurred pending the Court's decision on the motion for
arbitration. While the outcome cannot be predicted with certainty, 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. While the outcome cannot be predicted with
certainty, 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.
The Company is also subject to various other legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
While the outcome of these claims cannot be predicted with certainty, management
does not believe that the outcome of any of these legal matters will have a
material adverse effect on the Company's consolidated financial position or
results of operations.
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ITEMS 2.-5. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27-1 Financial Data Schedule - 1999
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1999.
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: May 11, 1999 /s/ Peter Gyenes
------------------------------------------
Peter Gyenes
Chairman, President and Chief Executive
Officer
(principal executive officer)
Dated: May 11, 1999 /s/ Charles F. Kane
------------------------------------------
Charles F. Kane
Vice President, Finance and Chief
Financial Officer
(principal finance and accounting officer)
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